##### Table of Contents

United States

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, 2008



 ̈ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934



For the transition period from  to



Commission File Number: 000-30757







Sunrise Telecom Incorporated

(Exact name of Registrant as specified in its charter)



|                                                               |  |                                  
|-------------------------------------------------------------- |  | ---------------------------------
|Delaware                                                       |  | 77-0291197                       
|(State or other jurisdiction of incorporation or organization) |  | (IRS Employer Identification No.)



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(b) of the Act:



None



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 is
a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.



Yes  ̈    No x



Indicate by check mark whether the
Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.



Yes  ̈    No x



Indicate by
check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 (Exchange Act) during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.



Yes x    No  ̈



Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and
posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ̈    No x



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.  ̈



Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check One):



|                             |  |                        |  |                                               |  |                               
|---------------------------- |  | ---------------------- |  | --------------------------------------------- |  | ------------------------------
|Large Accelerated Filer     ̈ |  | Accelerated Filer     ̈ |  | Non-accelerated Filer    x                    |  | Smaller reporting company     ̈
|                             |  |                        |  | (Do not check if a smaller reporting company) |  |                               



Indicate by check mark whether the Registrant
is a shell company (as defined in Rule 12b-2 of the Act).



Yes
 ̈    No x



As of June 29, 2008, the aggregate market value of the Common
Stock of the Registrant held by non-affiliates was $39,615,370 based upon the closing sale price for that date as reported in the pink sheets published by The Pink Sheets LLC.



As of March 31, 2009, there were 51,349,058 shares of the Registrants Common Stock
outstanding, par value $0.001 per share.



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SUNRISE TELECOM INCORPORATED



Index to Annual Report on Form 10-K



FOR THE FISCAL YEAR ENDED DECEMBER 31, 2008



|         |  |                                                                                                              |  |           
|-------- |  | ------------------------------------------------------------------------------------------------------------ |  | ----------
|         |  |                                                                                                              |  | PageNumber
|         |  |                                                                                                             
|         |  | Part I.                                                                                                      |  |           
|         |  |                                                                                                             
|Item 1.  |  | Business                                                                                                     |  | 3         
|         |  |                                                                                                             
|Item 1A. |  | Risk Factors                                                                                                 |  | 14        
|         |  |                                                                                                             
|Item 1B. |  | Unresolved Staff Comments                                                                                    |  | 27        
|         |  |                                                                                                             
|Item 2.  |  | Properties                                                                                                   |  | 27        
|         |  |                                                                                                             
|Item 3.  |  | Legal Proceedings                                                                                            |  | 27        
|         |  |                                                                                                             
|Item 4.  |  | Submission of Matters to a Vote of Security Holders                                                          |  | 28        
|         |  |                                                                                                             
|         |  | Part II.                                                                                                     |  |           
|         |  |                                                                                                             
|Item 5.  |  | Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities |  | 29        
|         |  |                                                                                                             
|Item 6.  |  | Selected Financial Data                                                                                      |  | 31        
|         |  |                                                                                                             
|Item 7.  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                        |  | 32        
|         |  |                                                                                                             
|Item 7A. |  | Quantitative and Qualitative Disclosures About Market Risk                                                   |  | 45        
|         |  |                                                                                                             
|Item 8.  |  | Financial Statements and Supplementary Data                                                                  |  | 46        
|         |  |                                                                                                             
|Item 9.  |  | Changes in and Disagreements with Accountants On Accounting and Financial Disclosure                         |  | 77        
|         |  |                                                                                                             
|Item 9A. |  | Controls and Procedures                                                                                      |  | 77        
|         |  |                                                                                                             
|Item 9B. |  | Other Information                                                                                            |  | 78        
|         |  |                                                                                                             
|         |  | Part III.                                                                                                    |  |           
|         |  |                                                                                                             
|Item 10. |  | Directors, Executive Officers and Corporate Governance                                                       |  | 79        
|         |  |                                                                                                             
|Item 11. |  | Executive Compensation                                                                                       |  | 85        
|         |  |                                                                                                             
|Item 12. |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters               |  | 101       
|         |  |                                                                                                             
|Item 13. |  | Certain Relationships and Related Transactions, and Director Independence                                    |  | 103       
|         |  |                                                                                                             
|Item 14. |  | Principal Accountant Fees and Services                                                                       |  | 104       
|         |  |                                                                                                             
|         |  | Part IV.                                                                                                     |  |           
|         |  |                                                                                                             
|Item 15. |  | Exhibits, Financial Statement Schedules                                                                      |  | 105       



HTT, RealWORX,
Sunrise Telecom, SunSet, SunLite, STT, and Sunset MTT, are trademarks of Sunrise Telecom Incorporated. This Annual Report on Form 10-K also includes references to registered service marks
and trademarks of other entities.



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Forward-Looking Statements



This Annual Report on Form 10-K contains forward-looking statements, such as: statements concerning projected revenues, costs
and expenses and gross margin; accounting estimates; assumptions and judgments; statements about our pending litigation; the effects of our restructuring plans; expected demand for our products; the effect that seasonality and volume will have on
our quarterly operating results; our dependence on a few key customers for a substantial portion of our revenue; our ability to scale our operations in response to changes in demand for existing products and services or the demand for new products
requested by our customers; the competitive nature of, and anticipated growth in, our markets; manufacturing, assembly and test capacity; our potential needs for additional capital; and inventory and accounts receivable levels. These forward-looking
statements are based on our current expectations, estimates and projections about our industry and business, and certain assumptions we have made, all of which may be subject to change. Forward-looking statements can often be identified by words
such as anticipates, expects, intends, plans, predicts, believes, seeks, estimates, may, will, should,
would, could, potential, continue, ongoing, similar expressions, and variations or negatives of these words. These statements are not guarantees of future performance and are subject to
risks, uncertainties and assumptions that are difficult to predict. Therefore, our actual results could differ materially and adversely from those expressed in any forward-looking statements as a result of many factors, including those listed under
the section Risk Factors contained in Part I, Item 1A of this report. These forward-looking statements speak only as of the date of this report. We undertake no obligation to revise or update any forward-looking statement for any
reason, except as otherwise required by law.



Part I.



ITEM 1.    BUSINESS



OVERVIEW



Sunrise Telecom designs, manufactures, and
markets service verification equipment that enables service providers to pre-qualify facilities for services, verify newly installed services, and diagnose problems relating to telecommunications, cable broadband, internet access, and wireless
networks. In addition, our products continuously monitor in-service cable, telecom and wireless networks to assist operators in improving network quality and to provide traffic data to assist network operations. Customers include telephone
companies, incumbent local exchange carriers, cable companies, competitive local exchange carriers, mobile operators, and network infrastructure suppliers throughout North America, Latin America, Europe, Africa, the Middle East, and the Asia/Pacific
region.



In October 1991, we were incorporated in California as Sunrise
Telecom, Inc. In July 2000, we reincorporated in Delaware, changed our name to Sunrise Telecom Incorporated. Our shares of common stock are currently listed for trading on the Pink Sheets LLC.



INDUSTRY BACKGROUND



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 multi-media rich websites, music, video, and software downloads. As an increasing number of subscribers access this bandwidth intensive content, the
ability to connect to and receive data from the Internet at high speeds has become, and will continue to become, more important.



A primary area of investment by our customers is the redesign of their networks to support higher speed broadband access to subscribers, and to enable new
multimedia services such as Voice-over IP networks (VoIP) and IP-TV. This involves upgrading the last mile portion of the network to a higher capacity, by deploying fiber and electronics deeper into the last mile. This may also include
the deployment of new technologies such as VDSL (very



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high bit-rate DSL) and sophisticated customer premises equipment to deliver these new services. As the capacity of the last mile is increased, the capacity of the
long-haul networks must also be increased to handle the demand. In addition, the signaling portion of the network is being upgraded to integrate and converge the new multimedia services into the existing infrastructure.



In the last few years, the nature of competition between various service provider
segments also has changed. Cable companies now routinely offer voice services, and telephone companies are now providing television programming to their subscribers. These once separate segments of the market are now competing fiercely for new
customers, and are seeking to minimize the loss of their customers. This makes the economics of service installation and repair, and the quality of the service delivered to the subscriber extremely important to the competitive outcome. Due to this
competition, comprehensive testing and monitoring of the network is becoming a competitive necessity for todays carriers.



KEY PRODUCT CATEGORIES



Our key product application technology areas are described below:



Wireline Access Technology.    Wireline access technology includes technologies such as Plain Old Telephone Service,
T-carrier, E-carrier, ISDN, digital subscriber line technology, and Ethernet. Digital subscriber line technology, commonly known as DSL, transmits data up to fifty times faster than older dial-up modems using the existing copper telephone wires.
Various implementations of DSL are being developed and deployed, including asymmetric DSL, known as ADSL, symmetric DSL, known as SDSL, high bit-rate DSL, known as HDSL, very high bit-rate DSL, known as VDSL, and others. Service providers deploying
DSL technology include local exchange carriers, such as AT&T, Inc. (formerly SBC Communications Inc.), British Telecom, France Telecom PLC, and Telecom Italia. Ethernet is commonly deployed over Cat 5 cable, a form of twisted pair copper wire.



Cable Broadband Networks.    Cable broadband
operators use a hybrid fiber coax last mile infrastructure, cable modems installed in the home, cable modem termination systems installed at major cable concentration points, and network headend equipment designed to connect their cable broadband
networks to video feeds and other networks. Most cable companies are currently offering analog and digital video, high-speed Internet access services, and VoIP telephone service, including Comcast Corporation, Charter Communications, Inc., Cox
Communications, Inc., TimeWarner Cable, Inc., and Virgin Media Inc., among others.



Fiber Optics.    Fiber optic cables use pulses of light to transmit digital information and offer very high bandwidth capacity. Due to their high capacity, fiber optic cables are being used
increasingly in the service provider networks in telecommunications, cable broadband, and mobile network applications. Today, fiber optic cables carry higher bandwidths by increasing the wavelength modulation speed or by carrying multiple
wavelengths on a single fiber. Common wavelength multiplexing schemes include Coarse Wavelength Division Multiplexing (CWDM) and Dense Wavelength Division Multiplexing (DWDM). Transmission technologies carried over fiber optic cables include
Ethernet, SDH, and SONET. Several service providers, such as Verizon Communications, Inc., are now deploying fiber optic cables directly to the subscribers residence, using a WDM technology called Passive Optical Network (PON).



Signaling.    Traditional telephone systems require a
signaling mechanism to set up and tear down phone calls. These signals serve such functions as supervising or monitoring the status of a line or 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 System 7 (SS7), is the base signaling system used by traditional telecom networks worldwide. In addition, new network services such
as VoIP, IP-TV, text messaging, multimedia messaging, roaming, and cell-phone web access place entirely new demands on the signaling system. As a result, signaling standards are evolving, and network operators face increasing complexity in
monitoring and troubleshooting their signaling networks.



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THE NEED FOR SERVICE VERIFICATION EQUIPMENT



In order to successfully deploy and maintain 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.



Field Verification Equipment.    Field verification
equipment is used by service providers to probe the actual wires, cables, or airwaves to verify that a service is functioning properly. 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 verification equipment in their day-to-day operations. Service providers have found field verification to be an effective method
to ensure that the lines operate properly at installation or after repair.



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 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. This equipment may also collect data on network operation and forward the information to a system for developing statistics
on network quality or other attributes of interest.



Because the
competition is intense for subscribers for high-speed bandwidth access, the quality and reliability of network service has become critical to service providers. These service providers cannot afford the loss of customers, loss of revenue, and
negative publicity resulting from poor service. Service verification equipment, such as the products provided by Sunrise Telecom, allows service providers to verify and repair service problems effectively and, thus, increase the quality and
reliability of their networks.



THE SUNRISE TELECOM SOLUTION



We design and manufacture service verification equipment, physical layer diagnostic
equipment, and monitoring systems that enable service providers to pre-qualify facilities for services, verify newly installed services, monitor the performance of video and signaling networks, and diagnose problems relating to copper twisted pair,
coaxial cable, and optical fibers. Our products also enable equipment manufacturers to test simulated networks during equipment development, verify the successful production of equipment, and help their field service teams diagnose problems. Our
products offer the following features:



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



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| |  |  | Customer Driven Features.    Each of our products is tailored to our customers needs. Our product marketing team interacts with our customers
during the design process to ensure that our products are the best available solution for them.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Handheld Modular Design.    We use handheld designs for many of our products that are for use in the field. The compact, lightweight design of
these products enhances the field technicians ability to easily carry these devices with them to diagnose problems and verify line operation. The SunSet MTT product family, for example, offers over 30 different test modules in a lightweight
portable unit.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



| |  |  | Rapid and Cost-Efficient Deployment.    Our products allow customers to test facilities and services rapidly and efficiently to ensure that they
are properly installed and that they can deliver the speed and features as ordered by the subscriber. 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 delivering service to end-user 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. Our products allow service providers to monitor their network quality and ensure customer satisfaction.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



PRODUCTS



Our major products are segmented into the following categories:



|                         |  |   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|------------------------ |  | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|WIRELINE ACCESS PRODUCTS
|                         |  |  
|SunSet MTT               |  | · |  | The Modular Test Toolkit is a full-featured handheld test set for access network service installation and maintenance. It features a variety of
handheld SunSet chassis configurations with support for over thirty different test modules to fit applications ranging from DSL, IP-TV, VoIP, Ethernet, copper diagnostics, T1 (1.544 mbps) and E1 (2 mbps) transmission, analog Voice Frequency
circuits, and SONET/SDH. The SunSet MTTs modularity allows field technicians to use a single unit to test a broad variety of services found in todays access network, and protects the customers capital investment. The unit
identifies problems with the physical transmission media, verifies proper signal transmission, verifies proper performance of the service to the customer, and identifies other problems on a troubled circuit.
|                         |  |  
|SunSet ISDN, SunLite BRI |  | · |  | These products support analysis and service verification for the Integrated Services Digital Network, known as ISDN. ISDN is a digital network
that offers more bandwidth than the traditional analog telephone network, but less bandwidth than DSL, T1, Ethernet, cable modems and other newer technologies.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|                         |  |  
|SunLite E1               |  | · |  | This pocket-sized unit supports transmission testing for E1.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|                         |  |  
|SunSet E20               |  | · |  | This handheld unit supports transmission testing for E1 and service verification for data, voice, mobile, and
other signaling protocols.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         



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|                            |  |   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|--------------------------- |  | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|CABLE BROADBAND PRODUCTS   
|                            |  |  
|CM2000 CM1000 CM750         |  | · |  | These handheld units are used for cable modem installation and field testing for cable television and telephone companies. Different
configurations support installation and test of current (Video on Demand, Digital Television and High Speed Data) as well as next generation IP services such as VoIP networks.                                                                                                                                                
|                            |  |  
|3010H                       |  | · |  | This rack-mounted headend analyzer and sweep generator provides the capabilities required to keep cable networks operating reliably and delivering
quality, distortion-free signals. It supports up to ten field technicians using remote 3010R products for return path maintenance and, as a forward sweep transmitter, it supports an unlimited number of technicians for maintaining the forward
path.                                                          
|                            |  |  
|3010R                       |  | · |  | A rugged field unit that includes both forward and return sweep plus Signal Level Meter (SLM) capabilities for maintaining the entire
cable network. The 3010R can also function as a headend unit for troubleshooting intermittent problems in specific network segments for added flexibility.                                                                                                                                                                  
|                            |  |  
|AT2500R Series              |  | · |  | A lightweight, full-featured Spectrum Analyzer designed for Cable TV (CATV) headend and field portable applications. It combines high
performance CATV, quadrature amplitude modulation (QAM), and video analysis in one instrument to verify and maintain analog TV signals, as well as premium digital services.                                                                                                                                              
|                            |  |  
|AT2500H Series              |  | · |  | Rack-mounted headend Spectrum Analyzer providing remote visibility into headend and plant performance. It performs remote headend testing of both
analog and digital downstream and upstream signals from 1 MHz to 1.5 GHz. It can also monitor maximum, minimum, and average ingress levels to be stored for historical reference and trend analysis.                                                                                                              
|                            |  |  
|realWORX                    |  | · |  | Fully automated broadband performance verification system that monitors upstream and downstream signal quality on a continuous basis from a
headend or hub site. It verifies the quality of downstream QAM and Analog CATV channels and ensures that the Return Path Ingress levels are within acceptable limits. realWORX integrates with the AT2500H Spectrum Analyzers and the optional
CM Series test units for remote real-time ingress levels.                
|FIBER OPTIC PRODUCTS       
|                            |  |  
|Scalable Test Toolkit (STT) |  | · |  | A portable, modular unit designed to test the core and metro optical networks of today and tomorrow. The STT supports SONET, SDH, OTN, GFP, LCAS,
C/DWDM (Coarse/Dense Wavelength Division Multiplexing), OTDR (Optical Time Domain Reflectometer), loss test set, and Ethernet/Gigabit Ethernet testing through a family of stackable test modules. The STT offers advanced analysis and diagnostic tools
for exchange, central office and laboratory applications.
|                            |  |  
|STT 40G                     |  | · |  | A portable, modular unit designed to verify the performance of new, high-bandwidth synchronous digital hierarchy
(SDH), optical transport networks (OTN) and SONET networks.                                                                                                                                                                                                                                                                                        



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|                           |  |   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                      
|-------------------------- |  | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|FIBER OPTIC PRODUCTS      
|                           |  |  
|SunSet 10G+                |  | · |  | A compact handheld unit that supports transmission testing for metropolitan and core optical networks. It supports both SONET and SDH networks,
including both electrical and optical signal testing in a small package for testing from 1.5 Mbps to ten gigabits per second bit rates.                                                                                                                                              
|                           |  |  
|SunSet SDH                 |  | · |  | A handheld unit that supports international SDH and digital transmission types found throughout metropolitan and access networks worldwide. The
SunSet SDH includes both electrical and optical signal testing and performs advanced service verification for various applications like ATM, mobile, ISDN, and voice.                                                                                                                
|                           |  |  
|SunSet OCx                 |  | · |  | A handheld unit that supports North American SONET and digital transmission types found throughout metropolitan and access networks worldwide. The
SunSet OCx includes both electrical and optical signal testing and performs advanced service verification for various applications like ATM, mobile, ISDN, and voice.                                                                                                             
|                           |  |  
|SunSet MTT                 |  | · |  | The Modular Test Toolkit (MTT) offers physical layer fiber optic testing modules and characterization for fiber optic links through an OTDR, loss
test set, power meter, and light source, as well as gigabit Ethernet testing on fiber optic links and an SDH/SONET testing.                                                                                                                                                        
|SIGNALING TESTING PRODUCTS
|                           |  |  
|3GMaster                   |  | · |  | A network analyzer used to monitor Second and Third Generation Mobile networks. Applications include regular network maintenance, billing
verification, network traffic statistics, quality of service testing, and troubleshooting complex problems like roaming and internetworking.                                                                                                                                               
|                           |  |  
|NeTracker                  |  | · |  | An advanced analyzer for testing the multiple protocols and data rates found in next-generation VoIP. Applications include service verification,
protocol analysis, voice quality testing, and stress testing for the VoIP environment.                                                                                                                                                                                              
|                           |  |  
|STT-MSA                    |  | · |  | The STT Multi-Service Analyzer (MSA) simulates, monitors, and analyzes different signaling protocols on SS7, ISDN, and IP-based next-generation
networks, and analyzes telecommunication environments such as 2G, 2.5G (including GSM, GPRS and EDGE), and 3G (UMTS, IMS and CDMA 2000). Advanced analysis tools capture, decode, and report on both the access network (wireless and wireline) and the
core network, simultaneously.
|                           |  |  
|TAMS                       |  | · |  | Traffic Analysis & Measurement System (TAMS) is a distributed system for VoIP, wireline, and wireless
networks. It features the Data Collector System (DCS) that gathers, stores, and processes network-wide data, and a centralized server. TAMS monitors in real-time the network traffic and the services provided by the operator, offering detailed
reports, statistics and alarms as well as troubleshooting capabilities.     



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On November 19, 2008, the Company and LTE entered into a Participation Purchase Agreement (Purchase
Agreement) pursuant to which we agreed to sell our Italy-based Protocol Products Group to LTE. The closing of the transaction occurred on December 12, 2008. The Protocol Products Group under LTE changed its name to Accanto Systems. We
sold our TAMS, NeTracker, 3GMaster, and STT-MSA products as part of the sale. In North America, we act as a direct distributor for Accanto Systems for all of these products, hosting and administering certain of their sales and marketing employees.
In Italy, Accanto Systems provides accounting and administration services for our Italy sales office and European Service Center. As a result of this transaction, we expect sales of our Signaling products to decline in future periods.



The percentage of our total revenue contributed by each class of products was as
follows:



|                |  |                          |  |      |  |     
|--------------- |  | ------------------------ |  | ---- |  | ----
|                |  | Years Ended December 31,
|                |  | 2008                     |  | 2007 |  | 2006
|Wireline access |  | 36%                      |  | 36%  |  | 36% 
|Cable broadband |  | 25%                      |  | 29%  |  | 31% 
|Fiber optics    |  | 28%                      |  | 27%  |  | 25% 
|Signaling       |  | 11%                      |  | 8%   |  | 8%  



CUSTOMERS



Our customers include telecommunications service providers, cable network operators,
wireless service providers, network equipment suppliers and installers, technicians, and engineers in North America, Latin America, Europe, Africa, the Middle East, and the Asia/Pacific region. We generally sell through our own direct sales offices
and independent distributors internationally and sell directly to customers in the United States. The following is a selected list of our largest customers in 2008:



|                                              |  |                                    
|--------------------------------------------- |  | -----------------------------------
|Adelphia Communications Corporation           |  | NTT                                
|AT&T, Inc. (formerly SBC Communications Inc.) |  | Siemens AG                         
|BellSouth Telecom, Inc. (now AT&T, Inc.)      |  | Sprint Corporation                 
|British Telecom PLC                           |  | Telecom Italia Mobile              
|Cablevision Systems Corporation               |  | Telkom SA Ltd.                     
|Comcast Corporation                           |  | Time Warner Cable, Inc.            
|Cox Communications, Inc.                      |  | United States Department of Defense
|Deutsche TeleKom, AG                          |  | Verizon Communications, Inc.       
|France Telecom                                |  |                                    



Since our inception, we have
sold our products to over 2,000 customers in over sixty countries. Verizon Communications, Inc. accounted for 13% and 11% of our net sales in 2007 and 2006, respectively. No customer accounted for 10% or more of our net sales for 2008. See
Item 1A, Risk FactorsCustomer Concentration.



SALES, MARKETING
AND CUSTOMER SERVICE



Sales.    We sell
our products to telecommunications service providers, cable network operators, wireless service providers, network infrastructure equipment suppliers and installers, technicians, and engineers through manufacturers representatives, independent
distributor organizations, and our direct sales force.



In the United
States, we sell our products through manufacturers representatives who are supported by a regional channel management and field engineering team. Manufacturers representatives are paid on a commission basis for sales in their respective
regions. The manufacturers representatives solicit orders from customers, we then ship our products directly to the customers and invoice those customers at time of shipment.



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Outside of the United States, we sell our products through a mix of our own sales offices and independent
distributors, which are directed by our regional sales management team. In general, we sell our products to the distributor at a discount from the end user price, and the distributor or sales office then resells the products to the end user.
International sales were $50.2 million or 62% of net sales in 2008, $53.0 million, or 57% of net sales in 2007 and $47.4 million, or 48% of net sales in 2006. 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 offices based in Beijing, Guangzhou, and Shanghai, China; Tokyo, Japan; Milan, Italy; Paris, France; Mexico City, Mexico; and Gomaringen,
Germany. During 2008, we closed sales offices in Korea and Spain and engaged third party distributors for those markets as a way to reduce costs. See Item 1A, Risk FactorsRisks of International Operations.



We sell our products predominantly to large communications service providers. These
types of customers generally commit significant resources to evaluate and approve products and require each vendor to expend substantial funds, time, and effort educating them 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 for use of our products by an executive officer or other senior level employee. The result is lengthy sales
and implementation cycles that make sales forecasting difficult. In addition, even after a large service provider has approved our product for purchase, future purchases are uncertain because we generally do not enter into long-term supply
agreements. Delays associated with 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 our large customers typically ranges from six to twenty-four months.



We generally do not sell our products with rights of return. On the few occasions when we have agreed to provide customers with rights of return, we have deferred
recognition of sales revenue until the rights of return have lapsed. We generally do not provide extended payment terms to our customers. Our normal terms are typically 30 days for North America and up to 60 days in international markets.
International markets have a much broader range of credit terms and payment intervals than our domestic market, reflecting a wider variety of customary local business practices in different world markets.



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 marketing team provides training and demonstration products to enable our worldwide sales channel to promote our products to our customers;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The marketing communications group maintains a public website, publishes brochures and specification sheets, and generates press releases and publicity to increase our
recognition in the telecommunications industry;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Our product managers and regional sales managers travel extensively with our sales team, manufacturers representatives, and international distributors to develop new
product opportunities with customers and to support their presentations, and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Our technical publications group prepares users manuals, field manuals, quick reference guides, and other tools to serve the needs of our users.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------



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;
| | - |  | -------------------------------------------



| |  |  | operating a telephone support line to help customers who are having difficulty using our products in their particular application;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------



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| |  |  | maintaining a proprietary website containing online, 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 internally for corrective action.
| | - |  | ----------------------------------------------------------------------------------------------------------------



SEASONALITY



Our sales have traditionally been seasonal in nature and tied to the buying patterns of our customers. The largest volume of quarterly
sales has typically been during the last calendar quarter of the year. In 2008, sales during the fourth quarter declined to $21.5 million, or 27% of annual sales. Our 2007 and 2006 fourth quarter sales were $27.3 million, or 29% of annual sales, and
$36.7 million, or 37% of annual sales, respectively. We expect that our quarterly operating results may fluctuate significantly and will be difficult to predict due to 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. See Item 1A, Risk FactorsQuarterly Fluctuations.



BACKLOG



Our backlog of customer orders as of December 31, 2008, was approximately $6.0 million, compared to approximately $8.2 million as
of December 31, 2007. 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.



RESEARCH AND DEVELOPMENT



We have assembled a team of highly skilled engineering professionals who are
experienced at designing telecommunications service verification test equipment. Our engineering personnel have expertise in a number of fields, including interfacing test equipment with digital loop carriers, voice and data switching technology,
local loop equipment, and operations support systems. We spent approximately $18.7 million on research and development in 2008, $23.6 million in 2007, and $21.1 million in 2006. Research and development represents our largest direct employment
expense. As of December 31, 2008, we had a total of 95 permanent and temporary employees engaged in research and development in: San Jose, California; Norcross, Georgia; and Beijing, China.



We believe that our future 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 continuously review and evaluate competitive dynamics, as well as technological and regulatory changes affecting
the converging telecommunications and cable broadband industries, and seek to offer products and capabilities that solve our customers operational challenges and improve their efficiency. New product development generally requires one to two
years of investment and occasionally up to four years.



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., the American National Standards Institute, the Internet Engineering Task Force, and various industry interest groups. Internationally, our products must comply
with standards established by the European Committee for Electrotechnical Standardization, the European Committee for



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Standardization, the European Telecommunications Standards Institute, telecommunications authorities in various countries, and with recommendations of the
International Telecommunications Union. The Company must also comply with recent directives by the European Union, including the Reduction of Hazardous Substance Directive which restricts the use of hazardous materials in the manufacture of various
types of electronic and electrical equipment, and the Waste Electrical and Electronics Equipment Directive which sets collection, recycling, and recovery targets for electrical goods. 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 AND SOURCES OF SUPPLY



Our
production process consists of planning, procurement, fabrication, rework, system assembly, system final test, software option customization, and shipping. For some of our products, we purchase parts, including resistors, integrated circuit boards,
LCDs and printed circuit boards, from distributors and manufacturers worldwide. We package these parts into kits and either send them to local contract manufacturers to assemble into printed circuit boards or we assemble them ourselves at our Taiwan
facility. For other products, we have our contract manufacturer buy the parts and assemble them on boards for us. We perform substantially all remaining manufacturing operations. We maintain sourcing and manufacturing operations in San Jose,
California and Taipei County, Taiwan, with the Taipei County facility being our largest manufacturing center. Our San Jose, Taipei County, and Modena operations are ISO 9001 certified.



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 source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 purchases of some products and components in advance to ensure an adequate supply, particularly for products that require lead times of
up to nine months to manufacture. See Item 1A, Risk Factors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:



|                       |  |                                                                                                                                                             
|---------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------
|Product Category       |  | Principal Competitors                                                                                                                                       
|Wireline Access        |  | JDS Uniphase Corporation; Exfo Electro-Optical Engineering, Inc.; Danaher Corporation (Fluke and Fluke Networks); 3M Corporation; Trend Communications, Ltd.
|Fiber Optics SONET/SDH |  | JDS Uniphase Corporation; Exfo Electro-Optical Engineering, Inc.; Anritsu Corporation; Trend Communications Ltd.                                            
|Cable Broadband        |  | JDS Uniphase Corporation; Trilithic, Inc                                                                                                                    
|Signaling              |  | Agilent Technologies, Inc.; Danaher Corporation (Tektronix); Radcom Ltd.                                                                                    



We expect that, as our industry
and market evolve, new competitors or alliances among competitors could emerge and acquire significant market share. Competition in our markets could increase which would result in greater threats to our market share, price pressure on our products,
and the potential of decreasing profitability.



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



| |  |  | continued high level of investment in research and development and marketing;
| | - |  | -----------------------------------------------------------------------------



| |  |  | speed of new product development and 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.
| | - |  | --------------------------------------------------



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. As of January 1, 2009, we had 20 issued U.S. patents relating to communications testers that expire between 2015 and 2025. 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 typically involves the use and development of a variety of forms of intellectual property and proprietary technology, although no one particular
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 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.
| | - |  | ------------------------------------------------------------



EMPLOYEES



As of December 31, 2008, we had a total of 362 full-time employees, consisting of 149 in the United States, 124 in Taiwan, 5 in Italy, 1 in Canada, 1 in Korea, 65 in China, 5 in Japan, 4 in Germany, 4 in France, and 4 in
Mexico. We also had 54 temporary employees at December 31, 2008. Of the total full-time employees, 87 were engaged in research and development, 63 were engaged in sales, marketing and customer support, 166 were engaged in operations, and 46
were engaged in administration and finance.



None of our employees is
subject to a collective bargaining agreement. Our employees worldwide are protected by a multitude of labor laws enacted by the countries in which we operate. We believe that our relations with our employees are good. See Item 1A Risk
FactorsDependence on Key Employees.



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ITEM 1A.    RISK FACTORS



In addition to other information in this Annual Report on Form 10-K, the following
risk factors should be carefully considered in evaluating us and our business because these factors may have a significant impact on our business, prospects, operating results or financial condition. Actual results could differ materially from
those projected in the forward-looking statements contained in this report as a result of the risk factors discussed below and elsewhere in this report.



Going ConcernOur ability to continue as a going concern is at risk.



Our consolidated financial statements were prepared assuming that we will continue as
a going concern. Our recurring losses from operations over many years and our inability to generate sufficient cash flows to meet our obligations creates substantial doubt about our ability to sustain our operations and continue as a going concern.
The global economic downturn created a substantially more difficult business environment in 2008, affecting our liquidity and operating performance. We believe it is unlikely that these adverse economic conditions will improve significantly in 2009,
and if our revenues and gross profit levels decline further and we are unable to reduce operating expenses sufficiently, we may become unable to pay our operating expenses on a timely basis due to a lack of sufficient liquidity. Our cost reduction
initiatives, credit arrangements and asset sales may not provide sufficient liquidity for us to continue as a going concern.



LiquidityOur lack of liquid funds and other sources of financing may limit our ability to maintain our existing
operations, grow our business and compete effectively.



Our
continued losses reduced our cash and cash equivalents in 2007 and 2008. As of March 31, 2009, we had approximately $7.0 million in cash and cash equivalents and $2.0 million outstanding under our bank lending facility. In order to meet our
liquidity needs, we may be required to sell assets, or to borrow on potentially unfavorable terms, to finance our capital expenditures and working capital needs for our business. We may be unable to sell assets, or unable to borrow at favorable
terms, if at all, to meet these needs. As a result, we may become unable to pay our ordinary expenses, including our debt service, on a timely basis. Our current lack of liquidity could harm us by:



| |  |  | increasing our vulnerability to adverse economic conditions in our industry or the economy in general;
| | - |  | ------------------------------------------------------------------------------------------------------



| |  |  | requiring substantial amounts of cash to be used for debt service or debt repayment, rather than other purposes, including operations;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------



| |  |  | limiting our ability to plan for, or react to, changes in our business and industry; and
| | - |  | ----------------------------------------------------------------------------------------



| |  |  | influencing investor, supplier and customer perceptions about our financial stability and limiting our ability to obtain additional financing or acquire and retain customers.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



We have been delisted from NASDAQ and from time to
time we have not been in compliance with SEC reporting requirements, making it generally more difficult to obtain equity or debt financing on financially attractive or acceptable terms. Further, the recent downturn in the equity and debt markets
generally makes it more difficult for us to obtain financing through the issuance of equity or debt securities in the capital markets. We cannot be certain that additional financing will be available if needed and to the extent required or, if
available, on acceptable terms. If we cannot raise necessary additional funds on acceptable terms, there could be a material adverse impact on our business and operations. We also may not be able to fund expansion, take advantage of future
opportunities, meet our existing debt obligations or respond to competitive pressures or unanticipated requirements. Further, if we issue additional equity or debt securities, stockholders may experience additional dilution or the new equity
securities may have rights, preferences or privileges senior to those of existing holders of our common stock.



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In December 2008, Silicon Valley Bank waived our default under our Loan Agreement with respect to non-compliance of
maintaining banking relationships with SVB and consented to our sale of Sunrise Telecom S.r.l. to LTE Innovations OY. The amendment does not contain any consent by SVB or waiver of the banks rights and remedies with respect to our default
under a Loan Agreement covenant pursuant to which we were required to maintain tangible net worth of $44 million for the quarters ended September 30, 2008 and December 31, 2008. As a result, Silicon Valley Bank may at any time declare
immediately due and payable all of our obligations under the Loan Agreement ($2.0 million as of March 31, 2009), cease extending credit or resort to other rights and remedies under the Loan Agreement. Silicon Valley Bank currently is not
allowing us to borrow any additional amounts under the Loan Agreement.



Material Weaknesses in Internal Control over Financial ReportingWe have identified material weaknesses in our internal control over financial reporting in the past and cannot assure you that
additional material weaknesses will not be identified in the future. If our internal controls are not effective, there may be material errors in our financial statements that are not identified in a timely manner and that could require restatement,
or our filings may not be timely, and investors may lose confidence in our reported financial information, any of which could lead to a decline in our stock price.



As a result of material weaknesses identified, management concluded that we did not maintain effective internal control over financial reporting as
of December 31, 2008. The material weaknesses related to controls over inventory management and financial reporting as a result of turnover of staff both at the senior and junior levels including the San Jose Controller, Director of
Tax & Treasury, Corporate Controller, Assistant Controller and the Broadband Controller all leaving in the second half of 2008.



Costs of Being a Public CompanyAs a public company we are required to comply with many financial accounting,
disclosure and governance rules that impose financial and management burdens on us.



As a public company, we are subject to many financial accounting, disclosure and governance requirements, with relatively high associated compliance costs. For example, we must have our annual financial statements audited
and our quarterly statements reviewed by an independent registered public accounting firm, and we must prepare, review and file annual, quarterly and current reports with the SEC. Costs of these and other compliance activities are particularly
significant to us because of our small size and our financial position. We have reviewed proposals to make the Company more successful with its current capital structure and with alternative ones. The process of evaluating different alternatives and
proposals is time consuming, expensive, and distracts management attention from the operations of the Company. Moreover, so long as we are not current in our SEC filings, our opportunities are more limited. If we are not able to file all reports,
our financial condition and stockholder confidence in our company may be harmed. Even if we do file all required reports, we may not be able to comply with all the requirements of being a public company on a regular basis in the future, or we may be
unable to reduce the costs of compliance or increase our revenue or profitability sufficiently to cover those costs.



Personnel RetentionBecause we are not listed on a national exchange, have steadily lost money in recent years, and
have begun to borrow money, we could have problems hiring and retaining our personnel.



We may face challenges in hiring and retaining qualified personnel due to the restatement, the related internal investigations, ongoing losses, lowering cash balances and our delisting from NASDAQ. We depend on our employees
and on our ability to attract and retain highly qualified personnel. Due to these problems, it has become, and may continue to be, more difficult to retain key personnel, including members of our finance and management team. Our continued losses
from operations and lack of liquid funds may further disrupt our hiring and retention of key personnel. Our inability to hire qualified personnel and retain existing key personnel has disrupted, and may continue to disrupt, our ability to
effectively manage our business and to complete our outstanding periodic reports. In addition, the loss of



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the services of any of our key employees, the inability to attract or retain qualified personnel in the future, or delays in hiring required personnel, particularly
engineers and sales personnel, could delay the development and introduction of, and negatively affect our ability to sell, our products.



We will not apply to relist our common stock on a national securities exchange until we have filed all reports required to be filed with the SEC. There can be no
assurance that we will be able to obtain listing of our common stock on a national securities exchange. We may decide it is not in our stockholders best interests to apply for a listing on a national securities exchange once we become current
with our SEC reporting requirements. Any decision we make not to apply to relist our common stock on a national securities exchange could result in our inability to retain and hire key personnel.



Long-term Impact of Cost ControlsThe
actions we have taken and may take in response to the slowdowns in demand for our products and services could have long-term adverse effects on our business.



From time to time, our business experiences lower revenues due to decreased or cancelled customer orders. To scale back our operations
and to reduce our expenses in response to decreased demand for our products and services and lower revenue, we have in the past reduced our workforce, restricted hiring, reduced salaries, restricted pay increases, reduced discretionary spending, and
relocated or closed some of our operations.



In February 2008, we
announced a restructuring plan intended to reduce costs and improve operating efficiencies. The plan included a 12% reduction in our worldwide workforce, across all functional areas, and a shut-down of certain international offices.



In May 2008, we announced our plans to restructure our operations to more closely align
them with our key strategic focus and more effectively target the residential triple play market, enhanced business services and the converging core network. We announced that we would combine our broadband and wireline and fiber optics operations.
As a result of combining our business units and operations, we are likely to reduce or eliminate investment in some or all of them, reduce or eliminate product lines, reduce or eliminate our sales presence in certain geographies, reduce our market
share and likely reduce our revenues. As a part of a reduction in workforce associated with our restructuring and streamlining efforts, we released from service our Chief Operating Officer, Gerhard Beenen, effective June 30, 2008.



In November 2008, we announced additional plans to restructure our operations by
divesting of our optical and protocol products groups and taking additional cost cutting actions during the fourth quarter of 2008 to reduce operating expenses by approximately 25% once the restructuring is fully implemented.



In April 2009, we announced Company-wide salary reductions of up to 7.5% generally
applicable to all employees and contractors. We are also mandating that each of our employees and contractors generally take off five days per quarter in 2009.



We may be unable to reduce expenditures quickly enough, and sustain them at a level necessary to restore profitability, and we may have to undertake further
restructuring or cost cutting initiatives that would entail additional charges in the future. Cost-cutting initiatives may impair our future ability to develop and market products effectively, to manage and control our business, and to remain
competitive. Moreover, cost reducing measures are time-consuming, can be costly to implement and can lead to a diminished quality of our products. Each of the above measures could have long-term effects on our business by reducing our pool of
employee talent, decreasing or slowing improvements in our products, making it more difficult for us to respond to customers, limiting our ability to increase production quickly if, and when, the demand for our products increases, and limiting our
ability to hire and retain key personnel. These circumstances could cause our revenue and earnings to be lower than they otherwise might be.



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Stock Option Granting PracticesOur investigation of our historical
stock option granting practices and resulting financial restatements and litigation have had, and may continue to have, a material adverse effect on our business, financial condition and results of operations.



Based on our investigation of our historical stock option granting practices, we
concluded that we had improperly accounted for options to purchase an aggregate of 1,377,970 shares of our common stock that were awarded in January 2001 and June 2002. As a result, we recorded a total of $5.6 million in additional stock-based
compensation expense for the years 2001 through 2005, net of forfeitures related to employee terminations. These expenses had the effect of decreasing income from operations, net income and net income per share (basic and diluted) in the affected
periods in which we reported a profit, and increasing loss from operations, net loss and net loss per share in the affected periods in which we reported a loss. As a result, in connection with our Annual Report on Form 10-K for the year ended
December 31, 2005, which we filed with the SEC on November 2, 2007, we restated our consolidated balance sheet as of December 31, 2004 and the consolidated statements of operations, stockholders equity and comprehensive loss,
and cash flows for each of the years in the two-year period ended December 31, 2004, each of the quarters of 2004 and the first two quarters of 2005 as well as our financial statements for fiscal 2001 and 2002 presented in selected financial
data in Part II, Item 6, Selected Financial Data presented in our 2005 Annual Report on Form 10-K filed with the SEC on November 2, 2007.



Our senior management team and our Board of Directors have devoted a significant amount of time on matters relating to the
restatement, our outstanding periodic reports, remedial efforts and related litigation. In addition, some current and former members of our senior management team and our Board of Directors are named defendants in a lawsuit alleging violations of
federal securities laws related to the restatement. Defending these actions may require significant time and attention from members of our current senior management team and our Board of Directors. If our senior management is unable to devote a
significant amount of time in the future developing and attaining our strategic business initiatives and running ongoing business operations, there may be a material adverse effect on our business, financial condition and results of operations.



Stockholder LitigationWe
have been named as a party to a stockholder derivative action lawsuit arising from our investigation of our historical stock option granting practices and the subsequent restatement of our financial statements and may be named as a party to
additional derivative action lawsuits, which could require significant management time and attention and result in significant legal expenses, which could have a material adverse effect on our business, financial condition, results of operations and
cash flows.



We are currently engaged in civil litigation with a
party that claims, among other allegations, that some of our current and former officers and directors improperly dated stock option grants to enhance their own profits on the exercise of such options or for other improper purposes, and we may
become the subject of additional private lawsuits based on our historical stock option granting practices and the subsequent restatement of our financial statements. The expense of defending such litigation may be significant. We have entered into
indemnification agreements with each of our present and former officers and directors and if we incur indemnification obligations in connection with the pending stockholder derivative litigation or otherwise, this could affect adversely our
financial condition. Moreover, the amount of time to resolve such litigation and potential additional lawsuits is unpredictable and defending the lawsuit may divert managements attention from the day-to-day operations of our business, which
could harm our business, results of operations and cash flows. In addition, an unfavorable outcome in such lawsuits, such as a court judgment against us resulting in monetary damages or penalties, could have a material adverse effect on our
business, results of operations and cash flows.



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Delisting from NASDAQ and Compliance with SEC Reporting
RequirementsOur common stock was delisted from the NASDAQ Stock Market, which could adversely affect the price of our stock and the ability of our stockholders to trade in our stock. We have not been in compliance with SEC reporting
requirements and if we are unable to remain in compliance with SEC reporting requirements, there may be a material adverse effect on us and our stock price.



Our common stock was delisted from the NASDAQ Stock Market in December 2005, as a result of various events that caused us not to be in
compliance with our public reporting obligations, and subsequently began trading on the Pink Sheets under the symbol SRTI.PK. In addition, as a result of our delay in filing periodic reports on a timely basis, we will not be eligible to
use a registration statement on Form S-3 to register offers and sales of our securities until all periodic reports have been timely filed for at least twelve months after we have filed all required reports.



From time to time, we have not been current in the filing of our periodic reports with
the SEC, and our efforts to become current have required and will continue to require substantial management time and attention as well as additional accounting and legal expense. In addition, if we are unable to remain current in our filings with
the SEC, we may face several adverse consequences. If we are unable to remain current in our filings with the SEC, investors in our securities will not have information regarding our business and financial condition with which to make decisions
regarding investment in our securities.



Foreign Corrupt Practices ActOur international operations are subject to anti-corruption laws, such as the U.S. Foreign Corrupt Practices Act, and any violations could lead to
sanctions against us that could harm our business and our financial condition.



Our operations are subject to the Foreign Corrupt Practices Act (FCPA) and similar anti-corruption laws of other countries. The FCPA generally
prohibits U.S. companies and their intermediaries from making payments to foreign government officials for the purpose of obtaining or maintaining business or otherwise obtaining favorable treatment. The FCPA also requires companies to maintain
adequate record-keeping and internal accounting practices to accurately reflect the transactions of the companies. Under the FCPA, U.S. companies may be held liable for actions taken by their strategic or local partners or representatives. The
FCPA and similar laws in other countries can impose civil and criminal penalties for violations.



If we do not properly implement practices and controls with respect to compliance with the FCPA and similar laws, or if we fail to enforce those practices and
controls properly, we may be subject to regulatory sanctions. For example, the SEC and the U.S. Department of Justice (the DOJ) may assert that we have violated the FCPA, which could lead to fines against us and
other penalties or remedies, such as appointment of a monitor or suspension of our ability to contract with U. S. or foreign governmental agencies. Investigations or sanctions by the SEC and DOJ in connection with FCPA
enforcement, and internal investigations into whether or not violations have occurred, can be expensive and time-consuming for us. Any of these outcomes may have an adverse effect on our business, and could adversely affect
our financial results and financial condition.



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 be volatile.



We have experienced significant fluctuations in our quarterly results and we expect
that our quarterly operating results will fluctuate significantly and unpredictably. Many factors could cause our operating results to fluctuate from quarter to quarter, including the following:



| |  |  | the size and timing of orders from our customers, and limitations on our ability to ship these orders on a timely basis;
| | - |  | ------------------------------------------------------------------------------------------------------------------------



| |  |  | 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;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | the variety of price, product, and technology competition;
| | - |  | ----------------------------------------------------------



| |  |  | the proportion of our sales that is domestic or international;
| | - |  | --------------------------------------------------------------



| |  |  | the mix of the products we sell and the varied margins associated with these products;
| | - |  | --------------------------------------------------------------------------------------



| |  |  | developments relating to our ongoing litigation; and
| | - |  | ----------------------------------------------------



| |  |  | economic downturns reducing demand for telecommunication and cable equipment and services.
| | - |  | ------------------------------------------------------------------------------------------



The factors listed above may affect our business and stock price in several ways. Given our high fixed costs from overhead, research
and development, and selling and marketing, and other activities necessary to run our business, if our net sales are below our expectations in any quarter, we may not be able to adjust spending accordingly. Our stock price may decline and may be
volatile, particularly if public market analysts and investors perceive that the factors listed above may contribute to unfavorable changes in operating results. 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.



Consolidation and Other Risks Within the Telecommunications IndustryOur operating results and financial condition
could be adversely affected by consolidation among our principal customers, the uncertainty of end-user demand for the telecommunication services they provide, and the risk of regulatory changes in the telecommunications industry.



In recent years, the telecommunications industry has experienced rapid growth. The
growth led to technology innovation, intense competition, short product life cycles, and regulatory uncertainty worldwide. It is difficult for companies operating in this industry to forecast future trends and developments, particularly forecasting
customer acceptance of competing technologies. Moreover, the continued growth of end-user demand for telecommunications services is uncertain and difficult to predict. Such uncertainties may lead telecommunications companies to postpone investments
in their businesses and purchases of related equipment, such as our products.



The telecommunications industry has also experienced consolidation, such as among incumbent local exchange carriers and competitive local exchange carriers, some of which are major customers. For example, GTE and Bell Atlantic, both of
which were customers of ours, merged to create Verizon Communications Inc. and Southwestern Bell, Pacific Bell, Ameritech, Bell South, and AT&T have consolidated and now operate as AT&T, Inc. Continued consolidation in the telecommunication
industry 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.



Dependence on Wireline Access
ProductsHistorically, a significant portion of our sales has been from our wireline access products, which makes our future sales and overall business vulnerable to product obsolescence and technological change in the wireline field.



Sales of our DSL and other wireline access products accounted for
approximately 36% of our net sales for both of the years ended December 31, 2008 and 2007. 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. 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 technologies. These competing technologies may ultimately prove to be superior to DSL services and continue to reduce or eliminate the demand for our DSL
products.



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Cable Broadband Industry HealthMany companies in the cable broadband
industry have incurred significant amounts of debt and operating losses, and face increasing competition from direct broadcast satellite and telecom service providers, which may negatively impact our cable equipment sales.



Companies in the cable broadband industry have taken on significant debt as companies
aggressively consolidate and build new digital networks to allow them to provide better picture quality, internet access, and voice telephony. As a result, cable companies may reduce their capital expenditures and hiring, either of which could
adversely impact our cable business more than we currently anticipate.



Customer ConcentrationOur customers are concentrated in the telecommunications and cable broadband industries, which makes our future success dependent on the buying patterns of these customers and
their continued demand for our products. In addition, a limited number of customers account for a high percentage of our net sales, and any adverse effect on these customers or our relationship with these customers could cause our net sales to
decrease.



Our customers are concentrated in the telecommunications
and cable broadband industries. Accordingly, our future success depends on the buying patterns of these customers and the continued demand by these customers for our products. Additionally, the market is characterized by rapidly changing technology,
evolving industry standards, changes in end-user requirements and frequent new product introductions and enhancements. See Risk FactorsConsolidation and Other Risks within the Telecommunications Industry for a discussion of
risks associated with the telecommunications industry. Our continued success will depend upon our 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 standards.



Moreover, a relatively small number
of customers account for a large percentage of our net sales. Net sales from our top five customers accounted for approximately 22% of net sales in 2008, 27% in 2007, and 28% in 2006. In general, our customers are not subject to long-term supply
contracts with us and are not obligated to purchase a specific amount of products from us or to provide us with binding forecasts of purchases for any period.



Historically, a significant portion of our net sales have come from a small number of relatively large orders from a limited number of large customers. We
anticipate that our operating results for a given period will be dependent on a limited number of customers.



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 pressure us to lower our prices to them, and they may successfully negotiate other terms and
provisions that may adversely affect our business and profits.



Product DevelopmentIf we are unable to develop new products successfully and enhance our existing 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 or otherwise abandoned because of the introduction of products involving competing technologies, by the evolution of alternative technologies or new industry protocol standards, by rival products of our competitors, market timing, or
product design flaws. These market conditions are even more complex and challenging because of the high degree to which the telecommunications industry is fragmented.



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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, characterized by evolving industry standards;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 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.



Furthermore, our expenditures
devoted to research and development may be considered high for our level of sales. If these efforts do not result in the development of products that generate strong sales for us or if we do not reduce these expenditures, our profit levels will not
return to their desired levels. If we reduce this spending, we may not be able to develop needed new products, which could negatively impact our sources of new revenues.



Sales Implementation CyclesThe length and unpredictability of the sales and implementation cycles for
our products make 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
contacts. 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.



Other sources of delays that lead to long sales cycles, or even to 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 deployments now typically ranges from six to twenty-four months. The deferral or loss of one or more significant sales could significantly affect our operating results, especially if there are significant
selling and marketing expenses associated with deferred or lost sales.



Managing Growth and SlowdownsWe may have difficulty managing expansions and contractions in our operations, which could reduce our chances of maintaining or restoring our profitability.



We experienced rapid growth in revenues and in our business during
1999 and 2000 followed by significant slowdowns in 2001 and 2002, which were then followed by sales increases in subsequent years. We experienced rapid growth in revenues between 2005 and 2006, which have been followed by significant declines in
sales in 2007 and 2008. These periods of expansion and contraction in our revenues and operations have placed, and may continue to place, a significant strain on our management and operations. As a result of our historical growth and potential
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; and
| | - |  | ----------------------------------------------------------------



| |  |  | the challenge to manage expense reductions without impacting development strategies or our long-term goals.
| | - |  | -----------------------------------------------------------------------------------------------------------



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We cannot ensure that we will be able to manage growth or slowdowns successfully, or that we will be able to
achieve or sustain profitability.



Manufacturing CapacityIf demand for our products does not match our manufacturing capacity, our earnings may suffer.



We cannot immediately adapt our production capacity and related cost structures to rapidly changing demand for our products. When demand does not meet our
expectations or manufacturing capacity exceeds our production requirements, profitability may decline. Conversely, if during a market upturn we cannot increase our manufacturing capacity to meet product demand, we will not be able to fulfill orders
in a timely manner, which in turn may have a negative effect on our earnings and overall 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 of 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. 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 continued challenges to our market share and price pressure on our products. Also, over time, our profitability, if any, may decrease. In
addition, it is difficult to assess accurately the market share of each of our products and lines of products because of the high degree of fragmentation in the market for service verification equipment. As a result, it may be difficult for us to
forecast accurately trends in the market and which of our products will be the most competitive over the longer term, and therefore, what is the best use of our cash, personnel and other forms of resources.



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 bound by long-term contracts, our future supply of parts is uncertain.



We purchase many key parts, such as microprocessors, field programmable gate arrays,
bus interface chips, optical components, and oscillators, from single source or sole suppliers, and we license certain software from third parties. 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 help ensure an
adequate supply. We may experience supply problems as a result of financial or operating 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, 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;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | 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;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the unavailability of, or interruption in, access to some process technologies; and
| | - |  | -----------------------------------------------------------------------------------



| |  |  | exposure to the financial problems and stability of our suppliers.
| | - |  | ------------------------------------------------------------------



In addition, the purchase of these components on a sole source basis subjects us to risks of price increases and potential quality assurance problems. Long
lead-times for delivery of certain sole-sourced components may impact our ability to respond to changes in production demand in a timely fashion to satisfy customers orders and we may not be able to ensure customer satisfaction. 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.



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 accounted for approximately 62% of our net sales in 2008, 57% in 2007 and 48% in 2006. We expect
international revenues to continue to account for a significant percentage of net sales for the foreseeable future. As a result, we will face various risks relating to our international operations, including the following:



| |  |  | fluctuations in foreign currency exchange rates and the risks of using hedging strategies to minimize our exposure to these fluctuations;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 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; and
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | possible disruptions to our customers, sales channels, sources of supply, or production facilities due to wars, terrorist acts, acts of protest or civil disobedience, or
other conflicts between or within various nations and due to variations in crime rates and the rule of law between nations.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



We cannot ensure that one or more of these factors will not materially and adversely affect our revenues and profits.



In addition, the Asia/Pacific and Latin America regions, both high-growth emerging
markets for telecommunications equipment, have experienced instability in many of their economies and significant devaluations in local currencies. Sales from customers located in these regions accounted for approximately 25%, 22% and 22% of our net
sales in 2008, 2007 and 2006, respectively. These economic instabilities may continue or worsen, which could have a material 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.



Operations in TaiwanWe rely on our subsidiary in Taiwan to manufacture a substantial portion of our products, and our
reputation and results of operations could be adversely affected if this subsidiary does not perform as we expect.



We produce a substantial portion of our products at our subsidiary in Taiwan and plan to concentrate more of our production there in the future. We depend on our
Taiwan subsidiary to produce a sufficient volume of our products in a timely fashion and at satisfactory quality levels. If we fail to manage our subsidiary so that it produces quality products on time and in sufficient quantities, our reputation
and results of operations could suffer. In addition, we rely on our Taiwan subsidiary to place orders with suppliers for the components they need to manufacture our products. If our subsidiary in Taiwan fails to place timely and sufficient orders
with its suppliers, our results of operations could suffer.



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The cost, quality, and availability of our Taiwan operation are essential to the successful production and sale of
our products. Our increasing reliance on this foreign subsidiary for manufacturing exposes us to risks that are not under our immediate control and which could negatively impact our results of operations. In addition, transportation delays and
interruptions, political and economic regulations, and natural disasters could also adversely impact our Taiwan operations and negatively impact our results of operations. See Risk FactorsDependence on Sole and Single Source
Suppliers and, Risks of International Operations for a discussion of risks associated with concentrating production activities at one facility that is outside the United States.



Concentration of ControlOur Chief
Executive Officer and certain directors retain significant control over us, which may allow them to decide the outcome of matters submitted to stockholders for approval. This influence may not be beneficial to all stockholders.



As of March 31, 2009, Paul A. Marshall, our President and Chief Executive Officer
and a member of our Board, and Robert C. Pfeiffer, a member of our Board, beneficially owned approximately 23% and 12%, respectively, of our outstanding shares of common stock. Consequently, these two individuals together control approximately 35%
of our outstanding shares of common stock and, to the extent that they act together, may be able to control the election of our directors and the approval of significant corporate transactions that must be submitted to a vote of the stockholders. In
addition, Messrs. Marshall and Pfeiffer constitute two of the six members of our Board and have significant influence in directing the actions taken by the Board. Further, to our knowledge, Paul Ker-Chin Chang, our former Chief Executive Officer,
President and Chairman of the Board, continues to hold a significant stake in our common stock. To the extent that Mr. Chang acts together with Messrs. Marshall and Pfeiffer, the three individuals together control a significant portion of our
outstanding shares of common stock. 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 us may also delay or prevent a change in control of us that other stockholders may consider desirable. In addition, conflict among the controlling stockholders may adversely impact their ability to take
joint actions in the best interests of us and our other stockholders.



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
imperfections that we consider to be insignificant at the time of shipment. We may misjudge the seriousness of a product imperfection and allow the product 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 defects and errors 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 regulations or laws regarding our products. Our defense against such 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.



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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 are 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 risks associated with our intellectual property assets, including the risks of unauthorized use of our intellectual property and the costs of protecting our
intellectual property.



Most of our intellectual property and proprietary
technology is not protected by patents, and as a result our intellectual property may not be adequately protected. If unauthorized persons were to copy, obtain, or otherwise misappropriate our intellectual property or proprietary technology, 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 revenues. 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 monitoring and detecting the 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.



Although our employees are subject to confidentiality obligations, this protection may be inadequate to deter or prevent the misappropriation of our intellectual
property or proprietary technology. Our inability to protect our intellectual property or proprietary technology may adversely affect our competitive business position.



Litigation has in the past been, and may in the future be, necessary to enforce our intellectual property rights and/or defend against the
accusations of others. This kind of litigation is time-consuming and expensive to prosecute and resolve and results in a substantial diversion of management resources. We cannot assure you that we will be successful in this type of 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.



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 a 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 proceedings initiated against us.



AcquisitionsWe have in the past acquired multiple companies and lines of business, and we may pursue additional acquisitions in the future. These activities involve numerous risks, including the use of cash,
acquired intangible assets, and the diversion of management attention.



We have acquired multiple companies and lines of business in the past. As a result of these acquisitions, we face numerous risks, including the following:



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



| |  |  | 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 independent companies;
| | - |  | ----------------------------------------------------------------------------------------------------------------



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| |  |  | developing compatible or complementary products and technologies from previously independent operations; and
| | - |  | ------------------------------------------------------------------------------------------------------------



| |  |  | pre-acquisition liabilities associated with the companies or intellectual property acquired, or both.
| | - |  | -----------------------------------------------------------------------------------------------------



The risks stated above are increased by the fact that most of the companies and assets
that we have acquired are located outside of the United States, which makes integration more difficult and costly. 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 additional acquisitions, we will face similar risks as those outlined 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 an acquisition is consummated;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | negotiating and closing these transactions;
| | - |  | -------------------------------------------



| |  |  | the possible need to fund these acquisitions by dilutive issuances of equity securities or by incurring debt; and
| | - |  | -----------------------------------------------------------------------------------------------------------------



| |  |  | the potential negative effect on our financial statements from an increase in other intangibles, write-off of research and development costs, and high costs and expenses from
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 effectively, efficiently, and successfully into our business.



Dependence on Key EmployeesIf one or more of our senior managers were to leave, we
could experience difficulty 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. If any of our senior managers were to
leave us, 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. We
do not have employment contracts with, or key person life insurance for, any of our personnel.



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 a stockholder may consider favorable. These
provisions provide for the following:



| |  |  | 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.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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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 could also limit the price that some investors might be willing to pay in the future for shares of our common stock.



AVAILABLE INFORMATION



Our website is http://www.sunrisetelecom.com. We make available free of charge, on or through our website, our annual, quarterly and
current reports, and any amendments to those reports, as soon as reasonably practicable after electronically filing such reports with the SEC. Information contained on our website is not part of this report.



ITEM 1B.     UNRESOLVED STAFF COMMENTS



None.



ITEM 2.    PROPERTIES



We own our headquarters, manufacturing and research, and development facility, which we built during 2001 on property that we acquired
that year. The facility is 91,700 square feet and is located in San Jose, California. As of December 31, 2008, we also had leases for 16,500 square feet of office and manufacturing space in Norcross, Georgia; and 127,300 square feet of office
and manufacturing space in Taipei County, Taiwan. We lease sales offices in Beijing, Guangzhou, and Shanghai, China; Seoul, Korea; Tokyo, Japan; Gomaringen, Germany; Milan, Italy; Paris, France; and Mexico City, Mexico.



We believe that our existing facilities are adequate for our needs for the foreseeable
future.



ITEM 3.     LEGAL
PROCEEDINGS



On December 13, 2006, a stockholder derivative
lawsuit was filed in the Superior Court of the State of California on behalf of Chris Stovall, a purported stockholder of the Company, against certain of the Companys current and former officers, directors, and employees and naming the Company
as a nominal defendant. The complaint asserts claims for breach of fiduciary duty, waste, unjust enrichment and other statutory claims arising out of the Companys stock option grant practices, which plaintiff claims included the
backdating of stock option grants. The court has granted three times the Companys motions to dismiss the claims based on the insufficiency of the complaint. The Company had disclosed an internal review of such practices in
November 2006 and described the results of that review in its Annual Report on Form 10-K for 2005, filed on November 2, 2007.



On November 21, 2007, Mr. Stovall filed a second amended complaint alleging similar legal claims arising primarily out of the historic stock option grant
practices as described in our 2005 Form 10-K. The second amended complaint seeks monetary damages from the individual defendants, restitution, disgorgement of profits, attorneys fees, and various corporate governance reforms.



In February 2008, the parties attempted to resolve the litigation through mediation,
but were unsuccessful. In May 2008, the court granted the Companys motion to dismiss the plaintiffs claims for a third time based on the insufficiency of the complaint, but left the plaintiff with the ability to further amend the
complaint. In June 2008, Stovall filed a third amended complaint alleging similar legal claims arising primarily out of the historic stock option grant practices of the Company, including prior to the Companys initial public offering. In
August 2008, the court denied the Companys motion to dismiss the plaintiffs claims against it and the individual defendants, but did not rule on the individual defendants motion to dismiss the plaintiffs claims. In October
2008, the court denied the individual



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defendants motion to dismiss the plaintiffs claim and allowed the plaintiff to proceed. In January 2009, the Company answered the complaint with a general
denial and asserted all available affirmative defenses. In February 2009, the court granted the motion of one individual defendant to compel arbitration of the claims against him, and the other individual defendants filed a motion to separately try
the issues related to the plaintiffs standing to sue. A hearing on the individual defendants motion to separately try the issues related to the plaintiffs standing to sue was held on April 10, 2009. The court has not yet ruled
on that motion.



The Company intends to continue to assert all available
defenses. The parties may continue with their mediation efforts in the future. The outcome of this litigation is uncertain and should the Company experience an unfavorable ruling, there exists the possibility of a material adverse impact on its
financial condition, results of operations and cash flows for the period in which the ruling occurs. No amount was accrued for this contingency as of December 31, 2008 as a loss is not considered probable or estimable.



From time to time, we may be involved in litigation or other legal proceedings,
including that noted above, relating to claims arising out of our day-to-day operations or otherwise. Litigation is inherently uncertain, and we could experience unfavorable rulings. Should we experience an unfavorable ruling, there exists the
possibility of a material adverse impact on our financial condition, results of operations, cash flows or on our business for the period in which the ruling occurs and/or future periods.



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



During the quarter ended December 31, 2008, there were no matters submitted to a
vote of the security holders, through the solicitation of proxies or otherwise.



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Part II.



ITEM 5.    MARKET FOR REGISTRANTS COMMON EQUITY, RELATED
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES



INFORMATION ABOUT
OUR COMMON STOCK



Our common stock was traded on the NASDAQ Stock
Market under the symbol SRTI since our initial public offering on July 13, 2000 through December 15, 2005, when our common stock was delisted and began trading on the Pink Sheets under the symbol SRTI.PK. Since
December 15, 2005, there has been no established public trading market for our common stock.



The following table sets forth, for the periods indicated, the highest and lowest sale prices for our common stock, as reported by the Pink Sheets.



|               |  |      |      |     |   |      |  |                |  |     |      |  |   |     
|-------------- |  | ---- | ---- | --- | - | ---- |  | -------------- |  | --- | ---- |  | - | ----
|2008           |  | High |      | Low |   | 2007 |  | High           |  | Low
|First Quarter  |  | $    | 2.10 |     | $ | 1.39 |  | First Quarter  |  | $   | 3.31 |  | $ | 1.98
|Second Quarter |  | $    | 1.48 |     | $ | 1.14 |  | Second Quarter |  | $   | 3.35 |  | $ | 2.75
|Third Quarter  |  | $    | 1.35 |     | $ | 0.30 |  | Third Quarter  |  | $   | 3.50 |  | $ | 1.88
|Fourth Quarter |  | $    | 0.62 |     | $ | 0.15 |  | Fourth Quarter |  | $   | 2.50 |  | $ | 1.65



Number of Holders



As of March 31, 2009, we had approximately 56 stockholders of record of our
common stock. We estimate that as of March 31, 2009, there were approximately 1,270 beneficial owners of our common stock.



Dividend Policy



We did not declare or pay any cash dividend in 2008 and 2007. Our Board of Directors will determine the amount of any future dividends based on our future financial condition and results of operations. Our secured revolving
credit arrangement with Silicon Valley Bank limits our ability to pay future dividends. See Item 7, Managements Discussion and Analysis of Financial Condition and Results of OperationsLiquidity and Capital Resources.



Unregistered Sales of Equity Securities



We did not sell any unregistered shares of our common stock during 2008, 2007, or
2006.



Purchases of Equity Securities by the Issuer and Affiliated Purchasers



Neither we nor any affiliated purchaser repurchased any of our equity
securities in the fourth quarter of 2008.



29



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##### Table of Contents

COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*

Among Sunrise Telecom Incorporated, the NASDAQ Composite Index

and the S&P Information Technology Index



LOGO



|* |  | $100 invested on 12/31/03 in stock or index, including reinvestment of dividends.
|- |  | ---------------------------------------------------------------------------------

| |  | Fiscal year ending December 31.
| |  | -------------------------------



Copyright@ 2009 S&P, a division of The McGraw-Hill Companies Inc. All rights reserved.



|                             |  |        |  |        |  |        |  |        |  |        |  |      
|---------------------------- |  | ------ |  | ------ |  | ------ |  | ------ |  | ------ |  | -----
|                             |  | 12/03  |  | 12/04  |  | 12/05  |  | 12/06  |  | 12/07  |  | 12/08
|Sunrise Telecom Incorporated |  | 100.00 |  | 82.18  |  | 50.01  |  | 64.72  |  | 60.31  |  | 14.12
|NASDAQ Composite             |  | 100.00 |  | 109.96 |  | 112.90 |  | 126.64 |  | 138.40 |  | 80.76
|S&P Information Technology   |  | 100.00 |  | 102.56 |  | 103.57 |  | 112.29 |  | 130.61 |  | 74.26



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##### Table of Contents

ITEM 6.    SELECTED FINANCIAL DATA



The table below sets forth selected 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.



|                                                          |      |                          |         |      |  |   |         |   |      |   |        |      |   |         |   |  |   |         |  
|--------------------------------------------------------- | ---- | ------------------------ | ------- | ---- |  | - | ------- | - | ---- | - | ------ | ---- | - | ------- | - |  | - | ------- | -
|                                                          |      | Years Ended December 31, |        
|                                                          | 2008 |                          |         | 2007 |  |   | 2006    |   | 2005 |   |        | 2004 |  
|Consolidated Statements of Operations Data(in thousands): |      |                          |         |      |  |   |         |   |      |   |        |      |   |         |   |  |   |         |  
|Net sales                                                 |      | $                        | 80,650  |      |  | $ | 93,391  |   |      | $ | 99,880 |      | $ | 68,514  |   |  | $ | 61,669  |  
|Cost of sales                                             |      |                          | 37,279  |      |  |   | 36,018  |   |      |   | 34,504 |      |   | 22,874  |   |  |   | 18,966  |  
|                                                          |      |                          |         |      |  |   |         |   |      |   |        |      |   |         |   |  |   |         |  
|Gross profit                                              |      |                          | 43,371  |      |  |   | 57,373  |   |      |   | 65,376 |      |   | 45,640  |   |  |   | 42,703  |  
|                                                          |      |                          |         |      |  |   |         |   |      |   |        |      |   |         |   |  |   |         |  
|Operating expenses:                                       |      |                          |         |      |  |   |         |   |      |   |        |      |   |         |   |  |   |         |  
|Research and development                                  |      |                          | 18,661  |      |  |   | 23,589  |   |      |   | 21,068 |      |   | 18,402  |   |  |   | 16,623  |  
|Selling and marketing                                     |      |                          | 23,959  |      |  |   | 28,817  |   |      |   | 27,688 |      |   | 23,462  |   |  |   | 18,067  |  
|General and administrative                                |      |                          | 16,173  |      |  |   | 18,746  |   |      |   | 16,586 |      |   | 14,795  |   |  |   | 10,154  |  
|Restructuring charges                                     |      |                          | 2,140   |      |  |   |        |   |      |   |       |      |   |        |   |  |   |        |  
|Impairment charges                                        |      |                          | 18,796  |      |  |   |        |   |      |   |       |      |   |        |   |  |   |        |  
|Gain on sale of business                                  |      |                          | (8,303  | )    |  |   |        |   |      |   |       |      |   |        |   |  |   |        |  
|Gain from legal settlement                                |      |                          |        |      |  |   |        |   |      |   |       |      |   | (1,500  | ) |  |   |        |  
|                                                          |      |                          |         |      |  |   |         |   |      |   |        |      |   |         |   |  |   |         |  
|Total operating expenses                                  |      |                          | 71,426  |      |  |   | 71,152  |   |      |   | 65,342 |      |   | 55,159  |   |  |   | 44,844  |  
|                                                          |      |                          |         |      |  |   |         |   |      |   |        |      |   |         |   |  |   |         |  
|Income (loss) from operations                             |      |                          | (28,055 | )    |  |   | (13,779 | ) |      |   | 34     |      |   | (9,519  | ) |  |   | (2,141  | )
|Other income, net                                         |      |                          | 1,151   |      |  |   | 2,043   |   |      |   | 2,174  |      |   | 472     |   |  |   | 899     |  
|                                                          |      |                          |         |      |  |   |         |   |      |   |        |      |   |         |   |  |   |         |  
|Income (loss) before income taxes                         |      |                          | (26,904 | )    |  |   | (11,736 | ) |      |   | 2,208  |      |   | (9,047  | ) |  |   | (1,242  | )
|Income tax expense (benefit)                              |      |                          | (840    | )    |  |   | 820     |   |      |   | 1,694  |      |   | 1,193   |   |  |   | 10,464  |  
|                                                          |      |                          |         |      |  |   |         |   |      |   |        |      |   |         |   |  |   |         |  
|Net income (loss)                                         |      | $                        | (26,064 | )    |  | $ | (12,556 | ) |      | $ | 514    |      | $ | (10,240 | ) |  | $ | (11,706 | )
|                                                          |      |                          |         |      |  |   |         |   |      |   |        |      |   |         |   |  |   |         |  
|Dividends per share                                       |      | $                        |        |      |  | $ |        |   |      | $ |       |      | $ | 0.05    |   |  | $ | 0.05    |  
|                                                          |      |                          |         |      |  |   |         |   |      |   |        |      |   |         |   |  |   |         |  
|Net income (loss) per share: (1)                          |      |                          |         |      |  |   |         |   |      |   |        |      |   |         |   |  |   |         |  
|Basic                                                     |      | $                        | (0.51   | )    |  | $ | (0.24   | ) |      | $ | 0.01   |      | $ | (0.20   | ) |  | $ | (0.23   | )
|                                                          |      |                          |         |      |  |   |         |   |      |   |        |      |   |         |   |  |   |         |  
|Diluted                                                   |      | $                        | (0.51   | )    |  | $ | (0.24   | ) |      | $ | 0.01   |      | $ | (0.20   | ) |  | $ | (0.23   | )
|                                                          |      |                          |         |      |  |   |         |   |      |   |        |      |   |         |   |  |   |         |  
|Shares used in computing net income (loss) pershare: (1)  |      |                          |         |      |  |   |         |   |      |   |        |      |   |         |   |  |   |         |  
|Basic                                                     |      |                          | 51,349  |      |  |   | 51,349  |   |      |   | 51,349 |      |   | 51,006  |   |  |   | 50,426  |  
|                                                          |      |                          |         |      |  |   |         |   |      |   |        |      |   |         |   |  |   |         |  
|Diluted                                                   |      |                          | 51,349  |      |  |   | 51,349  |   |      |   | 51,580 |      |   | 51,006  |   |  |   | 50,426  |  
|                                                          |      |                          |         |      |  |   |         |   |      |   |        |      |   |         |   |  |   |         |  



|                                                  |      |              |        |  |      |        |      |   |         |  |   |        |  |   |        
|------------------------------------------------- | ---- | ------------ | ------ |  | ---- | ------ | ---- | - | ------- |  | - | ------ |  | - | -------
|                                                  |      | December 31,
|                                                  | 2008 |              | 2007   |  | 2006 |        | 2005 |   | 2004   
|Consolidated Balance Sheet Data (in thousands):   |      |              |        |  |      |        |      |   |         |  |   |        |  |   |        
|Cash, cash equivalents and short-term investments |      | $            | 9,196  |  | $    | 15,981 |      | $ | 22,015  |  | $ | 24,956 |  | $ | 33,871 
|Working capital                                   |      |              | 22,512 |  |      | 31,968 |      |   | 40,694  |  |   | 40,134 |  |   | 50,500 
|Total assets                                      |      |              | 65,160 |  |      | 96,876 |      |   | 107,658 |  |   | 99,780 |  |   | 109,661
|Notes payable, less current portion               |      |              | 2      |  |      | 424    |      |   | 528     |  |   | 602    |  |   | 882    
|Total stockholders equity                        |      |              | 43,622 |  |      | 69,938 |      |   | 82,736  |  |   | 80,849 |  |   | 93,486 



|(1) |  | See Note 1(p) 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 net income (loss) per
share.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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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 above under Part I, Item 1A, Risk Factors. The following discussion should be read in conjunction with our consolidated financial statements and notes thereto included elsewhere
in this report.



OVERVIEW



We design, 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 broadband, internet access, and wireless networks. In addition, our products continuously monitor
in-service cable, telecom and wireless networks to assist operators in improving network quality and to provide traffic data to assist network operations. Our customers include telephone companies, incumbent local exchange carriers, cable companies,
competitive local exchange carriers, mobile operators, and network infrastructure suppliers, and installers throughout North America, Latin America, Europe, Africa, the Middle East, and the Asia/Pacific region.



We assess the overall success of our business primarily through the use of financial
metrics. Management considers several factors to be particularly important when assessing past business success and projecting future performance. The first such factor is the maintenance of high levels of working capital and low levels of debt. See
Liquidity and Capital Resources.



This first factor is
enabled by the second factor: the generation of cash flows from our operating activities. Ultimately, the ability to consistently generate substantial positive cash flows is the primary indicator of our business success and is imperative for our
survival. See Liquidity and Capital Resources.



The third
factor is profitability. In general, profitability indicates our success in generating present and future cash flows from our operating activities. The key components of our profitability are net sales, cost of sales, and operating expenses. See the
discussion directly below and Comparison of the Years Ended December 31, 2008, 2007 and 2006.



On November 19, 2008, the Company and LTE Innovations OY (LTE) entered into a Participation Purchase Agreement (Purchase Agreement)
pursuant to which we agreed to sell our Italy-based Protocol Products Group (PPG) to LTE for approximately 8.0 million Euros, or approximately $10.7 million in cash, of which approximately $0.6 million will be paid three months
after close and $1.7 million will be held in escrow for up to 15 months after close to secure indemnities under the Purchase Agreement. The closing of the transaction occurred on December 12, 2008. We used $2.0 million of the proceeds from the
sale to repay our borrowings outstanding under the Loan Agreement with Silicon Valley Bank in December 2008.



During 2008, we initiated several restructuring activities intended to reduce costs, improve operating efficiencies and change our operations to more closely align
them with our key strategic focus. The total restructuring charges of $2.1 million include employee severance and benefit costs, costs related to leased facilities abandoned or subleased, and disposal of owned equipment.



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Sources of Net Sales



We generate our cash flows primarily from selling telecommunications and broadband cable network testing equipment, and our future cash flows are largely dependent
on our continuing ability to sell our products and collect cash for the sales to our customers. Our sales largely depend upon our ability to provide products that test most types of telecommunications network technologies, including those related to
twisted-pair copper, cable broadband, and fiber optics networks. Within these technologies, we provide products that test the entire length of the network, from the point of installation in a building or residence through system back-offices and
trunk lines, including the signaling processes that set up and tear down phone calls and transmit packets. We consider investment in research and development and selling and marketing activities to be critical to our ability to generate strong sales
volume in the future. To that end, we strive to continually offer new products, and update existing products, to meet our customers needs.



We sell our products predominantly to large telecommunications service providers. These types of customers generally commit significant resources to the evaluation
of our and our competitors products and require each vendor to expend substantial time, effort, and expense educating them 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. 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. We anticipate that our operating results for any given period will continue to be dependent, to a significant extent, on purchase orders, which can be
delayed or cancelled by our customers.



Historically, a significant
portion of our net sales have come from a small number of relatively large orders from a limited number of customers. Verizon Communications, Inc. accounted for 13% and 11% of our net sales in 2007 and 2006, respectively. No customer accounted for
10% or more of our net sales in 2008. Overall, we anticipate that our operating results for a given period will be dependent on a small number of customers.



Currently, competition in the telecommunications equipment market is intense and is characterized by declining prices due to increased competition and new products
and due to declining customer demand. Because of these market conditions 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, or fail to introduce higher margin new products, there will be a corresponding decline in our gross margin percentage. See Part I, Item 1A, Risk FactorsCompetition and Risk
FactorsConsolidation and Other Risks Within the Telecommunications Industry.



We have substantial sales denominated in Euros, and to a lesser degree, amounts in the Canadian dollar, Japanese yen, Korean won and other currencies, and have, in prior years, used derivative financial instruments to hedge our
foreign exchange risks. We record the impact of changes in the current value of such forward contracts as other income or expense. We currently do not use forward contracts to hedge our foreign exchange risks. Foreign exchange exposure from sales
made in foreign currencies increased during the year ended December 31, 2008 but did not have a material impact on our results of operations. We have also been exposed to fluctuations in non-U.S. currency exchange rates related to our
manufacturing activities in Taiwan. In the future, we expect that a growing portion of our 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. See
Part I, Item 1A, Risk FactorsRisks of International Operations.



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##### Table of Contents

Cost of Sales



Our cost of sales consists primarily of the following:



| |  |  | direct material costs of product components, manuals, product documentation, and product accessories;
| | - |  | -----------------------------------------------------------------------------------------------------



| |  |  | production wages, taxes, and benefits;
| | - |  | --------------------------------------



| |  |  | allocated production overhead costs;
| | - |  | ------------------------------------



| |  |  | warranty costs;
| | - |  | ---------------



| |  |  | the costs of board level assembly by third party contract manufacturers; and
| | - |  | ----------------------------------------------------------------------------



| |  |  | scrapped and reserved material purchased for use in the production process.
| | - |  | ---------------------------------------------------------------------------



We recognize direct cost of sales, wages, taxes, benefits, and allocated overhead costs at the same time that we recognize revenue for products sold.
We expense scrapped materials as incurred.



Our industry is characterized
by limited sources and long lead times for the materials and components that we use to manufacture 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. These long lead times have caused in the past, and may in the future, cause us to purchase larger quantities of some parts, increasing our investment in
inventory and the risk of the parts obsolescence. Additionally, initiatives to remove lead and other hazardous substances may require redesign of our products and could result in higher rates of obsolescence for components currently on hand.
Any subsequent write-off of inventory could result in lower margins. See Part I, Item 1A, Risk FactorsDependence on Sole and Single Source Suppliers.



Operating Costs



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



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 or the headcount in each of these areas. These allocated charges include
facility rent, utilities, communications charges, and depreciation expenses for our building, equipment, and office furniture.



SFAS 123R requires companies to estimate the fair value of share-based payment awards on the date of grant using an option-pricing model. The value of the
portion of the award that is ultimately expected to vest is recognized as expense ratably over the requisite service periods. We have estimated the fair value of each award as of the date of



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##### Table of Contents

grant or assumption using the Black-Scholes option pricing model. For the years ended December 31, 2008, 2007 and 2006, we recorded stock-based compensation of
$0.2 million, $0.4 million and $1.0 million, respectively.



During 2008,
2007, and 2006, we charged $0.1 million, $0.3 million, and $0.8 million, respectively, to general and administrative expense for amortization of intangible assets, such as developed technology and non-compete agreements, obtained through various
business acquisitions.



RESULTS OF OPERATIONS



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



|                                  |  |       |    |  |       |    |  |       |  
|--------------------------------- |  | ----- | -- |  | ----- | -- |  | ----- | -
|                                  |  | 2008  |    |  | 2007  |    |  | 2006  |  
|Net sales                         |  | 100.0 | %  |  | 100.0 | %  |  | 100.0 | %
|Cost of sales                     |  | 46.2  |    |  | 38.5  |    |  | 34.5  |  
|                                  |  |       |    |  |       |    |  |       |  
|Gross profit                      |  | 53.8  |    |  | 61.5  |    |  | 65.5  |  
|                                  |  |       |    |  |       |    |  |       |  
|Operating expenses:               |  |       |    |  |       |    |  |       |  
|Research and development          |  | 23.0  |    |  | 25.3  |    |  | 21.1  |  
|Selling and marketing             |  | 29.7  |    |  | 30.9  |    |  | 27.7  |  
|General and administrative        |  | 20.1  |    |  | 20.1  |    |  | 16.6  |  
|Restructuring charges             |  | 2.7   |    |  |      |    |  |      |  
|Impairment charges                |  | 23.3  |    |  |      |    |  |      |  
|Gain on sale of business          |  | (10.3 | )  |  |      |    |  |      |  
|                                  |  |       |    |  |       |    |  |       |  
|Total operating expenses          |  | 88.5  |    |  | 76.3  |    |  | 65.4  |  
|                                  |  |       |    |  |       |    |  |       |  
|Income (loss) from operations     |  | (34.7 | )  |  | (14.8 | )  |  | 0.1   |  
|Other income, net                 |  | 1.4   |    |  | 2.2   |    |  | 2.2   |  
|                                  |  |       |    |  |       |    |  |       |  
|Income (loss) before income taxes |  | (33.3 | )  |  | (12.6 | )  |  | 2.3   |  
|Income tax expense (benefit)      |  | (1.0  | )  |  | 0.9   |    |  | 1.8   |  
|                                  |  |       |    |  |       |    |  |       |  
|Net income (loss)                 |  | (32.3 | )% |  | (13.5 | )% |  | 0.5   | %
|                                  |  |       |    |  |       |    |  |       |  



COMPARISON OF THE YEARS ENDED DECEMBER 31,
2008, 2007 AND 2006



Net Sales by
Product Category



Our net sales by product category for the
years ended December 31, 2008, 2007 and 2006 are summarized as follows (in thousands, except percentages):



|                       |      |                         |        |                    |   |        |                    |   |         |                         |  |                    |    |  |                    |        |  |   |        |  |   |        |   |  |     |   
|---------------------- | ---- | ----------------------- | ------ | ------------------ | - | ------ | ------------------ | - | ------- | ----------------------- |  | ------------------ | -- |  | ------------------ | ------ |  | - | ------ |  | - | ------ | - |  | --- | --
|(Dollars in thousands) |      | Years EndedDecember 31, |        | Variance inDollars |   |        | Variance inPercent |   |         | Years EndedDecember 31, |  | Variance inDollars |    |  | Variance inPercent |       
|                       | 2008 |                         | 2007   |                    |   |        | 2007               |   | 2006    |                         | 
|Wireline access        |      | $                       | 29,451 |                    | $ | 33,226 |                    | $ | (3,775  | )                       |  | (11                | )% |  | $                  | 33,226 |  | $ | 35,618 |  | $ | (2,392 | ) |  | (7  | )%
|Cable broadband        |      |                         | 20,090 |                    |   | 27,732 |                    |   | (7,642  | )                       |  | (28                | )% |  |                    | 27,732 |  |   | 31,306 |  |   | (3,574 | ) |  | (11 | )%
|Fiber optics           |      |                         | 22,321 |                    |   | 25,227 |                    |   | (2,906  | )                       |  | (12                | )% |  |                    | 25,227 |  |   | 24,969 |  |   | 258    |   |  | 1   | % 
|Signaling              |      |                         | 8,788  |                    |   | 7,206  |                    |   | 1,582   |                         |  | 22                 | %  |  |                    | 7,206  |  |   | 7,987  |  |   | (781   | ) |  | (10 | )%
|                       |      |                         |        |                    |   |        |                    |   |         |                         |  |                    |    |  |                    |        |  |   |        |  |   |        |   |  |     |   
|                       |      | $                       | 80,650 |                    | $ | 93,391 |                    | $ | (12,741 | )                       |  | (14                | )% |  | $                  | 93,391 |  | $ | 99,880 |  | $ | (6,489 | ) |  | (6  | )%
|                       |      |                         |        |                    |   |        |                    |   |         |                         |  |                    |    |  |                    |        |  |   |        |  |   |        |   |  |     |   



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##### Table of Contents

Net Sales by Product Category



Net sales decreased 14% to $80.7 million from $93.4 million in 2007. The decrease
primarily reflects decreased sales of cable broadband products, and to a lesser extent decreased sales of wireline access and fiber optics products. Decreases in sales of cable broadband and wireline access products were primarily related to our
customers reducing deployment of triple play services. The decrease in sales of fiber optics products was due primarily to customers delay of purchases of newer models of our Ethernet products as we transition our older, end of life models. The
increase in sales of signaling products primarily reflects increased sales of our TAMS system products, as the functionality of this product has been expanded significantly causing higher demand. We expect that our net sales of signaling products
will decrease in future periods as a result of the sale of our Protocol Products Group in December 2008.



Net sales decreased 6% to $93.4 million in 2007 from $99.9 million in 2006. The decrease was primarily attributable to a slower than anticipated roll out of triple
play services by several major customers. Wireline access product sales declined approximately $2.4 million primarily due to approximately $3.5 million of decreased sales of our Home Test Toolkit HTT product related to a delay in the
triple play implementation by one of our largest customers, offset in part by an increase of approximately $2.0 million in sales of our SunSet MTT SSMTT product related to DSL deployments by large customers. Cable broadband sales
decreased approximately $3.6 million primarily due to approximately $2.7 million decreased sales of our triple play products and a decline of approximately $0.9 million in sales of our older established products. Signaling product sales declined
$0.8 million due to timing of orders and the cyclical nature of our protocol systems business.



Net Sales by Geography



Our net sales by geographic areas for the years ended December 31, 2008, 2007 and 2006 are summarized as follows (in thousands, except percentages):



|                          |      |                         |        |                    |   |        |                    |   |         |                         |  |                    |    |  |                    |        |  |   |        |  |   |         |   |  |     |   
|------------------------- | ---- | ----------------------- | ------ | ------------------ | - | ------ | ------------------ | - | ------- | ----------------------- |  | ------------------ | -- |  | ------------------ | ------ |  | - | ------ |  | - | ------- | - |  | --- | --
|(Dollars in thousands)    |      | Years EndedDecember 31, |        | Variance inDollars |   |        | Variance inPercent |   |         | Years EndedDecember 31, |  | Variance inDollars |    |  | Variance inPercent |       
|                          | 2008 |                         | 2007   |                    |   |        | 2007               |   | 2006    |                         | 
|United States             |      | $                       | 30,431 |                    | $ | 40,351 |                    | $ | (9,920  | )                       |  | (25                | )% |  | $                  | 40,351 |  | $ | 52,433 |  | $ | (12,082 | ) |  | (23 | )%
|Canada                    |      |                         | 2,791  |                    |   | 2,609  |                    |   | 182     |                         |  | 7                  | %  |  |                    | 2,609  |  |   | 1,340  |  |   | 1,269   |   |  | 95  | % 
|Asia/Pacific              |      |                         | 16,313 |                    |   | 17,353 |                    |   | (1,040  | )                       |  | (6                 | )% |  |                    | 17,353 |  |   | 18,313 |  |   | (960    | ) |  | (5  | )%
|Europe/Africa/Middle East |      |                         | 26,896 |                    |   | 29,517 |                    |   | (2,621  | )                       |  | (9                 | )% |  |                    | 29,517 |  |   | 24,540 |  |   | 4,977   |   |  | 20  | % 
|Latin America             |      |                         | 4,219  |                    |   | 3,561  |                    |   | 658     |                         |  | 18                 | %  |  |                    | 3,561  |  |   | 3,254  |  |   | 307     |   |  | 9   | % 
|                          |      |                         |        |                    |   |        |                    |   |         |                         |  |                    |    |  |                    |        |  |   |        |  |   |         |   |  |     |   
|                          |      | $                       | 80,650 |                    | $ | 93,391 |                    | $ | (12,741 | )                       |  | (14                | )% |  | $                  | 93,391 |  | $ | 99,880 |  | $ | (6,489  | ) |  | (6  | )%
|                          |      |                         |        |                    |   |        |                    |   |         |                         |  |                    |    |  |                    |        |  |   |        |  |   |         |   |  |     |   



The decrease in sales in the
United States and Asia/Pacific in 2008 as compared to 2007 reflects decreased sales of cable broadband products, wireline access and fiber optics products primarily due to decreased demand for deployment of triple play services in those markets, and
delays in new product introductions. The decrease in sales in Europe/Africa/Middle East was primarily due to decreased sales of wireline access and signaling products. Sales to international customers accounted for approximately 62% of our net sales
in 2008, as compared to 57% in 2007 primarily due to a decrease in demand for triple play services in the United States.



Our U.S. sales declined $12.1 million in 2007 compared to 2006, due to decreased sales of our wireline access and cable broadband products as major customers
delayed deployments of triple play services. International sales increased $5.6 million, to 57% of net sales, in 2007, from 48% of net sales in 2006. Our growth in Europe/Africa/Middle East in 2007 reflects a $5.4 million increase in sales of
wireline access products, partially offset by a decline in sales of our fiber optics products. This increase in wireline access sales internationally was primarily due to a European service provider rolling out triple play services.



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Cost of Sales



|                        |      |                         |        |      |                    |   |                    |   |      |                         |       |      |                    |   |                    |   |        |   |  |   |        |   |  |   |       |  |   |  
|----------------------- | ---- | ----------------------- | ------ | ---- | ------------------ | - | ------------------ | - | ---- | ----------------------- | ----- | ---- | ------------------ | - | ------------------ | - | ------ | - |  | - | ------ | - |  | - | ----- |  | - | -
|(Dollars in thousands)  |      | Years EndedDecember 31, |        |      | Variance inDollars |   | Variance inPercent |   |      | Years EndedDecember 31, |       |      | Variance inDollars |   | Variance inPercent |  
|                        | 2008 |                         |        | 2007 |                    |   |                    |   | 2007 |                         |       | 2006 |                    |   |                   
|Cost of sales           |      | $                       | 37,279 |      |                    | $ | 36,018             |   |      | $                       | 1,261 |      | 4                  | % |                    | $ | 36,018 |   |  | $ | 34,504 |   |  | $ | 1,514 |  | 4 | %
|Percentage of net sales |      |                         | 46     | %    |                    |   | 39                 | % |      |                         |       |      |                    |   |                    |   | 39     | % |  |   | 35     | % |  |   |       |  |   |  



Gross margins were 54% and 61%
for 2008 and 2007, respectively. The lower gross margin percentage in 2008 compared to 2007 was primarily the result of a charge of $3.1 million for excess and obsolete inventory, a product warranty charge of $1.8 million relating to the CM750
product sold to a significant customer in prior years and a royalty settlement of $0.4 million with Wind River, Inc. We expect our gross margins as a percent of sales to improve in the future as we introduce new products and improve the management
of our inventory and product quality.



Gross margins were 61% and 65% for
2007 and 2006, respectively. The lower gross margin percentage in 2007 compared to 2006 was primarily the result of higher direct material costs and charges for excess and obsolete inventory aggregating $2.7 million during 2007. The higher charge
for excess and obsolete inventory in 2007 was due to product transitions.



Research and Development



|                         |      |                         |        |      |                    |   |        |                    |      |   |                         |      |  |                    |    |                    |   |        |   |  |   |        |   |  |   |       |  |    |  
|------------------------ | ---- | ----------------------- | ------ | ---- | ------------------ | - | ------ | ------------------ | ---- | - | ----------------------- | ---- |  | ------------------ | -- | ------------------ | - | ------ | - |  | - | ------ | - |  | - | ----- |  | -- | -
|(Dollars in thousands)   |      | Years EndedDecember 31, |        |      | Variance inDollars |   |        | Variance inPercent |      |   | Years EndedDecember 31, |      |  | Variance inDollars |    | Variance inPercent |  
|                         | 2008 |                         |        | 2007 |                    |   |        |                    | 2007 |   |                         | 2006 |  |                    |   
|Research and development |      | $                       | 18,661 |      |                    | $ | 23,589 |                    |      | $ | (4,928                  | )    |  | (21                | )% |                    | $ | 23,589 |   |  | $ | 21,068 |   |  | $ | 2,521 |  | 12 | %
|Percentage of net sales  |      |                         | 23     | %    |                    |   | 25     | %                  |      |   |                         |      |  |                    |    |                    |   | 25     | % |  |   | 21     | % |  |   |       |  |    |  



Research and development
(R&D) expenses decreased in 2008 compared to 2007 primarily due to lower headcount-related expenses of $2.9 million, decreased prototype expenses of $1.3 million and reduced spending for outside services of $0.9 million. R&D
expenses fluctuate from period to period, depending on the number and stages of our product development cycles. We expect our R&D expenses to decline in future periods as a result of our 2008 restructuring activities.



Research and development expenses increased in 2007 compared to 2006 primarily due to
increased prototype expenses of $0.9 million, higher spending for outside services of $0.7 million and increased headcount-related expenses of $0.5 million in the United States and at our some of our international locations.



Selling and Marketing



|                        |      |                         |        |      |                    |   |        |                    |      |   |                         |      |  |                    |    |                    |   |        |   |  |   |        |   |  |   |       |  |   |  
|----------------------- | ---- | ----------------------- | ------ | ---- | ------------------ | - | ------ | ------------------ | ---- | - | ----------------------- | ---- |  | ------------------ | -- | ------------------ | - | ------ | - |  | - | ------ | - |  | - | ----- |  | - | -
|(Dollars in thousands)  |      | Years EndedDecember 31, |        |      | Variance inDollars |   |        | Variance inPercent |      |   | Years EndedDecember 31, |      |  | Variance inDollars |    | Variance inPercent |  
|                        | 2008 |                         |        | 2007 |                    |   |        |                    | 2007 |   |                         | 2006 |  |                    |   
|Selling and marketing   |      | $                       | 23,959 |      |                    | $ | 28,817 |                    |      | $ | (4,858                  | )    |  | (17                | )% |                    | $ | 28,817 |   |  | $ | 27,688 |   |  | $ | 1,129 |  | 4 | %
|Percentage of net sales |      |                         | 30     | %    |                    |   | 31     | %                  |      |   |                         |      |  |                    |    |                    |   | 31     | % |  |   | 28     | % |  |   |       |  |   |  



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Selling and marketing expenses decreased in 2008 compared to 2007 primarily due to lower commission costs of $2.1
million, decreased headcount-related expenses of $1.2 million, and decreased depreciation expense of $0.4 million. We expect our selling and marketing expenses to decline in future periods as a result of our 2008 restructuring activities, which
included a reduction to our direct sales force.



Selling and marketing
expenses increased in 2007 compared to 2006 primarily due to increased outside services expense associated with product marketing and public relations of $0.8 million and increased headcount-related expenses of $0.6 million.



General and Administrative



|                           |  |                         |                    |   |      |                    |        |   |  |                    |                         |                    |      |     |    |  |   |        |   |  |   |        |   |  |   |       |  |    |  
|-------------------------- |  | ----------------------- | ------------------ | - | ---- | ------------------ | ------ | - |  | ------------------ | ----------------------- | ------------------ | ---- | --- | -- |  | - | ------ | - |  | - | ------ | - |  | - | ----- |  | -- | -
|                           |  | Years EndedDecember 31, |                    |   |      |                    |        |   |  |                    | Years EndedDecember 31, |                    |      |     |    |  |  
|                           |  |                         | Variance inDollars |   |      | Variance inPercent |        |   |  | Variance inDollars |                         | Variance inPercent |     
|(Dollars in thousands)     |  | 2008                    |                    |   | 2007 |                    |        |   |  | 2007               |                         |                    | 2006 |     |    | 
|General and administrative |  | $                       | 16,173             |   |      | $                  | 18,746 |   |  | $                  | (2,573                  | )                  |      | (14 | )% |  | $ | 18,746 |   |  | $ | 16,586 |   |  | $ | 2,160 |  | 13 | %
|Percentage of net sales    |  |                         | 20                 | % |      |                    | 20     | % |  |                    |                         |                    |      |     |    |  |   | 20     | % |  |   | 17     | % |  |   |       |  |    |  



General and administrative
expenses (G&A) decreased in 2008 compared to 2007 primarily due to decreased legal expense of $1.6 million as a result of lower litigation expenses, lower headcount-related expenses of $0.9 million and lower general operating
expenses of $0.7 million, partially offset by increased spending for temporary labor of $0.5 million and higher expenses for accounting, tax and audit related professional services of $0.3 million related to getting current with SEC filings. We
expect our G&A expenses to decrease in 2009 as we consolidate certain G&A functions as a result of our restructuring actions taken in 2008 and as our legal expenses continue to decline.



General and administrative expenses increased in 2007 compared to 2006 primarily due to
increased professional fees of $0.8 million, higher spending for outside services of $0.7 million and increased headcount-related expenses of $0.4 million.



Restructuring Charges



During 2008, we initiated several restructuring activities intended to reduce costs, improve operating efficiencies and change our operations to more closely align
them with our key strategic focus. The total restructuring charges of $2.1 million include employee severance and benefit costs, costs related to leased facilities to be abandoned or subleased, and impairment of owned equipment. During 2008, we
recognized $1.6 million of expense for workforce reduction and $0.5 million of other exit costs associated with restructuring activities in 2008. During 2009, we expect to incur additional restructuring costs related to continued reductions in our
operational footprint.



Impairment Charges



During the three months ended September 30, 2008, based on
a combination of factors, including a sustained decline in our market capitalization and the current economic environment, we concluded that there were sufficient indicators to require us to perform an impairment analysis of goodwill, intangible
assets and long-lived assets as of September 30, 2008. Based on the results of the analysis, we impaired the entire goodwill and intangible assets balances and recognized impairment charges of $14.0 million. In addition, we recorded an
impairment charge of $4.8 million related to long-lived assets that were partially impaired as of September 30, 2008. Refer to Note 5, Goodwill, Intangible Assets and Long-lived Assets, to the Consolidated Financial Statements in part
II, Item 8 of this report for further information.



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Gain on Sale of Business



On December 12, 2008, we closed the sale of Protocol Products Group to LTE
Innovations OY for approximately $10.7 million and we recognized a gain of approximately $8.3 million. Refer to Note 13, Sale of Business, for further information.



Other Income, Net



|                        |  |                         |       |   |                    |   |       |                    |  |      |                         |   |      |                    |    |  |                    |       |   |  |   |       |   |  |   |      |   |  |    |   
|----------------------- |  | ----------------------- | ----- | - | ------------------ | - | ----- | ------------------ |  | ---- | ----------------------- | - | ---- | ------------------ | -- |  | ------------------ | ----- | - |  | - | ----- | - |  | - | ---- | - |  | -- | --
|                        |  | Years EndedDecember 31, |       |   | Variance inDollars |   |       | Variance inPercent |  |      | Years EndedDecember 31, |   |      | Variance inDollars |    |  | Variance inPercent |      
|(Dollars in thousands)  |  | 2008                    |       |   | 2007               |   |       |                    |  | 2007 |                         |   | 2006 |                    |    | 
|Other income, net       |  | $                       | 1,151 |   |                    | $ | 2,043 |                    |  | $    | (892                    | ) |      | (44                | )% |  | $                  | 2,043 |   |  | $ | 2,174 |   |  | $ | (131 | ) |  | (6 | )%
|Percentage of net sales |  |                         | 1     | % |                    |   | 2     | %                  |  |      |                         |   |      |                    |    |  |                    | 2     | % |  |   | 2     | % |  |   |      |   |  |    |   



Other income, net primarily
consists of interest earned on cash and investment balances and gains and losses on assets, liabilities, and transactions denominated in foreign currencies, and realized investment gains and losses. Other income, net decreased in 2008 compared to
2007, primarily due to a reduction of $0.5 million in interest income earned due to lower interest rates and investment balances and lower realized gains of $0.6 million from the sale of Top Union stock recognized in 2007.



Other income, net decreased slightly in 2007 compared to 2006 due to losses on the
disposal of fixed assets of $0.4 million, partially offset by the positive impact of higher realized gains of $0.2 million on our sale of Top Union Electronics Corp. (Top Union) stock that we recognized in 2007. As of December 31,
2007, we no longer held shares of Top Union stock.



Income Tax Expense (Benefit)



Income tax
expense consists primarily of state and foreign income taxes. Income tax expense decreased $1.6 million to a benefit of $0.8 million in 2008 from an expense of $0.8 million in 2007 primarily as a result of the reversal of deferred tax liabilities as
a result of the impairment of goodwill in the third quarter of 2008, offset by income tax expense from establishing a valuation allowance for certain deferred tax assets in 2008.



Income tax expense decreased to $0.8 million in 2007 from $1.7 million in 2006 and reflects the lower levels of taxable income
generated in 2007 in certain of our foreign subsidiaries.



Liquidity and Capital Resources



Liquidity Overview



The accompanying consolidated financial statements have been
prepared assuming that we will continue as a going concern, which contemplates the realization of assets and the liquidation of liabilities in the normal course of business. We have incurred significant losses from operations from 2002 through 2008,
which has adversely impacted our liquidity and has significantly reduced our cash and cash equivalents. We have managed our liquidity during this time through a series of cost reduction initiatives, obtaining a secured revolving credit arrangement
with a financial institution and the sale of assets. The recession in the United States and the slowdown of economic growth in the rest of the world created a substantially more difficult business environment in 2008. Our liquidity position, as well
as our operating performance, was negatively affected by these economic conditions and by other financial and business factors, many of which are beyond our control. We do not believe it is likely that these adverse economic conditions will improve
significantly during 2009. If our revenues and gross profit levels decline further in 2009 and we are unable to



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sufficiently reduce operating expenses, we would continue to use cash in operating activities in 2009, further reducing our liquidity and cash and cash equivalents. As
a result, we may become unable to pay our operating expenses on a timely basis due to a lack of sufficient liquidity.



In 2008, we took action to both conserve cash and generate incremental cash flows. Such actions include the December 2008 sale of our wholly-owned Italian
subsidiary and restructuring activities that were intended to reduce costs and improve operating efficiencies. We intend to pursue further sales of assets to generate cash, and are exploring strategic alternatives, including a sale of the Company,
to enhance stockholder value. We also intend to seek a waiver of the default under our secured revolving credit agreement with Silicon Valley Bank (SVB), and to obtain an extension of the agreement, which otherwise expires
August 12, 2009. However, there can be no assurance that we will be successful with our plans.



Our significant operating losses and resulting negative cash flows from operating activities, among other factors, raise substantial doubt about our ability to
continue as a going concern. The accompanying consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.



Cash Requirements and Capital Resources



As of December 31, 2008 and 2007, we had working capital of $22.5 million and $32.0 million, respectively, and cash, cash equivalents of $9.2 million and $16.0
million, respectively.



On August 13, 2007, we entered into a $10
million secured revolving credit arrangement (Loan Agreement) with SVB to improve our liquidity and working capital. We may borrow, repay and re-borrow under the line of credit facility at any time. The amount that we are able to borrow
under the Loan Agreement will vary based on eligible accounts receivable, as defined in the agreement. The borrowing base on the revolving credit agreement is $5 million plus 80% of eligible accounts receivable. The line of credit facility bears
interest at the banks prime rate (4% at December 31, 2008). This line of credit is collateralized by substantially all of our assets and requires us to comply with customary affirmative and negative covenants principally relating to the
use and disposition of assets, tangible net worth and the satisfaction of a quick ratio test. In addition, the Loan Agreement contains customary events of default. Upon the occurrence of an uncured event of default, among other things, the bank may
declare that all amounts owed under the credit arrangement are due and payable.



On December 28, 2007, we amended our Loan Agreement to reduce our tangible net worth requirement from $57 million to $50 million. On August 12, 2008, we further amended our Loan Agreement, to extend the term of all indebtedness to
August 12, 2009. The amendment also reduced the required Quick Ratio Covenant to 0.80:1.00 (from 1:1) and the required minimum Tangible Net Worth Covenant to $44 million for the fiscal quarters ending September 30, 2008 and
December 31, 2008 and to $40 million for the fiscal quarters ending March 31, 2009 and June 30, 2009 (from $50 million for all such periods).



As of September 30, 2008 and December 31, 2008, we were in default of our Tangible Net Worth Covenant due to our tangible net worth being less than $44
million. In addition, we were in default of the $50 million Tangible Net Worth Covenant for the March 31, 2008 and June 30, 2008 periods. Under this revolving credit agreement, there was $2.0 million outstanding as of December 31,
2008 and March 31, 2009.



On December 12, 2008, we further
amended the Loan Agreement with SVB to extend from November 30, 2008 to December 31, 2008, the period within which we are required to establish and maintain our primary domestic banking relationship with SVB and its affiliates, and SVB
waived our default with respect to non-compliance of maintaining banking relationships with SVB as of November 30, 2008. Under the terms of the amendment, SVB consented to the



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sale of our Protocol Products Group to LTE. We used $2.0 million of the proceeds from the sale to prepay our obligations under the Loan Agreement in December 2008. The
amendment does not contain any consent by SVB or waiver of SVBs rights and remedies with respect to our default under the Loan Agreement, pursuant to which we were required to maintain tangible net worth of $44 million for the quarter ended
September 30, 2008. As a result, SVB may at any time declare immediately due and payable all of our obligations under the Loan Agreement ($2.0 million after the prepayment referenced above), cease extending credit or resort to other rights and
remedies under the Loan Agreement. Currently, we are not able to borrow any additional amounts under the Loan Agreement.



Sources and Uses of Cash



Cash used in operating activities was $10.2 million in 2008 compared to $2.8 million in 2007. Cash used in operating activities increased during 2008 compared to
2007 primarily due to the increase in our net loss for 2008, and increases in accounts receivable offset by a decrease in inventories. Cash used in operating activities increased during 2007 compared to 2006 primarily due to the net loss for 2007.
In general, our ability to generate and sustain positive cash flows from operations will depend on our ability to generate and collect cash from future sales, while maintaining a cost structure lower than those sales amounts. Therefore, sales volume
is the most significant uncertainty in our ability to generate positive cash flows from operations.



Cash provided by investing activities of $1.9 million in 2008 was primarily due to the net proceeds of $4.9 million from the sale of our Protocol Products Group in
December 2008, offset by capital expenditures of $2.8 million. Cash provided by investing activities was $1.8 million in 2007 compared to cash used in investing activities of $2.9 million in 2006. The $4.7 million increase in net cash provided by
investing activities during 2007 compared to 2006 was primarily due to an increase in the sales of short-term investments, net of purchases and a reduction of capital expenditures in 2007. As of December 31, 2008, we had no plans for
nonrecurring capital expenditures outside the usual course of those needed for our ongoing production, research and development, and selling and marketing activities.



Cash provided by financing activities was $1.8 million in 2008. Cash used in financing activities was $0.2 million in 2007 and $0.5
million in 2006. The increase in cash provided by financing activities during 2008 is primarily due to net borrowings of $2.0 million on our line of credit. The decrease in cash used in financing activities during 2007 compared to 2006 was primarily
due to increases in restricted cash during 2006 that were not required during 2007 and reduced payments on notes payable. No issuance of stock under the Stock Purchase Plan or exercise of stock options have been permitted subsequent to December 2005
due to restrictions on our ability to issue stock as a result of not being current with our SEC filings.



CRITICAL ACCOUNTING POLICIES



The
preparation of financial statements in accordance with United States generally accepted accounting principles requires us to make estimates, assumptions, and judgments that affect the amounts reported in our consolidated financial statements and the
accompanying notes. We base our estimates on historical experience and various other assumptions that we believe to be reasonable. Although these estimates are based on our present best knowledge of the future impact that current events and actions
will have on us, actual results may differ from these estimates, assumptions, and judgments.



We consider critical those accounting policies that require our most subjective or complex judgments, which often result from a need to make estimates about the effect of matters that are inherently uncertain, and
that are among the most important of our accounting policies to the portrayal of our financial condition and results of operations. These critical accounting policies are the determination of our allowance for doubtful accounts receivable, valuation
of excess and obsolete inventory, valuation of goodwill and other intangible assets, accounting for the liability of product warranty, deferred income tax assets and liabilities and revenue recognition.



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Allowance for Doubtful Accounts Receivable



We determine our allowance for doubtful accounts receivable by making our best estimate of specific uncollectible accounts considering our historical
accounts receivable collection experience and the information that we have about the current status of our 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 charge provisions for doubtful accounts receivable to general and administrative expenses on our statements of
operations.



Valuation of Inventories



Inventories are recorded at the lower of cost determined on a first-in-first-out basis
(approximated by average cost) or market. We compare our inventory on hand against projected demand, and record provisions for excess and obsolete inventories when inventory on hand exceeds our estimate of future demand for that inventory. This
evaluation includes an analysis of historical and forecasted sales levels by product and a review of other factors such as competitiveness of product offerings, market conditions and product life cycles. Inventories on hand in excess of forecasted
demand are reserved with a charge to cost of sales. If an inventory item is reserved, a new cost basis for that inventory item is established, and subsequent changes in facts and circumstances do not result in the restoration or increase in that
newly established cost basis. If this inventory item is subsequently sold or otherwise disposed of, then the related reserve is reversed, resulting in lower costs and higher gross margins relating to the sale or disposition of that inventory.



Valuation of Goodwill and Other Intangible Assets



We evaluate the valuation of goodwill in the manner prescribed by SFAS No. 142,
Goodwill and Other Intangible Assets(SFAS 142). As required by SFAS 142, we test goodwill for impairment annually, during our fourth fiscal quarter or whenever events or changes in circumstances indicate that the carrying amount
of the asset may not be fully recoverable. Recoverability of goodwill is determined at the reporting unit level, with the Company as a single reporting unit, using a two-step approach. First, the carrying amount of the entire reporting unit is
compared to its fair value, as determined by the market value of the Companys outstanding common stock, adjusted for a control premium. If the carrying value of the entire reporting unit exceeds its fair value, the second step is performed. In
this step, an impairment loss is recognized for the excess, if any, of the carrying amount of goodwill over its implied fair value. The implied fair value of the reporting units goodwill is the amount by which the fair value of the entire
reporting unit exceeds the sum of the individual fair values of its assets, except goodwill, less the sum of the individual fair values of its liabilities. The fair values of individual assets and liabilities may be estimated as the amount at which
they could be bought or sold in a current transaction between willing parties. If this information is not available, fair value is determined based on the best information available under the circumstances. This often involves the use of valuation
techniques, such as the present value of expected future cash flows, discounted at a rate commensurate to the risk involved, or other acceptable valuation techniques.



During the quarter ended September 30, 2008, based on a combination of factors, including a sustained decline in our market
capitalization, we concluded that there were sufficient indicators to require us to perform an interim goodwill impairment analysis as of September 30, 2008. We estimated the fair value of the Company using the market comparable approach, which
analyzes our quoted market prices adjusted for a control premium. The results of the goodwill analysis indicated that there would be no remaining implied value attributable to goodwill. Accordingly, during the quarter September 30, 2008, we
impaired the entire goodwill balance and recorded goodwill impairment charges of $12.8 million.



We evaluate the valuation of intangible assets other than goodwill in the manner prescribed by SFAS 144, Accounting for the Impairment or Disposal of Long-Lived
Assets. As required by that standard, we monitor events and changes in circumstances that could indicate that the carrying amount of an intangible asset may not be recoverable.



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These events and circumstances include a significant change in how we use the asset, significant changes in legal factors or the business climate that could affect the
assets value, and current period operating or cash flow losses combined with a history of such losses or a forecast of continuing losses associated with the use of the asset. If such an event or change in circumstances were to occur, we would
assess the recoverability of the intangible asset by determining whether its carrying value would be recovered through undiscounted expected future cash flows. If the carrying value of the asset were to exceed the undiscounted expected future cash
flows, we would recognize an impairment for the excess of the carrying value over the assets fair value.



In connection with completing our goodwill impairment analysis, we performed an impairment analysis of our intangible and long-lived assets as of September 30,
2008. The impairment analysis indicated that all of the identified intangible assets were not recoverable and as a result, we impaired the carrying values of the identified intangible assets, which resulted in impairment charges on intangibles
assets totaling $1.2 million. In addition, we recorded an impairment charge of $4.8 million relating to our long-lived assets. The impairment charges are included in operating expenses in Impairment charges in the consolidated statements
of operations in the year ended December 31, 2008.



Product Warranties



Our wireline access products and fiber optic products sold in the
United States are covered by a three-year warranty covering parts and labor, with an option to purchase a two-year extended warranty. Our cable broadband and signaling products are covered by a one to three year warranty, with an option to purchase
a two-year extended warranty. Our products sold in all other countries generally are sold with a one-year warranty, with the option to purchase a two-year extended warranty. We defer revenue from services and support provided under our extended
warranty programs and recognize it on a straight-line basis over the warranty period. We are also subject to laws and regulations in the various countries in which we sell regarding vendor obligations to ensure product performance. At the time we
recognize revenue from a products sale, we determine the reserve for the future cost of meeting our obligations under the standard warranties and product performance laws and regulations by considering our historical experience with the costs
of meeting such obligations. If the future costs of meeting these obligations differ from our historical experience, additional reserves for warranty obligations may be required. We charge provisions for future warranty costs to cost of sales in our
statements of operations.



Income taxes



We recognize income taxes in accordance with SFAS 109, using an asset and
liability approach. This approach requires the recognition of taxes payable or refundable for the current year and deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in our consolidated
financial statements or tax returns. The measurement of current and deferred taxes is based on provisions of the enacted tax law. SFAS 109 provides for recognition of deferred tax assets if the realization of such assets is more likely than not
to occur. Otherwise, a valuation allowance is established for the deferred tax assets which may not be realized.



We are subject to income tax audits by the tax authorities in the jurisdictions in which we operate. The determination of tax liabilities in each of these
jurisdictions requires the interpretation and application of complex and sometimes uncertain tax laws and regulations. The recognition and measurement of current taxes payable or refundable and deferred tax assets and liabilities requires that we
make certain estimates and judgments. Changes to these estimates or a change in judgment may have a material impact on our tax provision in a future period.



Effective January 1, 2007, we adopted FIN 48, which requires a more-likely-than-not threshold for financial statement recognition and measurement of tax
positions taken or expected to be taken in a tax return. We record a liability for the difference between the benefit recognized and measured pursuant to FIN 48 and the tax position taken



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or expected to be taken on its tax return. To the extent that our assessment of such tax positions changes, the change in estimate is recorded in the period in which
the determination is made. With the adoption of FIN 48, we also began reporting tax-related interest and penalties as a component of income tax expense.



Revenue Recognition



We recognize revenue from a customer order when all of the following criteria are met: persuasive evidence of an arrangement exists; delivery has occurred; the
price is fixed or determinable; and collectability is reasonably assured. For product sales, we consider delivery to have occurred when title and risk of loss have been transferred to the customer, which is usually when the product has been received
by a common carrier.



When the arrangement with the customer includes
future obligations or customer acceptance provisions, we recognize revenue when those obligations have been met or customer acceptance has been received. We use objective evidence of fair value to allocate revenue to elements in multiple element
arrangements and recognize revenue when the criteria for revenue recognition has been met for each element. In the absence of objective evidence of fair value of a delivered element, we allocate revenue to the fair value of the undelivered elements
and the residual revenue to the delivered elements. The price charged when an element is sold separately generally determines its fair value. We defer revenue from support provided under our extended warranty programs, and recognize 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 and amounts received for product sales that are subject to customer acceptance. Provisions
are recorded at the time of sale for estimated product returns, standard warranty obligations, and customer support.



OFF-BALANCE SHEET ARRANGEMENTS



As of December 31, 2008, we did not have any off-balance sheet arrangements that have or are reasonably likely to have a material effect on our current or
future financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources.



CONTRACTUAL OBLIGATIONS



The following table summarizes, as of December 31, 2008, the timing of future cash payments due under certain contractual obligations (in thousands):



|                                                              |  |                 |  |                 |  |          |  |          |  |                 
|------------------------------------------------------------- |  | --------------- |  | --------------- |  | -------- |  | -------- |  | ----------------
|                                                              |  | Payments Due in
|                                                              |  | Total           |  | Less than1 year |  | 1-3years |  | 4-5years |  | More than5 years
|Borrowings and notes payable                                  |  | $2,002          |  | $2,002          |  | $       |  | $       |  | $              
|Interest expense associated with borrowings and notes payable |  | 65              |  | 65              |  |         |  |         |  |                
|Operating lease obligations                                   |  | 2,992           |  | 1,449           |  | 1,456    |  | 87       |  |                
|Purchase obligations*                                         |  | 3,411           |  | 3,411           |  |         |  |         |  |                
|                                                              |  |                 |  |                 |  |          |  |          |  |                 
|Total                                                         |  | $8,470          |  | $6,927          |  | $1,456   |  | $87      |  | $              
|                                                              |  |                 |  |                 |  |          |  |          |  |                 



|* |  | Represents our outstanding purchase orders for goods and services. While the amount above represents our purchase agreements as of December 31, 2008, the actual amounts to be paid may be
less in the event that any agreements are renegotiated, cancelled, or terminated.
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



We have $1.4 million of long-term income taxes payable related to unrecognized tax benefits as of December 31, 2008. We cannot estimate the payments due by
period because the total income taxes payable and timing of tax



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payments depend on the resolution of uncertain tax positions and any future tax examinations which cannot be estimated with certainty. Therefore, the income taxes
payable related to unrecognized tax benefits are not reflected in the contractual obligations table above.



RECENT ACCOUNTING PRONOUNCEMENTS



In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (SFAS 159). SFAS 159 permits entities to choose to measure many financial assets and financial liabilities
at fair value. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings. Effective January 1, 2008, we adopted the provisions of SFAS 159 but did not choose the fair value option and
therefore, there was no impact on our consolidated financial statements.



In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations (SFAS 141R), which replaces SFAS No. 141. SFAS 141R establishes principles and requirements for how an acquirer recognizes and
measures in its financial statements the identifiable assets acquired, the liabilities assumed, any non-controlling interest in the acquiree and the goodwill acquired. SFAS 141R also establishes disclosure requirements which will enable users to
evaluate the nature and financial effects of the business combination. SFAS 141R is effective for fiscal years beginning after December 15, 2008. We will be required to adopt SFAS 141R in our fiscal year 2009 commencing January 1, 2009.



ITEM 7A.    QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT MARKET RISK



Foreign Currency Risk



We sell our products in North America, the Asia/Pacific region, Latin America,
Africa, the Middle East, and Europe and maintain operations in several different countries. Changes in currency exchange rates affect the valuation in our financial statements of the assets and liabilities of these operations. We also have a portion
of our sales denominated in euros, the Canadian dollar, Japanese yen, Korean won, and other currencies, which are also affected by changes in currency exchange rates. To hedge these risks, we have, at certain times, used derivative financial
instruments. As of December 31, 2008, we had no material derivative financial instruments or other foreign exchange risk hedging devices. With or without hedges, our financial results could be affected by changes in foreign currency exchange
rates, although foreign exchange risks have not been material to our financial position or results of operations to date.



Interest Rate Risk



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 held derivative financial instruments in our investment portfolio. We invest our excess cash in depository accounts with financial institutions, in debt instruments of United States
governmental agencies, and in debt instruments of 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
through portfolio diversification and review of the financial stability of the institutions with which we deposit funds and from whom we purchase debt instruments.



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. Because our investment policy restricts us to
invest in conservative, interest-bearing investments and because our business strategy does not rely on generating material returns from our investment portfolio, we do not expect our market risk exposure on our investment portfolio to be material.



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ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA



Index to Financial Statements



|                                                                                                                                       |  |     
|-------------------------------------------------------------------------------------------------------------------------------------- |  | ----
|                                                                                                                                       |  | Page
|Audited Consolidated Financial Statements of Sunrise Telecom Incorporated                                                              |  |     
|                                                                                                                                       | 
|Report of Independent Registered Public Accounting Firm                                                                                |  | 47  
|                                                                                                                                       | 
|Consolidated Balance Sheets as of December 31, 2008 and 2007                                                                           |  | 48  
|                                                                                                                                       | 
|Consolidated Statements of Operations for the Years Ended December 31, 2008, 2007, and 2006                                            |  | 49  
|                                                                                                                                       | 
|Consolidated Statements of Stockholders Equity and Comprehensive Income (Loss) for the Years Ended December 
31, 2008, 2007, and 2006 |  | 50  
|                                                                                                                                       | 
|Consolidated Statements of Cash Flows for the Years Ended December 31, 2008, 2007, and 2006                                            |  | 51  
|                                                                                                                                       | 
|Notes to Consolidated Financial Statements                                                                                             |  | 52  



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Report of Independent Registered Public Accounting Firm



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, 2008 and 2007, and the related consolidated statements of operations, stockholders equity and comprehensive income
(loss), and cash flows for each of the years in the three-year period ended December 31, 2008. 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 the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.



In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Sunrise Telecom
Incorporated and subsidiaries as of December 31, 2008 and 2007, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2008, in conformity with U.S. generally accepted
accounting principles.



The accompanying consolidated financial
statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has suffered recurring losses from operations that raise substantial doubt about
its ability to continue as a going concern. Managements plans in regard to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.



/s/ KPMG LLP



Mountain View, California

May 1, 2009



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SUNRISE TELECOM INCORPORATED AND SUBSIDIARIES



Consolidated Balance Sheets



(in thousands, except per share data)



|                                                                                                                                                      |  |              |         |   |      |   |        |  
|----------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | ------- | - | ---- | - | ------ | -
|                                                                                                                                                      |  | December 31, |        
|                                                                                                                                                      |  | 2008         |         |   | 2007 |  
|ASSETS                                                                                                                                                |  |              |         |   |      |   |        |  
|Current assets:                                                                                                                                       |  |              |         |   |      |   |        |  
|Cash and cash equivalents                                                                                                                             |  | $            | 9,196   |   |      | $ | 15,981 |  
|Accounts receivable, net of allowances of $1,004 and $270, respectively                                                                               |  |              | 19,732  |   |      |   | 17,972 |  
|Inventories                                                                                                                                           |  |              | 11,481  |   |      |   | 17,445 |  
|Prepaid expenses and other assets                                                                                                                     |  |              | 2,200   |   |      |   | 2,283  |  
|Deferred tax assets                                                                                                                                   |  |              |        |   |      |   | 982    |  
|                                                                                                                                                      |  |              |         |   |      |   |        |  
|Total current assets                                                                                                                                  |  |              | 42,609  |   |      |   | 54,663 |  
|Property and equipment, net                                                                                                                           |  |              | 20,132  |   |      |   | 27,211 |  
|Restricted cash                                                                                                                                       |  |              | 296     |   |      |   | 296    |  
|Goodwill                                                                                                                                              |  |              |        |   |      |   | 12,736 |  
|Intangible assets, net                                                                                                                                |  |              |        |   |      |   | 1,116  |  
|Other assets                                                                                                                                          |  |              | 2,123   |   |      |   | 854    |  
|                                                                                                                                                      |  |              |         |   |      |   |        |  
|Total assets                                                                                                                                          |  | $            | 65,160  |   |      | $ | 96,876 |  
|                                                                                                                                                      |  |              |         |   |      |   |        |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                  |  |              |         |   |      |   |        |  
|Current liabilities:                                                                                                                                  |  |              |         |   |      |   |        |  
|Short-term borrowings and current portion of notes payable                                                                                            |  | $            | 2,000   |   |      | $ | 183    |  
|Accounts payable                                                                                                                                      |  |              | 3,403   |   |      |   | 4,653  |  
|Other accrued liabilities                                                                                                                             |  |              | 12,833  |   |      |   | 15,158 |  
|Income taxes payable                                                                                                                                  |  |              | 617     |   |      |   | 181    |  
|Deferred revenue                                                                                                                                      |  |              | 1,244   |   |      |   | 2,520  |  
|                                                                                                                                                      |  |              |         |   |      |   |        |  
|Total current liabilities                                                                                                                             |  |              | 20,097  |   |      |   | 22,695 |  
|Notes payable, less current portion                                                                                                                   |  |              | 2       |   |      |   | 424    |  
|Income taxes payable                                                                                                                                  |  |              | 1,368   |   |      |   | 1,700  |  
|Deferred revenue, less current portion                                                                                                                |  |              | 71      |   |      |   | 13     |  
|Deferred tax liabilities                                                                                                                              |  |              |        |   |      |   | 2,106  |  
|                                                                                                                                                      |  |              |         |   |      |   |        |  
|Total liabilities                                                                                                                                     |  |              | 21,538  |   |      |   | 26,938 |  
|                                                                                                                                                      |  |              |         |   |      |   |        |  
|Stockholders equity:                                                                                                                                 |  |              |         |   |      |   |        |  
|Preferred stock, $0.001 par value per share; 10,000,000 shares authorized; none issued and outstanding                                                |  |              |        |   |      |   |       |  
|Common stock, $0.001 par value per share; 175,000,000 shares authorized; 51,349,058 shares outstanding as of December 31, 2008 and 2007,
respectively |  |              | 51      |   |      |   | 51     |  
|Additional paid-in capital                                                                                                                            |  |              | 77,964  |   |      |   | 77,788 |  
|Accumulated deficit                                                                                                                                   |  |              | (34,856 | ) |      |   | (8,792 | )
|Accumulated other comprehensive income                                                                                                                |  |              | 463     |   |      |   | 891    |  
|                                                                                                                                                      |  |              |         |   |      |   |        |  
|Total stockholders equity                                                                                                                            |  |              | 43,622  |   |      |   | 69,938 |  
|                                                                                                                                                      |  |              |         |   |      |   |        |  
|Total liabilities and stockholders equity                                                                                                            |  | $            | 65,160  |   |      | $ | 96,876 |  
|                                                                                                                                                      |  |              |         |   |      |   |        |  



See accompanying notes to
consolidated financial statements.



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SUNRISE TELECOM INCORPORATED AND SUBSIDIARIES



Consolidated Statements of Operations



(in thousands, except per share data)



|                                                      |  |                          |         |   |      |   |         |      |  |   |       
|----------------------------------------------------- |  | ------------------------ | ------- | - | ---- | - | ------- | ---- |  | - | ------
|                                                      |  | Years Ended December 31,
|                                                      |  | 2008                     |         |   | 2007 |   |         | 2006
|Net sales                                             |  | $                        | 80,650  |   |      | $ | 93,391  |      |  | $ | 99,880
|Cost of sales                                         |  |                          | 37,279  |   |      |   | 36,018  |      |  |   | 34,504
|                                                      |  |                          |         |   |      |   |         |      |  |   |       
|Gross profit                                          |  |                          | 43,371  |   |      |   | 57,373  |      |  |   | 65,376
|                                                      |  |                          |         |   |      |   |         |      |  |   |       
|Operating expenses:                                   |  |                          |         |   |      |   |         |      |  |   |       
|Research and development                              |  |                          | 18,661  |   |      |   | 23,589  |      |  |   | 21,068
|Selling and marketing                                 |  |                          | 23,959  |   |      |   | 28,817  |      |  |   | 27,688
|General and administrative                            |  |                          | 16,173  |   |      |   | 18,746  |      |  |   | 16,586
|Restructuring charges                                 |  |                          | 2,140   |   |      |   |        |      |  |   |      
|Impairment charges                                    |  |                          | 18,796  |   |      |   |        |      |  |   |      
|Gain on sale of business                              |  |                          | (8,303  | ) |      |   |        |      |  |   |      
|                                                      |  |                          |         |   |      |   |         |      |  |   |       
|Total operating expenses                              |  |                          | 71,426  |   |      |   | 71,152  |      |  |   | 65,342
|                                                      |  |                          |         |   |      |   |         |      |  |   |       
|Income (loss) from operations                         |  |                          | (28,055 | ) |      |   | (13,779 | )    |  |   | 34    
|Other income, net                                     |  |                          | 1,151   |   |      |   | 2,043   |      |  |   | 2,174 
|                                                      |  |                          |         |   |      |   |         |      |  |   |       
|Income (loss) before income taxes                     |  |                          | (26,904 | ) |      |   | (11,736 | )    |  |   | 2,208 
|Income tax expense (benefit)                          |  |                          | (840    | ) |      |   | 820     |      |  |   | 1,694 
|                                                      |  |                          |         |   |      |   |         |      |  |   |       
|Net income (loss)                                     |  | $                        | (26,064 | ) |      | $ | (12,556 | )    |  | $ | 514   
|                                                      |  |                          |         |   |      |   |         |      |  |   |       
|Net income (loss) per share:                          |  |                          |         |   |      |   |         |      |  |   |       
|Basic and diluted                                     |  | $                        | (0.51   | ) |      | $ | (0.24   | )    |  | $ | 0.01  
|                                                      |  |                          |         |   |      |   |         |      |  |   |       
|Shares used in computing net income (loss) per share: |  |                          |         |   |      |   |         |      |  |   |       
|Basic                                                 |  |                          | 51,349  |   |      |   | 51,349  |      |  |   | 51,349
|                                                      |  |                          |         |   |      |   |         |      |  |   |       
|Diluted                                               |  |                          | 51,349  |   |      |   | 51,349  |      |  |   | 51,580
|                                                      |  |                          |         |   |      |   |         |      |  |   |       



See accompanying notes to
consolidated financial statements.



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SUNRISE TELECOM INCORPORATED AND SUBSIDIARIES



Consolidated Statements of Stockholders Equity and Comprehensive

Income (Loss)



(in thousands)



|                                                            |  |              |  |                          |    |  |                                 |        |   |                                      |   |        |                                            |  |   |                          |   |  |                            |       |   |  |   |         |   |  |   |         |  
|----------------------------------------------------------- |  | ------------ |  | ------------------------ | -- |  | ------------------------------- | ------ | - | ------------------------------------ | - | ------ | ------------------------------------------ |  | - | ------------------------ | - |  | -------------------------- | ----- | - |  | - | ------- | - |  | - | ------- | -
|                                                            |  | Common Stock |  | AdditionalPaid-inCapital |    |  | DeferredStock-basedCompensation |        |   | RetainedEarnings(AccumulatedDeficit) |   |        | AccumulatedOtherComprehensiveIncome (Loss) |  |   | TotalStockholdersEquity |   |  | ComprehensiveIncome (Loss) |      
|                                                            |  | Shares       |  | Amount                   |    |  |                                 |        |   |                                     
|Balances, December 31, 2005                                 |  | 51,349       |  | $                        | 51 |  | $                               | 76,392 |   |                                      | $ | (8     | )                                          |  | $ | 3,250                    |   |  | $                          | 1,164 |   |  | $ | 80,849  |   |  |   |         |  
|Reversal of deferred stock- based compensation              |  |             |  |                          |   |  |                                 | (8     | ) |                                      |   | 8      |                                            |  |   |                         |   |  |                            |      |   |  |   |        |   |  |   |         |  
|Stock-based compensation expense                            |  |             |  |                          |   |  |                                 | 1,042  |   |                                      |   |       |                                            |  |   |                         |   |  |                            |      |   |  |   | 1,042   |   |  |   |         |  
|Change in unrealized gain on available-for-sale investments |  |             |  |                          |   |  |                                 |       |   |                                      |   |       |                                            |  |   |                         |   |  |                            | 352   |   |  |   | 352     |   |  | $ | 352     |  
|Cumulative translation adjustment                           |  |             |  |                          |   |  |                                 |       |   |                                      |   |       |                                            |  |   |                         |   |  |                            | (21   | ) |  |   | (21     | ) |  |   | (21     | )
|Net income                                                  |  |             |  |                          |   |  |                                 |       |   |                                      |   |       |                                            |  |   | 514                      |   |  |                            |      |   |  |   | 514     |   |  |   | 514     |  
|                                                            |  |              |  |                          |    |  |                                 |        |   |                                      |   |        |                                            |  |   |                          |   |  |                            |       |   |  |   |         |   |  |   |         |  
|Comprehensive income                                        |  |              |  |                          |    |  |                                 |        |   |                                      |   |        |                                            |  |   |                          |   |  |                            |       |   |  |   |         |   |  | $ | 845     |  
|                                                            |  |              |  |                          |    |  |                                 |        |   |                                      |   |        |                                            |  |   |                          |   |  |                            |       |   |  |   |         |   |  |   |         |  
|Balances, December 31, 2006                                 |  | 51,349       |  |                          | 51 |  |                                 | 77,426 |   |                                      |   | 77,426 |                                            |  |   | 3,764                    |   |  |                            | 1,495 |   |  |   | 82,736  |   |  |   |         |  
|Stock-based compensation expense                            |  |             |  |                          |   |  |                                 | 362    |   |                                      |   |       |                                            |  |   |                         |   |  |                            |      |   |  |   | 362     |   |  |   |         |  
|Change in unrealized gain on available-for-sale investments |  |             |  |                          |   |  |                                 |       |   |                                      |   |       |                                            |  |   |                         |   |  |                            | (406  | ) |  |   | (406    | ) |  | $ | (406    | )
|Cumulative translation adjustment                           |  |             |  |                          |   |  |                                 |       |   |                                      |   |       |                                            |  |   |                         |   |  |                            | (198  | ) |  |   | (198    | ) |  |   | (198    | )
|Net loss                                                    |  |             |  |                          |   |  |                                 |       |   |                                      |   |       |                                            |  |   | (12,556                  | ) |  |                            |      |   |  |   | (12,556 | ) |  |   | (12,556 | )
|                                                            |  |              |  |                          |    |  |                                 |        |   |                                      |   |        |                                            |  |   |                          |   |  |                            |       |   |  |   |         |   |  |   |         |  
|Comprehensive loss                                          |  |              |  |                          |    |  |                                 |        |   |                                      |   |        |                                            |  |   |                          |   |  |                            |       |   |  |   |         |   |  | $ | (13,160 | )
|                                                            |  |              |  |                          |    |  |                                 |        |   |                                      |   |        |                                            |  |   |                          |   |  |                            |       |   |  |   |         |   |  |   |         |  
|Balances, December 31, 2007                                 |  | 51,349       |  |                          | 51 |  |                                 | 77,788 |   |                                      |   |       |                                            |  |   | (8,792                   | ) |  |                            | 891   |   |  |   | 69,938  |   |  |   |         |  
|Stock-based compensation expense                            |  |             |  |                          |   |  |                                 | 176    |   |                                      |   |       |                                            |  |   |                         |   |  |                            |      |   |  |   | 176     |   |  |   |         |  
|Cumulative translation adjustment                           |  |             |  |                          |   |  |                                 |       |   |                                      |   |       |                                            |  |   |                         |   |  |                            | (428  | ) |  |   | (428    | ) |  | $ | (428    | )
|Net loss                                                    |  |             |  |                          |   |  |                                 |       |   |                                      |   |       |                                            |  |   | (26,064                  | ) |  |                            |      |   |  |   | (26,064 | ) |  |   | (26,064 | )
|                                                            |  |              |  |                          |    |  |                                 |        |   |                                      |   |        |                                            |  |   |                          |   |  |                            |       |   |  |   |         |   |  |   |         |  
|Comprehensive loss                                          |  |              |  |                          |    |  |                                 |        |   |                                      |   |        |                                            |  |   |                          |   |  |                            |       |   |  |   |         |   |  | $ | (26,492 | )
|                                                            |  |              |  |                          |    |  |                                 |        |   |                                      |   |        |                                            |  |   |                          |   |  |                            |       |   |  |   |         |   |  |   |         |  
|Balances, December 31, 2008                                 |  | 51,349       |  | $                        | 51 |  | $                               | 77,964 |   |                                      | $ |       |                                            |  | $ | (34,856                  | ) |  | $                          | 463   |   |  | $ | 43,622  |   |  |   |         |  
|                                                            |  |              |  |                          |    |  |                                 |        |   |                                      |   |        |                                            |  |   |                          |   |  |                            |       |   |  |   |         |   |  |   |         |  



See accompanying notes to
consolidated financial statements.



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SUNRISE TELECOM INCORPORATED AND SUBSIDIARIES



Consolidated Statements of Cash Flows



(in thousands)



|                                                                                                   |      |                          |         |      |  |   |         |   |  |   |        |  
|-------------------------------------------------------------------------------------------------- | ---- | ------------------------ | ------- | ---- |  | - | ------- | - |  | - | ------ | -
|                                                                                                   |      | Years Ended December 31, |        
|                                                                                                   | 2008 |                          |         | 2007 |  |   | 2006    |  
|Cash flows from operating activities:                                                              |      |                          |         |      |  |   |         |   |  |   |        |  
|Net income (loss)                                                                                  |      | $                        | (26,064 | )    |  | $ | (12,556 | ) |  | $ | 514    |  
|Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: |      |                          |         |      |  |   |         |   |  |   |        |  
|Depreciation and amortization                                                                      |      |                          | 3,927   |      |  |   | 4,585   |   |  |   | 5,186  |  
|Stock-based compensation expense                                                                   |      |                          | 176     |      |  |   | 362     |   |  |   | 1,042  |  
|Provision for losses on accounts receivable                                                        |      |                          | 779     |      |  |   | 378     |   |  |   | 271    |  
|Gain on sale of business                                                                           |      |                          | (8,303  | )    |  |   |        |   |  |   |       |  
|Loss on disposal of property and equipment                                                         |      |                          | 119     |      |  |   | 550     |   |  |   | 111    |  
|Non-cash restructuring charges                                                                     |      |                          | 193     |      |  |   |        |   |  |   |       |  
|Gain on sale of marketable securities                                                              |      |                          |        |      |  |   | (521    | ) |  |   | (341   | )
|Impairment charges                                                                                 |      |                          | 18,796  |      |  |   |        |   |  |   |       |  
|Deferred income taxes                                                                              |      |                          | (1,124  | )    |  |   | 302     |   |  |   | (158   | )
|Changes in operating assets and liabilities:                                                       |      |                          |         |      |  |   |         |   |  |   |        |  
|Accounts receivable                                                                                |      |                          | (3,919  | )    |  |   | 3,729   |   |  |   | (4,625 | )
|Inventories                                                                                        |      |                          | 4,697   |      |  |   | (246    | ) |  |   | (4,837 | )
|Prepaid expenses and other assets                                                                  |      |                          | 270     |      |  |   | (548    | ) |  |   | (518   | )
|Accounts payable and accrued liabilities                                                           |      |                          | 1,857   |      |  |   | 2,758   |   |  |   | 2,729  |  
|Income taxes payable                                                                               |      |                          | (421    | )    |  |   | (1,681  | ) |  |   | 1,704  |  
|Deferred revenue                                                                                   |      |                          | (1,218  | )    |  |   | 92      |   |  |   | 1,590  |  
|                                                                                                   |      |                          |         |      |  |   |         |   |  |   |        |  
|Net cash provided by (used in) operating activities                                                |      |                          | (10,235 | )    |  |   | (2,796  | ) |  |   | 2,668  |  
|                                                                                                   |      |                          |         |      |  |   |         |   |  |   |        |  
|Cash flows from investing activities:                                                              |      |                          |         |      |  |   |         |   |  |   |        |  
|Purchases of short-term investments                                                                |      |                          |        |      |  |   | (1,003  | ) |  |   | (4,510 | )
|Proceeds from sales of short-term investments                                                      |      |                          |        |      |  |   | 5,570   |   |  |   | 6,577  |  
|Proceeds from sales of marketable securities                                                       |      |                          |        |      |  |   | 976     |   |  |   | 657    |  
|Proceeds from sale of business, net                                                                |      |                          | 4,916   |      |  |   |        |   |  |   |       |  
|Capital expenditures                                                                               |      |                          | (2,823  | )    |  |   | (3,403  | ) |  |   | (5,401 | )
|Acquisition of intangible assets                                                                   |      |                          | (190    | )    |  |   | (297    | ) |  |   | (236   | )
|                                                                                                   |      |                          |         |      |  |   |         |   |  |   |        |  
|Net cash provided by (used in) investing activities                                                |      |                          | 1,903   |      |  |   | 1,843   |   |  |   | (2,913 | )
|                                                                                                   |      |                          |         |      |  |   |         |   |  |   |        |  
|Cash flows from financing activities:                                                              |      |                          |         |      |  |   |         |   |  |   |        |  
|Decrease (increase) in restricted cash                                                             |      |                          |        |      |  |   | 4       |   |  |   | (283   | )
|Proceeds from short-term borrowings and notes payable                                              |      |                          | 4,000   |      |  |   |        |   |  |   | 27     |  
|Payments on short-term borrowings                                                                  |      |                          | (2,000  | )    |  |   |        |   |  |   |       |  
|Payments on notes payable                                                                          |      |                          | (163    | )    |  |   | (169    | ) |  |   | (240   | )
|                                                                                                   |      |                          |         |      |  |   |         |   |  |   |        |  
|Net cash provided by (used in) financing activities                                                |      |                          | 1,837   |      |  |   | (165    | ) |  |   | (496   | )
|                                                                                                   |      |                          |         |      |  |   |         |   |  |   |        |  
|Effect of exchange rate changes on cash and cash equivalents                                       |      |                          | (290    | )    |  |   | (351    | ) |  |   | (133   | )
|                                                                                                   |      |                          |         |      |  |   |         |   |  |   |        |  
|Net increase (decrease) in cash and cash equivalents                                               |      |                          | (6,785  | )    |  |   | (1,469  | ) |  |   | (874   | )
|Cash and cash equivalents at the beginning of the period                                           |      |                          | 15,981  |      |  |   | 17,450  |   |  |   | 18,324 |  
|                                                                                                   |      |                          |         |      |  |   |         |   |  |   |        |  
|Cash and cash equivalents at the end of the period                                                 |      | $                        | 9,196   |      |  | $ | 15,981  |   |  | $ | 17,450 |  
|                                                                                                   |      |                          |         |      |  |   |         |   |  |   |        |  
|Supplemental Disclosure                                                                            |      |                          |         |      |  |   |         |   |  |   |        |  
|Cash paid for interest                                                                             |      | $                        | 11      |      |  | $ | 29      |   |  | $ | 23     |  
|                                                                                                   |      |                          |         |      |  |   |         |   |  |   |        |  



See accompanying notes to
consolidated financial statements.



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SUNRISE TELECOM INCORPORATED AND SUBSIDIARIES



Notes to Consolidated Financial Statements



(1)    Business and Significant Accounting Policies



(a)    Business



Sunrise Telecom Incorporated (the Company) designs, manufactures, and
markets service verification equipment that enables service providers to pre-qualify facilities for services, verify newly installed services, and diagnose problems relating to telecommunications, cable broadband, internet access and wireless
networks. The Company sells its products on six continents through a worldwide network of manufacturers, sales representatives, distributors, and direct sales people. Due to its international operations, the Company has wholly-owned subsidiaries
located outside of the United States in Canada, Italy, Taiwan, South Korea, Japan, China, Germany, France, Spain, and Mexico.



(b)    Basis of Presentation



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



(c)    Going Concern



The accompanying consolidated financial statements have been prepared assuming that
the Company will continue as a going concern, which contemplates the realization of assets and the liquidation of liabilities in the normal course of business. The Company has incurred significant losses from operations from 2002 through 2008, which
has adversely impacted its liquidity and has significantly reduced its cash and cash equivalents. The Company has managed its liquidity during this time through a series of cost reduction initiatives, obtaining a secured revolving credit arrangement
with a financial institution and the sale of assets. The recession in the United States and the slowdown of economic growth in the rest of the world created a substantially more difficult business environment in 2008. The Companys liquidity
position, as well as its operating performance, was negatively affected by these economic conditions and by other financial and business factors, many of which are beyond its control. The Company does not believe it is likely that these adverse
economic conditions will improve significantly during 2009. If the Companys revenues and gross profit levels decline further in 2009 and the Company is unable to sufficiently reduce operating expenses, it would continue to use cash in
operating activities in 2009, further reducing its liquidity and cash and cash equivalents. As a result, the Company may become unable to pay its operating expenses on a timely basis due to a lack of sufficient liquidity.



The Company took actions in 2008 to both conserve cash and generate incremental cash
flows. Such actions include the sale of its wholly-owned Italian subsidiary in December 2008 and restructuring activities during 2008 intended to reduce costs and improve operating efficiencies. The Company intends to generate cash through further
sales of assets or secured or unsecured financing arrangements, and is exploring strategic alternatives to enhance stockholder value, including a sale of the Company. The Company also intends to pursue obtaining a waiver of the default under its
revolving credit agreement with Silicon Valley Bank, as well as obtaining an extension of the agreement, which otherwise expires August 12, 2009. However, there can be no assurance that the Company will be successful with its plans.



The Companys significant operating losses and resulting negative cash flows
from operating activities, among other factors, raise substantial doubt about its ability to continue as a going concern. The accompanying condensed consolidated financial statements do not include any adjustments that might result from the outcome
of this uncertainty.



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Notes to Consolidated Financial Statements(Continued)



(d)    Risks and Uncertainties



The Companys continued losses from operations and cash used in operating activities have reduced its cash and cash equivalents
in 2007 and 2008. As of December 31, 2008, the Company had approximately $9.0 million in cash and cash equivalents and $2.0 million was outstanding under its secured revolving credit arrangement (Loan Agreement) with Silicon Valley
Bank (SVB). In the future, the Company may need to borrow through additional debt, equipment loans, lease lines of credit, asset-based financings, mortgages or other financing arrangements and sell assets to finance capital expenditures
and working capital for its business. It is possible that the Company may continue to use cash in operating activities and may become unable to pay its ordinary operating expenses, including its debt service, on a timely basis. The Companys
lack of liquidity could result in:



| |  |  | increasing its vulnerability to adverse conditions in its industry or macro-economy in general;
| | - |  | -----------------------------------------------------------------------------------------------



| |  |  | limiting its ability to obtain additional financing;
| | - |  | ----------------------------------------------------



| |  |  | requiring it to sell assets to raise cash at potentially unfavorable prices;
| | - |  | ----------------------------------------------------------------------------



| |  |  | requiring a substantial portion of cash flow from operations to be used for debt service or to prepay debt, thereby reducing cash flow available for other purposes, including
operating expenditures;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | limiting its flexibility in planning for, or reacting to, changes in its business and industry; and
| | - |  | ---------------------------------------------------------------------------------------------------



| |  |  | affecting perceptions by investors, suppliers and customers about its financial stability thereby further limiting its ability to obtain additional financing and to acquire
and retain customers.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The global unfavorable economic
and market conditions and the financial crisis could impact the Companys business in a number of ways, including:



| |  |  | potential deferment of purchases and orders by customers;
| | - |  | ---------------------------------------------------------



| |  |  | customers inability to obtain financing to make purchases from the Company and/or maintain their business;
| | - |  | -----------------------------------------------------------------------------------------------------------



| |  |  | negative impact from increased financial pressures on third-party dealers, distributors and retailers; and
| | - |  | ----------------------------------------------------------------------------------------------------------



| |  |  | negative impact from increased financial pressures on key suppliers.
| | - |  | --------------------------------------------------------------------



If the economic, market and geopolitical conditions in the United States and the rest of the world do not improve, or if they continue
to deteriorate, the Company may experience material adverse impacts on its business, operating results and financial condition.



(e)    Revenue Recognition



The Company recognizes revenue from a customer order when all of the following criteria are met: persuasive evidence of an arrangement exists, delivery has
occurred, the price is fixed or determinable, and collectability is reasonably assured. For product sales, the Company considers delivery to have occurred when title and risk of loss have been transferred to the customer, which is usually at the
time that the product has been picked up by a common carrier. When the arrangement with the customer includes future obligations or customer acceptance provisions, the Company recognizes revenue when those obligations have been met or customer
acceptance has been received. Deferred revenue represents amounts received from customers in advance of support services to be provided and amounts received prior to customer acceptance.



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Notes to Consolidated Financial Statements(Continued)



Extended warranty service is offered as part of the product sale arrangement and sold at a later date if not
purchased at time of sale. When offered with the product sale, the Company follows the guidance in EITF 00-21, Revenue Arrangements with Multiple Deliverables. Fair value of the extended warranty services exists and is based on the price when
the service is sold separately. The Company defers revenue from the extended warranty service arrangement and recognizes such revenue on a straight line basis over the service period.



The Company generally does not sell its products with rights of return. On the few occasions when the Company has agreed to provide
customers with rights of return, it has deferred recognition of sales revenue until the rights of return have lapsed. The Company generally does not provide extended payment terms to its customers. The normal terms are typically 30 days for North
America and up to 60 days in other markets. In the United States, we sell our products through manufacturers representatives who are supported by a regional channel management and field engineering team. Manufacturers representatives are
paid on a commission basis for sales in their respective regions. The manufacturers representatives solicit orders from customers, and the Company then ships its products directly to the customers and invoices those customers at time of
shipment. Outside the United States, the Company sells its products through a mix of its own sales offices and independent distributors. The Company recognizes revenue upon shipment to the distributors as the distributors are not granted any return
or stock rotation rights.



(f)    Warranty Cost



The Companys products are covered by standard warranties of one to three years
to its customers depending on the specific product and terms of the customer purchase agreement. The Companys standard warranties require it to repair or replace defective products during the warranty period at no cost to the customer. At the
time that product revenue is recognized, the Company records a liability for estimated costs under its standard warranties. The costs are estimated based on historical experience. The Company periodically assesses the adequacy of its recorded
liability for product warranties and adjusts the amount as necessary.



(g)    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. Accordingly, no
research and development costs have been capitalized.



(h)    Fair
Value of Financial Instruments



For financial instruments consisting
of cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities and short-term borrowings included in the Companys financial statements, the carrying amounts are reasonable estimates of fair value due to their short
maturities. Estimated fair values for investment securities classified as cash equivalents, are based on quoted market prices for the same or similar instruments.



(i)    Cash Equivalents



The Company considers all highly liquid investments with an original maturity of 90 days or less when acquired to be cash equivalents. Cash equivalents as of
December 31, 2008 and 2007 consisted primarily of cash on deposit with banks and money market funds. The Company determines the appropriate classification of debt and equity securities at the time of purchase. Investments classified as
available for sale are reported at market value, with the unrealized gains



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Notes to Consolidated Financial Statements(Continued)



and losses, net of tax, reported as a separate component of other comprehensive income or 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).



(j)    Restricted Cash



Restricted cash is cash held in certificates of deposit by a financial institution that collateralize standby letters of credit issued by the financial institution
on the Companys behalf.



(k)    Allowances for Doubtful
Accounts and Sales Returns



The Company determines its allowance for
doubtful accounts receivable by making its best estimate of specific and general uncollectible accounts considering its historical accounts receivable collection experience and the information that it has about the current status of the accounts
receivable balances. If future conditions cause the collection experience to change or if the Company later obtains different information about the status of any or all of its accounts receivable, additional allowances for doubtful accounts
receivable may be required. The Company charges provisions for doubtful accounts receivable to general and administrative expense.



The Company records an allowance for sales returns for estimated future product returns related to current period product revenue. The Company bases its allowance
on periodic assessments of historical trends in product return rates. If the actual future returns were to deviate from the historical data on which the reserve had been established, the Companys revenue could be adversely affected. The
allowance is recorded as a reduction of revenues in the Companys consolidated financial statements.



(l)    Inventories



Inventories are recorded at the lower of cost determined on a first-in-first-out basis (approximated by average cost) or market. The Company compares its inventory on hand against projected demand, and records provisions for excess and
obsolete inventories when inventory on hand exceeds estimated future demand. This evaluation includes an analysis of historical and forecasted sales of products and a review of other factors such as product competitiveness, product life cycles and
market conditions. Inventories in excess of forecasted demand are reserved with a charge to cost of sales. If inventory is reserved, a new cost basis for that inventory is established, and later changes in facts and circumstances do not restore or
increase that newly established cost basis. If reserved inventory is subsequently sold or otherwise disposed of, then the related reserve is reversed, resulting in lower costs and higher gross margins relating to the sale or disposition of such
inventory.



(m)    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 fifteen to thirty-nine years for buildings, five to seven years for improvements, and three to five years for
equipment, furniture and fixtures.



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Notes to Consolidated Financial Statements(Continued)



(n)    Goodwill



In accordance with SFAS No. 142, Goodwill and Other Intangible Assets, the Company assesses the recoverability of the
carrying value of its goodwill as of November 30 of each fiscal year, or whenever events or changes in circumstances indicate that the carrying amount of the asset may not be fully recoverable. Recoverability of goodwill is determined at the
reporting unit level, with the Company as a single reporting unit, using a two-step approach. First, the carrying amount of the entire reporting unit is compared to its fair value, as determined by the market value of the Companys outstanding
common stock. If the carrying value of the entire reporting unit exceeds its fair value, the second step is performed. In this step, an impairment loss is recognized for the excess, if any, of the carrying amount of goodwill over its implied fair
value. The implied fair value of the reporting units goodwill is the amount by which the fair value of the entire reporting unit exceeds the sum of the individual fair values of its assets, except goodwill, less the sum of the individual fair
values of its liabilities. The fair values of individual assets and liabilities may be estimated as the amount at which they could be bought or sold in a current transaction between willing parties. If this information is not available, fair value
is determined based on the best information available under the circumstances. This often involves the use of valuation techniques, such as the present value of expected future cash flows, discounted at a rate commensurate to the risk involved, or
other acceptable valuation techniques. See Note 5Goodwill, Intangible Assets and Long-lived Assets.



(o)    Long-Lived Assets



Long-lived assets, including property and equipment and identifiable intangible assets, are evaluated for impairment whenever events or changes in circumstances
indicate that such assets may be impaired, or that the estimated useful lives are no longer appropriate. In accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long Lived Assets (SFAS 144), the
impairment evaluation is performed based on asset groups, which represent the lowest level for which identifiable cash flows are largely independent of the cash flows of other groups of assets and liabilities. The Company reviews its long-lived
assets for impairment based on estimated future undiscounted cash flows attributable to the assets. In the event that such cash flows are not expected to be sufficient to recover the recorded value of the assets, the assets are written down to their
estimated fair values. See Note 5Goodwill, Intangible Assets and Long-lived Assets.



(p)    Income Taxes



The Company accounts for income taxes using the asset and liability method under SFAS No. 109, Accounting for Income Taxes(SFAS 109). Under this method, deferred tax assets and liabilities are recognized for the
future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and for the future tax consequences attributable to operating loss and
tax credit carryforwards. Deferred tax assets and liabilities are measured using the enacted tax laws expected to apply to 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.



SFAS 109 requires that the Company weigh both positive and negative evidence in order to ascertain whether it is likely that deferred tax assets will be realized.
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary 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 losses and tax credit carryforwards.



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Notes to Consolidated Financial Statements(Continued)



In July 2006, the Financial Accounting Standards Board (FASB) issued Interpretation 48,
Accounting for Uncertainty in Income Taxes, an Interpretation of SFAS 109 (FIN 48), to create a single model to address accounting for uncertainty in tax positions. FIN 48 clarifies the accounting for income taxes by
prescribing a minimum recognition threshold that a tax position must reach before financial statement recognition. FIN 48 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods,
disclosure and transition. Effective January 1, 2007, the Company adopted the provisions of FIN 48, the adoption of which did not have a significant impact on the Companys consolidated financial statements. The effect of the adoption of
FIN 48 on the Companys consolidated financial statements is summarized in Note 14Income Taxes.



(q)    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 consist primarily of cash on deposit with banks and money market funds.



Credit risk with respect to trade receivables are limited as the majority of the Companys sales are derived from large telephone operating companies, large
cable television system operators, and other established telecommunication companies with relatively good credit histories located throughout the world. The Company performs ongoing credit evaluations of its customers.



The Companys customers are concentrated in the telecommunications and cable
broadband industries 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 market is characterized by rapidly
changing technology, evolving industry standards, changes in end-user requirements, and frequent new product introductions and enhancements. 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 standards. Sales of our DSL and other wireline access products accounted for approximately 36% of our net sales for both
of the years ended December 31, 2008 and 2007. Currently, the Company 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. 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 technologies. These competing technologies may ultimately prove to be superior to DSL services and continue to reduce or eliminate the demand for the Companys DSL products. 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 relative values of currencies, longer payment cycles, and greater difficulty in collecting
accounts receivable. Verizon Communications, Inc. accounted for 13% and 11% of the Companys net sales in 2007 and 2006, respectively. No customer accounted for 10% or more of the Companys net sales in 2008.



The Company purchases many key products, such as microprocessors, field programmable
gate arrays, bus interface chips, optical components, and oscillators, from a single source or from that sources sole supplier and relies exclusively on third-party subcontractors to manufacture certain sub-assemblies. The Company may also
retain third party design services in the development of the Companys products. The Company does not have long-term supply agreements with these vendors. As a result of its reliance on single-source vendors, the Companys operations are
subject to risks including, but not limited to, interruption of supply of key components, delays in product manufacture



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Notes to Consolidated Financial Statements(Continued)



and delivery, product development delays, price fluctuations, and exposure to quality related issues. Long lead-times for delivery of certain sole-sourced components
may impact the ability of the Company to respond to changes in production demand in a timely fashion.



(r)    Net Income (Loss) per Share



Basic net income (loss) 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
potential common equivalent shares outstanding during the period. Potential common equivalent shares consist of common stock issuable upon exercise of stock options using the treasury stock method. For the years ended December 31, 2008, 2007,
and 2006, potential common equivalent shares from weighted average outstanding stock options of 2,647,928, 3,304,334 and 4,402,434, respectively, were excluded from the calculation of diluted EPS presented in the consolidated statements of
operations because their effect would have been anti-dilutive.



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



|                                                                                          |  |                          |  |        |  |       
|----------------------------------------------------------------------------------------- |  | ------------------------ |  | ------ |  | ------
|                                                                                          |  | Years Ended December 31,
|                                                                                          |  | 2008                     |  | 2007   |  | 2006  
|Basicweighted-average number of common shares outstanding                                |  | 51,349                   |  | 51,349 |  | 51,349
|Effect of dilutive potential common equivalent shares:                                    |  |                          |  |        |  |       
|Stock options outstanding                                                                 |  |                         |  |       |  | 231   
|                                                                                          |  |                          |  |        |  |       
|Dilutedweighted-average number of common shares and common equivalent shares outstanding |  | 51,349                   |  | 51,349 |  | 51,580
|                                                                                          |  |                          |  |        |  |       



(s)    Share-Based
Compensation



The Company has in effect incentive plans under which
incentive stock options have been granted to employees and non-qualified stock options have been granted to employees and non-employee members of the Board of Directors. The Company also has an employee stock purchase plan for all eligible
employees, which was suspended in May 2006. Effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 123R, Share-Based Payment(SFAS 123R), which requires all
share-based payments to employees, including grants of employee stock options and employee stock purchase rights, to be recognized in the financial statements based on their respective grant date fair values.



SFAS 123R requires companies to estimate the fair value of share-based payment
awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense ratably over the requisite service periods. The Company has estimated the fair value of
each award as of the date of grant or assumption using the Black-Scholes option pricing model.



(t)    Use of Estimates



The
preparation of financial statements in accordance with United States generally accepted accounting principles requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and the 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. The Company revises estimates as additional
information becomes available.



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Notes to Consolidated Financial Statements(Continued)



(u)    Foreign Currency Translation



The functional currency for the Companys foreign subsidiaries located in Taiwan and Canada is the U.S. dollar. Accordingly, the
Company remeasures the monetary assets and liabilities of these foreign subsidiaries to the U.S. dollar at year-end exchange rates and remeasures the nonmonetary assets and liabilities to the U.S. dollar at historical rates. Income and expense
amounts related to monetary assets and liabilities are remeasured to the U.S. dollar at the weighted average exchange rates in effect during the year, and income and expense accounts related to nonmonetary assets and liabilities are remeasured
to the U.S. dollar at historical exchange rates. Remeasurement gains and losses are recognized as income, or expense, in the year of occurrence.



The functional currencies for the Companys other foreign subsidiaries are the local currencies. Accordingly, the Company applies the period end exchange rate
to translate each subsidiarys assets and liabilities and the weighted average exchange rate for the period to translate the subsidiarys revenues, expenses, gains, and losses into U.S. Dollars. Translation adjustments are included as
a separate component of accumulated other comprehensive income (loss) within stockholders equity.



(v)    Advertising Cost



The Company expenses advertising costs as incurred. Such costs are included in selling and marketing expense and totaled approximately $137,000, $184,000, and $417,000 during the years ended December 31, 2008, 2007, and 2006,
respectively.



(w)    Recent Accounting Pronouncements



In February 2007, the FASB issued SFAS No. 159, The
Fair Value Option for Financial Assets and Financial Liabilities (SFAS 159). SFAS 159 permits entities to choose to measure many financial assets and financial liabilities at fair value. Unrealized gains and losses on items for which
the fair value option has been elected are reported in earnings. Effective January 1, 2008, the Company adopted the provisions of SFAS 159 but did not choose the fair value option and therefore, there was no impact on its condensed consolidated
financial statements.



In December 2007, the FASB issued SFAS
No. 141 (revised 2007), Business Combinations (SFAS 141R), which replaces SFAS No. 141. SFAS 141R establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, any non-controlling interest in the acquiree and the goodwill acquired. SFAS 141R also establishes disclosure requirements which will enable users to evaluate the nature and financial effects of
the business combination. SFAS 141R is effective for fiscal years beginning after December 15, 2008. The Company will be required to adopt SFAS 141R in its fiscal year 2009 commencing January 1, 2009.



(x)    Other Comprehensive Income (Loss)



Other comprehensive income (loss) is recorded directly to stockholders equity
and includes unrealized gains and losses which have been excluded from the consolidated statements of operations. These unrealized gains and losses consist of foreign currency translation adjustments, unrealized gains and losses on
available-for-sale.



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Notes to Consolidated Financial Statements(Continued)



(2)    Financial Statement Details



Inventories



Inventories consisted of the following (in thousands):



|                |  |              |        |      |   |       
|--------------- |  | ------------ | ------ | ---- | - | ------
|                |  | December 31,
|                |  | 2008         |        | 2007
|Raw materials   |  | $            | 4,772  |      | $ | 8,187 
|Work in process |  |              | 2,461  |      |   | 5,486 
|Finished goods  |  |              | 4,248  |      |   | 3,772 
|                |  |              |        |      |   |       
|                |  | $            | 11,481 |      | $ | 17,445
|                |  |              |        |      |   |       



Property and Equipment



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



|                                               |  |              |        |      |   |       
|---------------------------------------------- |  | ------------ | ------ | ---- | - | ------
|                                               |  | December 31,
|                                               |  | 2008         |        | 2007
|Land                                           |  | $            | 6,870  |      | $ | 8,821 
|Building                                       |  |              | 8,899  |      |   | 10,023
|Equipment                                      |  |              | 27,853 |      |   | 33,885
|Furniture and fixtures                         |  |              | 2,305  |      |   | 2,634 
|Leasehold improvements                         |  |              | 1,285  |      |   | 1,606 
|                                               |  |              |        |      |   |       
|                                               |  |              | 47,212 |      |   | 56,969
|Less accumulated depreciation and amortization |  |              | 27,080 |      |   | 29,758
|                                               |  |              |        |      |   |       
|                                               |  | $            | 20,132 |      | $ | 27,211
|                                               |  |              |        |      |   |       



Depreciation expense for the
years ended December 31, 2008, 2007 and 2006 was $3.9 million, $4.2 million and $4.4 million, respectively.



Other Assets



Other assets consisted of the following (in thousands):



|                                                      |  |              |       |      |   |    
|----------------------------------------------------- |  | ------------ | ----- | ---- | - | ---
|                                                      |  | December 31,
|                                                      |  | 2008         |       | 2007
|Proceeds receivable from sale of businesssee Note 13 |  | $            | 1,701 |      | $ |   
|Insurance deposits                                    |  |              | 71    |      |   | 452
|Rental deposits                                       |  |              | 124   |      |   | 335
|Other deposits                                        |  |              | 227   |      |   | 67 
|                                                      |  |              |       |      |   |    
|                                                      |  | $            | 2,123 |      | $ | 854
|                                                      |  |              |       |      |   |    



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Notes to Consolidated Financial Statements(Continued)



Other Accrued Liabilities



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



|                                                |  |              |        |      |   |       
|----------------------------------------------- |  | ------------ | ------ | ---- | - | ------
|                                                |  | December 31,
|                                                |  | 2008         |        | 2007
|Accrued compensation and other related benefits |  | $            | 3,114  |      | $ | 5,861 
|Commissions payable                             |  |              | 637    |      |   | 1,340 
|Sales tax payable                               |  |              | 127    |      |   | 423   
|Accrued warranty (see Note 6)                   |  |              | 2,745  |      |   | 1,454 
|Accrued inventory receipts                      |  |              | 2,082  |      |   | 1,226 
|Legal accrual                                   |  |              | 522    |      |   | 307   
|Other accrued expenses                          |  |              | 3,606  |      |   | 4,547 
|                                                |  |              |        |      |   |       
|                                                |  | $            | 12,833 |      | $ | 15,158
|                                                |  |              |        |      |   |       



Other Income, net



Other income, net consisted of the following (in thousands):



|                                      |  |                          |       |   |      |   |       |      |  |   |       |  
|------------------------------------- |  | ------------------------ | ----- | - | ---- | - | ----- | ---- |  | - | ----- | -
|                                      |  | Years Ended December 31, |      
|                                      |  | 2008                     |       |   | 2007 |   |       | 2006 | 
|Interest income                       |  | $                        | 192   |   |      | $ | 733   |      |  | $ | 650   |  
|Foreign exchange gain                 |  |                          | 1,032 |   |      |   | 983   |      |  |   | 1,028 |  
|Gain on sale of marketable securities |  |                          |      |   |      |   | 521   |      |  |   | 335   |  
|Interest expense                      |  |                          | (116  | ) |      |   | (30   | )    |  |   | (60   | )
|Other income (expense), net           |  |                          | 43    |   |      |   | (164  | )    |  |   | 221   |  
|                                      |  |                          |       |   |      |   |       |      |  |   |       |  
|                                      |  | $                        | 1,151 |   |      | $ | 2,043 |      |  | $ | 2,174 |  
|                                      |  |                          |       |   |      |   |       |      |  |   |       |  



(3)    Valuation and
Qualifying Accounts



A summary of allowances for doubtful accounts
and sales returns is as follows (in thousands):



|     |  |                            |     |                           |   |            |  |   |                      |   |  |   |      
|---- |  | -------------------------- | --- | ------------------------- | - | ---------- |  | - | -------------------- | - |  | - | -----
|     |  | Balance atBeginningof Year |     | Charged toSales /Expenses |   | Write-offs |  |   | Balanceat Endof Year
|2008 |  | $                          | 270 |                           | $ | 779        |  | $ | (45                  | ) |  | $ | 1,004
|2007 |  | $                          | 281 |                           | $ | 378        |  | $ | (389                 | ) |  | $ | 270  
|2006 |  | $                          | 428 |                           | $ | 66         |  | $ | (213                 | ) |  | $ | 281  



The allowance for doubtful
accounts was $778,000 and $15,000 as of December 31, 2008 and 2007, respectively.



(4)    Fair Value of Financial Instruments



In September 2006, the FASB issued SFAS No. 157, Fair Value Measurement (SFAS 157), which defines fair value, establishes guidelines for measuring fair value and expands disclosures regarding fair value
measurements. SFAS 157 does not require any new fair value measurements but rather eliminates inconsistencies in guidance found in



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Notes to Consolidated Financial Statements(Continued)



various prior accounting pronouncements. On February 12, 2008, the FASB issued FSP SFAS 157-2, Effective Date of FASB Statement No. 157,which
deferred the effective date for adoption of fair value measurements for nonfinancial assets and liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually), to fiscal
years beginning after November 15, 2008. These nonfinancial items include assets and liabilities, such as reporting units measured at fair value in a goodwill impairment test and nonfinancial assets acquired and liabilities assumed in a
business combination. Fair value is defined under SFAS 157 as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an
orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value under SFAS 157 must maximize the use of observable inputs and minimize the use of unobservable inputs.



The Company adopted SFAS 157 effective January 1, 2008, for all of its financial
assets and liabilities that are recognized or disclosed at fair value on a recurring basis (at least annually). To increase consistency and comparability in fair value measurements, SFAS 157 establishes a fair value hierarchy based on the inputs
used in valuation techniques. There are three levels to the fair value hierarchy of inputs to fair value, as follows:



| |  |  | Level 1: Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
| | - |  | -------------------------------------------------------------------------------------------------------------------------



| |  |  | Level 2: Inputs reflect quoted prices for identical assets or liabilities in markets that are not active; quoted prices for similar assets or liabilities in active markets;
inputs other than quoted prices that are observable for the assets or liabilities; or inputs that are derived principally from or corroborated by observable market data by correlation or other means.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Level 3: Unobservable inputs reflecting the Companys own assumptions incorporated in valuation techniques used to determine fair value. These assumptions are required
to be consistent with market participant assumptions that are reasonably available.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



As of December 31, 2008, the Company had investments in money market funds of $3.3 million in cash and cash equivalents classified as Level 1 and no financial
assets or liabilities in the Level 2 or 3 hierarchy.



(5)    Goodwill, Intangible Assets and Long-lived Assets



Goodwill



In accordance with SFAS No. 142,
Goodwill and Other Intangible Assets (SFAS 142), the Company applies a fair value based impairment test to the carrying value of goodwill and indefinite-lived intangible assets on an annual basis or more frequently if events or
circumstances indicate that an impairment loss may have been incurred. With the adoption of SFAS 142, the Company determined that there was a single reporting unit for the purpose of goodwill impairment tests. The analysis of potential impairment of
goodwill requires a two-step process. The first step is the estimation of fair value. If the carrying value of the Companys net assets is greater than fair value, the second step is performed to measure the amount of impairment, if any.
Goodwill impairment exists when the estimated implied fair value of goodwill is less than its carrying value.



During the quarter ended September 30, 2008, based on a combination of factors, including a sustained decline in the Companys market capitalization, the
Company concluded that there were sufficient indicators to require it to perform an interim goodwill impairment analysis as of September 30, 2008. The fair value of the Company was estimated using the market comparable approach, which analyzes
the Companys quoted market prices adjusted for a



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Notes to Consolidated Financial Statements(Continued)



control premium. The results of the goodwill analysis indicated that there would be no remaining implied value attributable to goodwill. Accordingly, during the year
ended December 31, 2008, the Company impaired the entire goodwill balance and recognized a goodwill impairment charge of $12.8 million in the consolidated statement of operations under operating expenses.



Intangible and Long-lived Assets



In accordance with SFAS No. 144, the Company assesses the recoverability of long-lived assets with finite useful lives whenever
events or changes in circumstances indicate that the Company may not be able to recover the assets carrying amount. The Company measures the amount of impairment of such long-lived assets by the amount by which the carrying value of the asset
exceeds the fair market value of the asset, which is generally determined based on projected discounted future cash flows or appraised values. In connection with completing its goodwill impairment analysis, the Company performed an impairment
analysis of its intangible and long-lived assets as of September 30, 2008. The impairment analysis indicated that all of the identified intangible assets were not recoverable and as a result, the Company impaired the carrying values of the
identified intangible assets, which resulted in impairment charges on intangibles assets totaling $1.2 million. In addition, the Company recorded an impairment charge of $4.8 million relating to its long-lived assets. The impairment charges are
included in operating expenses in Impairment charges in the consolidated statements of operations in the year ended December 31, 2008.



The Company had amortized its intangible assets on a straight-line basis over their estimated useful lives of up to seventeen years. Aggregate amortization expense
for the years ended December 31, 2008, 2007, and 2006 was $0.1 million, $0.3 million, and $0.8 million, respectively. Amortization expense is classified as a general and administrative expense on the Companys consolidated statements of
operations.



(6)    Liability for Product Warranties



During the year ended December 31, 2008, the Company recorded
a warranty charge of approximately $1.8 million relating to its CM750 product that had been sold to a significant customer in prior years. Changes in the Companys liability for product warranties, which is included in other accrued liabilities
in the consolidated balance sheets, during the years ended December 31, 2008, 2007, and 2006, were as follows (in thousands):



|     |  |                            |       |                 |   |               |  |   |                      |   |  |   |      
|---- |  | -------------------------- | ----- | --------------- | - | ------------- |  | - | -------------------- | - |  | - | -----
|Year |  | Balance atBeginningof Year |       | WarrantyExpense |   | WarrantyCosts |  |   | Balance atEnd ofYear
|2008 |  | $                          | 1,454 |                 | $ | 2,884         |  | $ | (1,593               | ) |  | $ | 2,745
|2007 |  | $                          | 1,656 |                 | $ | 1,302         |  | $ | (1,504               | ) |  | $ | 1,454
|2006 |  | $                          | 834   |                 | $ | 1,836         |  | $ | (1,014               | ) |  | $ | 1,656



(7)    Short-term
Borrowings and Notes Payable



Notes Payable



The Companys Italian subsidiary, Sunrise Telecom, S.r.l., has a loan from the
Italian government which bears interest at 2% per year. As of December 31, 2007, the outstanding balance on this loan was $0.6 million. On December 12, 2008, the Company completed the sale of Sunrise Telecom S.r.l to LTE Innovations
OY and as a result, the loan from the Italian government was assumed by the buyer. See Note 13, Sale of Business.



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Notes to Consolidated Financial Statements(Continued)



Revolving Credit Agreement



On August 13, 2007, the Company entered into a $10 million secured revolving credit arrangement (Loan Agreement) with Silicon Valley Bank
(SVB) to improve liquidity and working capital for the Company. The Company may borrow, repay and reborrow under the line of credit facility at any time. The amount that the Company is able to borrow under the Loan Agreement will vary
based on the eligible accounts receivable, as defined in the agreement. The borrowing base on the Loan Agreement is $5 million plus 80% of eligible accounts receivable. The line of credit facility bears interest at the banks prime rate (4% at
December 31, 2008). This line of credit is collateralized by substantially all of the Companys assets and requires the Company to comply with customary affirmative and negative covenants principally relating to the use and disposition of
assets, tangible net worth and the satisfaction of a quick ratio test. In addition, the Loan Agreement contains customary events of default. Upon the occurrence of an uncured event of default, among other things, the bank may declare that all
amounts owed under the credit arrangement are due and payable.



On
December 28, 2007, the Loan Agreement was amended to reduce the Companys tangible net worth requirement from $57 million to $50 million. On August 12, 2008, the Company further amended the Loan Agreement, which was to expire on
August 13, 2008, to extend the term of all indebtedness to August 12, 2009. The amendment also reduced the required Quick Ratio Covenant to 0.80:1.00 (from 1:1) and the required minimum Tangible Net Worth Covenant to $44 million for the
fiscal quarters ending September 30, 2008 and December 31, 2008 and to $40 million for the fiscal quarters ending March 31, 2009 and June 30, 2009 (from $50 million for all such periods).



As of September 30, 2008 and December 31, 2008, the Company was in default of
its Tangible Net Worth Covenant due to the Companys tangible net worth being less than $44 million. In addition, the Company was in default of the $50 million tangible net worth covenant for the March 31, 2008 and June 30, 2008
periods. Under this revolving credit agreement, there was $2.0 million outstanding as of December 31, 2008.



On December 12, 2008, the Company and SVB amended the Loan Agreement to extend from November 30, 2008 to December 31, 2008, the period within which
the Company is required to establish and maintain its primary domestic banking relationship with SVB and its affiliates, and waived the Companys default with respect to non-compliance of maintaining banking relationships with SVB as of
November 30, 2008. Under the terms of the amendment, SVB consented to the Companys sale of its entire interest in Sunrise Telecom S.r.l. to LTE Innovations OY. The Company used $2.0 million of the proceeds from the sale to prepay its
obligations under the Loan Agreement in December 2008. The amendment does not contain any consent by SVB or waiver of SVBs rights and remedies with respect to the Companys default under the Loan Agreement, pursuant to which the Company
is required to maintain tangible net worth of $44 million for the quarter ended September 30, 2008. As a result, SVB may at any time declare immediately due and payable all of the Companys obligations under the Loan Agreement ($2.0
million after the prepayment referenced above), cease extending credit or resort to other rights and remedies under the Loan Agreement. The Company is currently not able to borrow any additional amounts under the Loan Agreement.



Letters of Credit



As of December 31, 2008 and 2007, the Company had standby letters of credit with a maximum potential future payment of $296,000 and $296,000,
respectively. These standby letters of credit secure an equal amount of performance bonds that were issued by financial institutions to our customers.



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Notes to Consolidated Financial Statements(Continued)



(8)    Restructuring



During 2008, the Company initiated several restructuring activities intended to reduce costs, improve operating efficiencies and change its
operations to more closely align them with its key strategic focus. The total restructuring charges were approximately $2.1 million and included employee severance and benefit costs, costs related to leased facilities to be abandoned or subleased,
and impairment of owned equipment. The Company completed its restructuring activities by the end of the fourth quarter of 2008. During the year ended December 31, 2008, the Company recognized $1.6 million of expense for workforce reduction and
$0.5 million of lease termination costs, contract buy-out, and disposal of assets associated with restructuring activities in 2008. These expenses are presented as Restructuring charges in the Companys Consolidated Statements of
Operations.



The following table summarizes the activity in the accrued
restructuring balance, included in other accrued liabilities in the accompanying condensed consolidated balance sheet, for the year ended December 31, 2008 and is expected to be fully paid by the end of the second quarter 2009 (in thousands):



|                    |  |                               |   |                      |   |              |  |   |                 |   |  |                               |      |   |  |   |    
|------------------- |  | ----------------------------- | - | -------------------- | - | ------------ |  | - | --------------- | - |  | ----------------------------- | ---- | - |  | - | ---
|                    |  | Balance as ofDecember 31,2007 |   | RestructuringCharges |   | CashPayments |  |   | Non-cashCharges |   |  | Balance as ofDecember 31,2008
|Workforce reduction |  | $                             |  |                      | $ | 1,584        |  | $ | (1,272          | ) |  | $                             |     |   |  | $ | 312
|Other exit costs    |  |                               |  |                      |   | 556          |  |   | (212            | ) |  |                               | (193 | ) |  |   | 151
|                    |  |                               |   |                      |   |              |  |   |                 |   |  |                               |      |   |  |   |    
|                    |  | $                             |  |                      | $ | 2,140        |  | $ | (1,484          | ) |  | $                             | (193 | ) |  | $ | 463
|                    |  |                               |   |                      |   |              |  |   |                 |   |  |                               |      |   |  |   |    



(9)    Leases



The Company leases all of its facilities, other than its U.S.
headquarters which is owned by the Company, under several operating lease agreements through 2014. Future minimum lease payments, under these agreements, as of December 31, 2008, are as follows (in thousands):



|                         |  |        |      
|------------------------ |  | ------ | -----
|Year ending December 31, |  | Amount
|2009                     |  | $      | 1,449
|2010                     |  |        | 1,018
|2011                     |  |        | 341  
|2012                     |  |        | 97   
|2013                     |  |        | 56   
|Thereafter               |  |        | 31   
|                         |  |        |      
|                         |  | $      | 2,992
|                         |  |        |      



Rent expense for the years ended
December 31, 2008, 2007, and 2006 was approximately $1.8 million for each year.



(10)    Capital Stock



Shares
reserved for future issuance are as follows as of December 31, 2008:



|                             |  |           
|---------------------------- |  | ----------
|Employee Stock Purchase Plan |  | 702,887   
|Stock Option Plan            |  | 10,905,145
|                             |  |           
|                             |  | 11,608,032
|                             |  |           



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Notes to Consolidated Financial Statements(Continued)



(11)    Share-Based Compensation Plans



The Company uses share-based compensation plans to attract, motivate, retain, and
reward high-quality employees, directors, and consultants by enabling them to acquire or increase their equity interest in the Company. The Company believes that participation in these share-based compensation plans strengthens the mutuality of
interests between participants and Company stockholders and provides participants with long-term performance incentives to promote the creation of stockholder value. Consequently, share-based compensatory awards issued subsequent to the initial
award to the Companys employees are determined primarily on the basis of individual performance. The Company currently has outstanding awards under its 1993 Stock Option Plan, its 2000 Stock Plan, and its 2000 Employee Stock Purchase Plan.



Share-based compensation expense recognized in the Companys
consolidated statements of operations for the fiscal years ended December 31, 2008, 2007 and 2006 was as follows (in thousands):



|                           |  |                          |     |      |   |      |  |   |      
|-------------------------- |  | ------------------------ | --- | ---- | - | ---- |  | - | -----
|                           |  | Years Ended December 31,
|                           |  | 2008                     |     | 2007 |   | 2006
|Cost of sales              |  | $                        | 10  |      | $ | 22   |  | $ | 56   
|Research and development   |  |                          | 51  |      |   | 114  |  |   | 458  
|Selling and marketing      |  |                          | 65  |      |   | 144  |  |   | 375  
|General and administrative |  |                          | 50  |      |   | 82   |  |   | 153  
|                           |  |                          |     |      |   |      |  |   |      
|Total                      |  | $                        | 176 |      | $ | 362  |  | $ | 1,042
|                           |  |                          |     |      |   |      |  |   |      



The Company has historically
issued new shares upon the exercise of stock options or employee stock purchase plan purchases.



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 in July 2000. The total number of shares reserved for issuance under the
Stock Plan equaled 7,550,000 shares of common stock, plus 5,250,000 shares of common stock that remained reserved for issuance under the Companys 1993 Stock Option Plan as of the date the Stock Plan became effective, for a total of 12,800,000
shares. In February 2006, the Companys Board approved a 200,000 share reserve increase for the Stock Plan which increased the total number of shares to 13,000,000. All outstanding options under the 1993 Stock Option Plan are administered under
the 2000 Stock Plan but will continue to be governed by their existing terms. As of December 31, 2008, the Company had granted options to purchase 9,846,346 shares of its common stock to its employees, directors, and consultants and options to
purchase 5,675,776 shares of common stock were canceled and returned to the Stock Plan, leaving 8,829,430 shares available for future grants.



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 four-year period, and expire 10 years from the date of grant, or sooner, upon termination of employment or if the stock plan is terminated by the Board of Directors.



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Notes to Consolidated Financial Statements(Continued)



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 its vesting. Unvested shares so purchased are subject to the Companys right to repurchase the shares at the original purchase price, which right lapses at a rate equivalent to the vesting period of the
original option. As of December 31, 2008, there were no shares issued and subject to repurchase under the 1993 Employee Stock Plan.



The following table summarizes stock option activity and weighted-average exercise prices for the year ended December 31, 2008.



|                             |  |                           |  |                    |   |  |                               |      |                                                     |   |                                |  |   |    
|---------------------------- |  | ------------------------- |  | ------------------ | - |  | ----------------------------- | ---- | --------------------------------------------------- | - | ------------------------------ |  | - | ---
|                             |  | OptionsAvailablefor Grant |  | OptionsOutstanding |   |  | Weighted-AverageExercisePrice |      | Weighted-AverageRemainingContractual Life(in years) |   | AggregateIntrinsicValue ($000)
|Balance at December 31, 2007 |  | 7,454,340                 |  | 3,450,805          |   |  | $                             | 3.48 |                                                     | $ | 4.08                           |  | $ | 357
|Granted                      |  |                          |  |                   |   |  | $                             |     |                                                     |   |                                |  |   |    
|Exercised                    |  |                          |  |                   |   |  | $                             |     |                                                     |   |                                |  |   |    
|Forfeited                    |  | 1,375,090                 |  | (1,375,090         | ) |  | $                             | 3.42 |                                                     |   |                                |  |   |    
|                             |  |                           |  |                    |   |  |                               |      |                                                     |   |                                |  |   |    
|Balance at December 31, 2008 |  | 8,829,430                 |  | 2,075,715          |   |  | $                             | 3.50 |                                                     |   | 2.98                           |  | $ |   
|                             |  |                           |  |                    |   |  |                               |      |                                                     |   |                                |  |   |    
|Exercisable                  |  |                           |  | 2,064,220          |   |  | $                             | 3.51 |                                                     |   | 2.97                           |  | $ |   
|                             |  |                           |  |                    |   |  |                               |      |                                                     |   |                                |  |   |    
|Vested and expected to vest  |  |                           |  | 2,075,715          |   |  | $                             | 3.50 |                                                     |   | 2.98                           |  | $ |   
|                             |  |                           |  |                    |   |  |                               |      |                                                     |   |                                |  |   |    



The aggregate intrinsic value is
based on the closing price of the Companys common stock on the Pink Sheets on December 31, 2008 of $.48. There were no in the money options as of December 31, 2008.



Unrecognized compensation expense as of December 31, 2008 was approximately $10,000 and will be recognized during the quarter
ended March 31, 2009.



Information regarding stock options
outstanding as of December 31, 2008 is summarized in the following table:



|                         |                   |                     |                                                    |                     |                               |   |                   |  |                               |  |   |     
|------------------------ | ----------------- | ------------------- | -------------------------------------------------- | ------------------- | ----------------------------- | - | ----------------- |  | ----------------------------- |  | - | ----
|Range of Exercise Prices |                   | Options Outstanding |                                                    | Options Exercisable
|                         | NumberOutstanding |                     | Weighted-AverageRemainingContractualLife(in Years) |                     | Weighted-AverageExercisePrice |   | NumberExercisable |  | Weighted-AverageExercisePrice
|$1.50-$1.58              |                   | 252,400             |                                                    | 0.24                |                               | $ | 1.55              |  | 252,400                       |  | $ | 1.55
|1.67-1.76                |                   | 93,748              |                                                    | 4.61                |                               | $ | 1.71              |  | 93,748                        |  | $ | 1.71
|1.91-1.91                |                   | 208,417             |                                                    | 3.73                |                               | $ | 1.91              |  | 208,417                       |  | $ | 1.91
|1.96-2.40                |                   | 210,025             |                                                    | 1.67                |                               | $ | 2.18              |  | 210,025                       |  | $ | 2.18
|2.45-3.05                |                   | 231,944             |                                                    | 5.00                |                               | $ | 2.70              |  | 231,944                       |  | $ | 2.70
|3.20-3.20                |                   | 320,852             |                                                    | 5.27                |                               | $ | 3.20              |  | 309,357                       |  | $ | 3.20
|3.26-3.91                |                   | 22,285              |                                                    | 0.88                |                               | $ | 3.43              |  | 22,285                        |  | $ | 3.43
|3.98-3.98                |                   | 294,200             |                                                    | 2.74                |                               | $ | 3.98              |  | 294,200                       |  | $ | 3.98
|4.09-4.94                |                   | 266,164             |                                                    | 2.59                |                               | $ | 4.58              |  | 266,164                       |  | $ | 4.58
|5.40-20.38               |                   | 175,680             |                                                    | 1.18                |                               | $ | 9.95              |  | 175,680                       |  | $ | 9.95
|                         |                   |                     |                                                    |                     |                               |   |                   |  |                               |  |   |     
|                         |                   | 2,075,715           |                                                    | 2.98                |                               | $ | 3.50              |  | 2,064,220                     |  | $ | 3.51
|                         |                   |                     |                                                    |                     |                               |   |                   |  |                               |  |   |     



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Notes to Consolidated Financial Statements(Continued)



The Company made no grants of stock options or other share-based awards 2006, 2007 or 2008 and option holders
have not been permitted to exercise options since December 2005 due to the Company not being current with its SEC filings. No stock options were exercised under the Stock Plan or the 1993 Stock Option Plan during the years ended December 31,
2008, 2007 and 2006. On March 31, 2009, the Company granted options to purchase approximately 3.1 million shares of its common stock to employees at an exercise price of $0.66 per share.



The Company extended by two additional years the exercise periods of 76 outstanding
fully vested stock option grants, representing 295,094 shares in the fiscal year ended December 31, 2006 that could not be exercised due to the Company not being current with its SEC filings and that would have otherwise expired. These
extensions were treated as modifications to the original grants and the incremental fair value associated with these modifications of $0.2 million was calculated using the Black-Scholes option pricing model. Expected volatility was estimated based
on historical volatility of the Companys stock. Expected term was estimated based on the contractual life of the instrument, the vesting period of the grant, and the historical exercise behavior. The following assumptions were used in the fair
value calculations:



|                        |  |         |  
|----------------------- |  | ------- | -
|                        |  | 2006    |  
|Dividend yield          |  |        |  
|Expected term           |  | 2 Years |  
|Risk-free interest rate |  | 4.83    | %
|Volatility rate         |  | 78      | %



Employee Stock Purchase Plan



The Companys 2000 Employee Stock Purchase Plan (the Purchase
Plan) became effective in April 2000. The Purchase Plan allows employees to designate up to 15% of their base compensation, subject to legal restrictions and limitations, to purchase shares of common stock at 85% of the lesser of the fair
market value (FMV) at the beginning of the offering period or the exercise date. The offering period extends for up to two years and includes four exercise dates occurring at six month intervals. Under the terms of the plan, if the FMV
at an exercise date is less than the FMV at the beginning of the offering period, the current offering period will terminate and a new offering period of up to two years will commence.



In February 2006, the Companys Board of Directors approved a 300,000 share reserve increase for the Purchase Plan pursuant to
the automatic adjustment provisions of the Purchase Plan. As of December 31, 2008, 2,350,000 shares of common stock had been reserved for issuance under the Purchase Plan with 1,647,113 shares issued, leaving 702,887 shares remaining for future
issuance.



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Notes to Consolidated Financial Statements(Continued)



No purchases have been permitted under the Purchase Plan subsequent to November 10, 2005 due to
restrictions on the Companys ability to issue stock as a result of not being current with its SEC filings. Thus, there were no purchases under the Purchase Plan during 2008, 2007 and 2006. The Purchase Plan was suspended and employee
contributions were refunded during the quarter ended June 30, 2006. The suspension of the Purchase Plan was treated as a modification to the two year offering period which began May 10, 2005. The fair value associated with this
modification was not material and was calculated using the Black-Scholes option pricing model and expensed immediately. Expected volatility was estimated based on historical volatility of the Companys stock. Expected term was estimated based
on the contractual life of the instrument, the vesting period of the grant, and the historical exercise behavior. The following assumptions were used in the fair value calculations:



|                        |  |        |  
|----------------------- |  | ------ | -
|                        |  | 2006   |  
|Dividend yield          |  |       |  
|Expected term           |  | 1 Year |  
|Risk-free interest rate |  | 5.01   | %
|Volatility rate         |  | 82     | %



(12)    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, which vests over a six-year period beginning on the employees date of hire. The Plan does not provide participants with an election to use their contributions to purchase the Companys stock. The
Company made contributions to the Plan of $0.4, $0.6 million and zero during 2008, 2007 and 2006 respectively. In November 2008, the Company suspended contributions to the Plan.



(13)    Sale of Business



Under SFAS No. 144, the Company reports assets to be disposed of by sale as held for sale and recognizes those assets and liabilities on the consolidated
balance sheet at the lower of carrying amount or fair value, less cost to sell. Assets classified as held for sale are not depreciated. As of September 30, 2008, the Company met the criteria to classify assets as held for sale relating to its
wholly-owned Italian subsidiary, Sunrise Telecom S.r.l. (Protocol Products Group or PPG). The net assets associated with PPG were classified as held-for-sale September 30, 2008 until its disposition on December 12, 2008.



On November 19, 2008, the Company and LTE Innovations OY
(LTE) entered into a Participation Purchase Agreement (Purchase Agreement) pursuant to which the Company agreed to sell PPG to LTE for approximately 8.0 million Euros, or approximately $10.7 million in cash, of which
approximately $0.6 million will be paid three months after close and $1.7 million will be held in escrow for up to fifteen months after close to secure indemnities under the Purchase Agreement. The closing of the transaction occurred on
December 12, 2008. The Company used $2.0 million of the proceeds from the sale to repay its borrowings outstanding under the Loan Agreement with SVB in December 2008. The Company expects to incur significant continuing direct cash inflows
related to the disposed entity as a result of the continuation of the distribution of PPGs products in the U.S. by the Company. Therefore, the disposal does not meet the criteria to classify the results of operations of PPG, as well as its
assets and liabilities, as a discontinued operation. The carrying value of the net assets disposed was approximately $1.8 million, including cash and cash equivalents of $2.9 million, and the direct costs of disposal were approximately $0.6 million.
The Company recognized a gain of $8.3 million on the sale of PPG in the fourth quarter of 2008.



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Notes to Consolidated Financial Statements(Continued)



(14)    Income Taxes



Income (loss) before income taxes consisted of the following (in thousands):



|        |  |                          |         |   |      |   |         |      |  |   |       |  
|------- |  | ------------------------ | ------- | - | ---- | - | ------- | ---- |  | - | ----- | -
|        |  | Years Ended December 31, |        
|        |  | 2008                     |         |   | 2007 |   |         | 2006 | 
|U.S.    |  | $                        | (24,072 | ) |      | $ | (10,914 | )    |  | $ | (106  | )
|Foreign |  |                          | (2,832  | ) |      |   | (822    | )    |  |   | 2,314 |  
|        |  |                          |         |   |      |   |         |      |  |   |       |  
|Total   |  | $                        | (26,904 | ) |      | $ | (11,736 | )    |  | $ | 2,208 |  
|        |  |                          |         |   |      |   |         |      |  |   |       |  



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



|                            |  |                          |        |   |      |   |      |      |  |   |       |  
|--------------------------- |  | ------------------------ | ------ | - | ---- | - | ---- | ---- |  | - | ----- | -
|                            |  | Years Ended December 31, |       
|                            |  | 2008                     |        |   | 2007 |   |      | 2006 | 
|Current expense:            |  |                          |        |   |      |   |      |      |  |   |       |  
|Federal                     |  | $                        |       |   |      | $ |     |      |  | $ | 173   |  
|State                       |  |                          |       |   |      |   |     |      |  |   | 17    |  
|Foreign                     |  |                          | 284    |   |      |   | 517  |      |  |   | 1,663 |  
|                            |  |                          |        |   |      |   |      |      |  |   |       |  
|                            |  |                          | 284    |   |      |   | 517  |      |  |   | 1,853 |  
|                            |  |                          |        |   |      |   |      |      |  |   |       |  
|Deferred expense (benefit): |  |                          |        |   |      |   |      |      |  |   |       |  
|Federal                     |  |                          | (1,124 | ) |      |   | 378  |      |  |   | 249   |  
|State                       |  |                          | (170   | ) |      |   | 60   |      |  |   | 20    |  
|Foreign                     |  |                          | 170    |   |      |   | (135 | )    |  |   | (428  | )
|                            |  |                          |        |   |      |   |      |      |  |   |       |  
|                            |  |                          | (1,124 | ) |      |   | 303  |      |  |   | (159  | )
|                            |  |                          |        |   |      |   |      |      |  |   |       |  
|                            |  | $                        | (840   | ) |      | $ | 820  |      |  | $ | 1,694 |  
|                            |  |                          |        |   |      |   |      |      |  |   |       |  



Income tax expense (benefit)
differed from the amounts computed by applying the U.S. federal income tax rate of 34% for the years ended December 31, 2008, 2007 and 2006 to pretax income (loss), as a result of the following (in thousands):



|                                               |  |                          |        |   |      |   |        |      |  |   |       |  
|---------------------------------------------- |  | ------------------------ | ------ | - | ---- | - | ------ | ---- |  | - | ----- | -
|                                               |  | Years Ended December 31, |       
|                                               |  | 2008                     |        |   | 2007 |   |        | 2006 | 
|Computed tax                                   |  | $                        | (9,147 | ) |      | $ | (3,990 | )    |  | $ | 750   |  
|State taxes, net of federal income tax benefit |  |                          | (170   | ) |      |   | 60     |      |  |   | 25    |  
|Nondeductible meals and entertainment          |  |                          | 62     |   |      |   | 66     |      |  |   | 52    |  
|Nondeductible impairment charges               |  |                          | 476    |   |      |   |       |      |  |   |      |  
|Losses and other items not benefited           |  |                          | 8,103  |   |      |   | 4,044  |      |  |   | 847   |  
|Foreign tax rate differential                  |  |                          | 54     |   |      |   | 609    |      |  |   | (379  | )
|Other, net                                     |  |                          | (218   | ) |      |   | 31     |      |  |   | 399   |  
|                                               |  |                          |        |   |      |   |        |      |  |   |       |  
|                                               |  | $                        | (840   | ) |      | $ | 820    |      |  | $ | 1,694 |  
|                                               |  |                          |        |   |      |   |        |      |  |   |       |  



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Notes to Consolidated Financial Statements(Continued)



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):



|                                                       |  |              |         |   |      |   |         |  
|------------------------------------------------------ |  | ------------ | ------- | - | ---- | - | ------- | -
|                                                       |  | December 31, |        
|                                                       |  | 2008         |         |   | 2007 |  
|Deferred tax assets:                                   |  |              |         |   |      |   |         |  
|Inventory reserves and additional costs capitalized    |  | $            | 2,618   |   |      | $ | 1,599   |  
|Accrued compensation and vacation                      |  |              | 981     |   |      |   | 1,119   |  
|Allowance for doubtful accounts                        |  |              | 184     |   |      |   | 61      |  
|Property and equipment                                 |  |              | 1,790   |   |      |   |        |  
|Goodwill amortization                                  |  |              | 1,798   |   |      |   |        |  
|Other accruals and reserves                            |  |              | 3,437   |   |      |   | 3,228   |  
|Net operating losses                                   |  |              | 12,140  |   |      |   | 6,812   |  
|Foreign and other tax credits                          |  |              | 3,008   |   |      |   | 2,760   |  
|Amortization of intangible assets                      |  |              | 2,061   |   |      |   | 4,560   |  
|Foreign deferred tax assets                            |  |              | 24      |   |      |   |        |  
|                                                       |  |              |         |   |      |   |         |  
|Total deferred tax assets                              |  |              | 28,041  |   |      |   | 20,139  |  
|Valuation allowance                                    |  |              | (26,663 | ) |      |   | (18,381 | )
|                                                       |  |              |         |   |      |   |         |  
|Available deferred tax assets                          |  |              | 1,378   |   |      |   | 1,758   |  
|                                                       |  |              |         |   |      |   |         |  
|Deferred tax liabilities:                              |  |              |         |   |      |   |         |  
|Property and equipment depreciation                    |  |              |        |   |      |   | (169    | )
|State deferred tax liabilities, net of federal benefit |  |              | (1,378  | ) |      |   | (951    | )
|Goodwill amortization                                  |  |              |        |   |      |   | (1,762  | )
|                                                       |  |              |         |   |      |   |         |  
|Total deferred tax liabilities                         |  |              | (1,378  | ) |      |   | (2,882  | )
|                                                       |  |              |         |   |      |   |         |  
|Net deferred tax liabilities                           |  | $            |        |   |      | $ | (1,124  | )
|                                                       |  |              |         |   |      |   |         |  



Net deferred tax liabilities are
reported on the accompanying consolidated balance sheets as follows (in thousands):



|                                   |  |              |   |      |   |        |  
|---------------------------------- |  | ------------ | - | ---- | - | ------ | -
|                                   |  | December 31, |  
|                                   |  | 2008         |   | 2007 |  
|Current deferred tax assets        |  | $            |  |      | $ | 982    |  
|Long-term deferred tax liabilities |  |              |  |      |   | (2,106 | )
|                                   |  |              |   |      |   |        |  
|Net deferred tax liabilities       |  | $            |  |      | $ | (1,124 | )
|                                   |  |              |   |      |   |        |  



During 2008 and 2007, the
Company recorded a valuation allowance against all of the Companys net deferred tax assets in the United States and certain of the foreign jurisdictions in the amount of $26.7 million and $18.4 million, respectively. The expense for recording
the valuation allowance is a non-cash item, and the recording of this expense does not imply that the Company owes additional income taxes.



As of December 31, 2008, deferred tax assets of approximately $177,000 consisting of certain net operating losses resulting from the exercise of employee stock
options had not been recognized in the financial statements. When utilized, the tax benefit of these losses will be accounted for as a credit to additional paid-in capital.



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Notes to Consolidated Financial Statements(Continued)



The Company determined the valuation allowance on deferred tax assets in accordance with the provisions of
SFAS 109 which requires that the Company weigh both positive and negative evidence in order to ascertain whether it is more likely than not that deferred tax assets will be realized. Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and for the future tax consequences attributable to operating losses and
tax credit carryforwards. The ultimate realization of deferred tax assets is dependent on the generation of future taxable income during the periods in which the related temporary differences become deductible. The Company evaluated all significant
available positive and negative evidence, including the existence of cumulative net losses in recent periods, benefits that could be realized from available tax strategies, and forecasts of future taxable income, in determining the need for a
valuation allowance on its deferred tax assets. Cumulative net losses in recent periods represented sufficient negative evidence that was difficult for positive evidence to overcome under the evaluation guidance of SFAS 109 and, accordingly, a
valuation allowance was recorded against all of the Companys net deferred tax assets in the United States and certain of the foreign jurisdictions. The Company intends to maintain this valuation allowance until sufficient positive evidence,
such as the resumption of a consistent earnings pattern, exists to support its reversal in accordance with SFAS 109.



As of December 31, 2008, the Company had net operating losses for federal and state income tax purposes of approximately $30.3 million and $33.1 million,
respectively, that it expects to carry forward to reduce future income subject to income taxes. The federal net operating loss will begin to expire, if not used, in 2023 and the state net operating loss carryforwards will begin to expire in 2013.
Under Section 382 of the Internal Revenue Code of 1986, as amended, the benefits from the Companys net operating loss carryforwards may be impaired or limited in certain circumstances. Events which limit the amount of net operating losses
that the Company may utilize in any one year include, but are not limited to, a cumulative ownership change of more than 50%, as defined in Section 382, over a three-year period.



As of December 31, 2008, unused research and development tax credits of approximately $527,000 and $562,000 were available to
reduce future federal and California income taxes, respectively. The federal research credit carryforward will begin to expire in 2022, and the state development credits will carry forward indefinitely.



Cumulative undistributed earnings of approximately $2.8 million related to the
Companys international subsidiaries as of December 31, 2008 are intended to be permanently reinvested. A deferred income tax liability would have resulted had such earnings been repatriated, which would have been absorbed by a
corresponding reversal in valuation allowance.



The Companys
unrecognized tax benefits at December 31, 2008 relate to various domestic and foreign jurisdictions. As of December 31, 2008 the Company had total gross unrecognized tax benefits of $4.1 million, which if recognized would affect the
effective tax rate. As of December 31, 2008, the amount of long-term income taxes payable for unrecognized tax benefits, including accrued interest, was $1.4 million. The Company does not anticipate any significant changes to its unrecognized
tax benefits within the next 12 months. The activity for unrecognized tax benefits for the year ended December 31, 2008 is as follows (in thousands):



|                                                                     |  |        |       |  
|-------------------------------------------------------------------- |  | ------ | ----- | -
|                                                                     |  | Amount |      
|Balance at December 31, 2007                                         |  | $      | 3,885 |  
|Increases related to current year tax positions                      |  |        | 451   |  
|Increases related to prior year tax positions                        |  |        | 461   |  
|Decreases related to prior year tax positions                        |  |        | (526  | )
|Expiration of the statute of limitations for the assessment of taxes |  |        | (158  | )
|                                                                     |  |        |       |  
|Balance at December 31, 2008                                         |  | $      | 4,113 |  
|                                                                     |  |        |       |  



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Notes to Consolidated Financial Statements(Continued)



The Company has adopted the accounting policy that interest and penalties are classified as part of its income
tax expense. In 2008, the Company recorded $31,000 of such interest and penalty expense and, as of December 31, 2008, the balance of such accrued interest and penalty was $151,000.



The Company files U.S. federal, U.S. state and foreign tax returns. The Companys major tax jurisdictions are the U.S.,
California, Canada, Italy, and Taiwan. The Companys 2004 through 2008 fiscal years remain subject to examination by the IRS for U.S. federal tax purposes, 2003 through 2008 fiscal years remain subject to examination by the California Franchise
Tax Board, 2004 through 2008 remain subject to examination for Canada tax purposes, 2003 through 2008 remain subject to examination for Italy tax purposes and 2006 through 2008 remain subject to examination for Taiwan tax purposes.



(15)    Segment Information



The Company operates in one reportable operating segment: the design, manufacture, and
sale of equipment for testing wireline access, cable broadband, fiber optics and signaling. SFAS No. 131, Disclosure About Segments of an Enterprise and Related Information(SFAS 131), establishes standards for the way public
business enterprises report information about operating segments in annual consolidated financial statements and requires that those enterprises report selected information about operating segments in interim financial reports. SFAS 131 also
establishes standards for related disclosures about products and services, geographic areas, and major customers.



Net sales information regarding operations in the different geographic regions in which the Company does business is as follows (in thousands):



|                          |  |                          |        |      |   |        |  |   |       
|------------------------- |  | ------------------------ | ------ | ---- | - | ------ |  | - | ------
|                          |  | Years Ended December 31,
|                          |  | 2008                     |        | 2007 |   | 2006  
|United States             |  | $                        | 30,431 |      | $ | 40,351 |  | $ | 52,433
|Canada                    |  |                          | 2,791  |      |   | 2,609  |  |   | 1,340 
|Asia/Pacific              |  |                          | 16,313 |      |   | 17,353 |  |   | 18,313
|Europe/Africa/Middle East |  |                          | 26,896 |      |   | 29,517 |  |   | 24,540
|Latin America             |  |                          | 4,219  |      |   | 3,561  |  |   | 3,254 
|                          |  |                          |        |      |   |        |  |   |       
|                          |  | $                        | 80,650 |      | $ | 93,391 |  | $ | 99,880
|                          |  |                          |        |      |   |        |  |   |       



Long-lived assets, excluding
financial instruments, deferred tax assets, and intangible assets, were located in the following geographic regions (in thousands):



|                              |  |                    |        |      |   |       
|----------------------------- |  | ------------------ | ------ | ---- | - | ------
|                              |  | As of December 31,
|                              |  | 2008               |        | 2007
|United States                 |  | $                  | 17,382 |      | $ | 21,979
|Canada                        |  |                    |       |      |   | 1,163 
|Taiwan and other Asia/Pacific |  |                    | 2,573  |      |   | 2,735 
|Europe/Africa/Middle East     |  |                    | 177    |      |   | 1,334 
|                              |  |                    |        |      |   |       
|                              |  | $                  | 20,132 |      | $ | 27,211
|                              |  |                    |        |      |   |       



In the third quarter of 2008,
the Company closed its Montreal, Canada office, transferring the fixed assets previously located at that office to other Company locations.



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Notes to Consolidated Financial Statements(Continued)



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



|                |  |                          |        |      |   |        |  |   |       
|--------------- |  | ------------------------ | ------ | ---- | - | ------ |  | - | ------
|                |  | Years Ended December 31,
|                |  | 2008                     |        | 2007 |   | 2006  
|Wireline access |  | $                        | 29,451 |      | $ | 33,226 |  | $ | 35,618
|Cable broadband |  |                          | 20,090 |      |   | 27,732 |  |   | 31,306
|Fiber optics    |  |                          | 22,321 |      |   | 25,227 |  |   | 24,969
|Signaling       |  |                          | 8,788  |      |   | 7,206  |  |   | 7,987 
|                |  |                          |        |      |   |        |  |   |       
|                |  | $                        | 80,650 |      | $ | 93,391 |  | $ | 99,880
|                |  |                          |        |      |   |        |  |   |       



(16)    Legal Proceedings
and Contingencies



Cash Payments for Expired Employee Stock Options



Certain current and former employees have expired unexercised stock
options that, but for the Companys inability to issue stock, may have realized gains from the exercise of those options. During the second quarter of 2008, the Companys Board of Directors approved a plan to offer cash compensation to
those affected current and former employees provided that they execute and return a limited release of potential claims. The proposed compensation being offered represents the difference between (i) the average closing price of the
Companys common stock during the applicable period (further defined below) and (ii) the exercise price of the option (assuming the option was in-the-money), multiplied by the number of shares that were vested under the option
at the beginning of the applicable period. If an option expired 30 days after termination of employment, the applicable period is the 30 days following termination of employment. If an option expired 90 days after termination of employment, the
applicable period is the 90 days following termination of employment. If an option expired during employment because of its ten-year term, the applicable period is the 30 days prior to the expiration of the option. In December 2008, the Company made
payments aggregating $0.2 million to settle such option liability, which was expensed in the second quarter of 2008.



Stockholder Litigation



On December 13, 2006, a stockholder derivative lawsuit was filed in the Superior Court of the State of California on behalf of Chris Stovall, a purported
stockholder of the Company, against certain of the Companys current and former officers, directors, and employees and naming the Company as a nominal defendant. The complaint asserts claims for breach of fiduciary duty, waste, unjust
enrichment and other statutory claims arising out of the Companys stock option grant practices, which plaintiff claims included the backdating of stock option grants. The court has granted three times the Companys motions to
dismiss the claims based on the insufficiency of the complaint. The Company had disclosed an internal review of such practices in November 2006 and described the results of that review in its Annual Report on Form 10-K for the year ended
December 31, 2005, filed on November 2, 2007.



On
November 21, 2007, Mr. Stovall filed a second amended complaint alleging similar legal claims arising primarily out of the Companys historic stock option grant practices as described in the Companys 2005 Annual Report on Form
10-K for the year ended December 31, 2005. The second amended complaint seeks monetary damages from the individual defendants, restitution, disgorgement of profits, attorneys fees, and various corporate governance reforms.



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Notes to Consolidated Financial Statements(Continued)



In February 2008, the parties attempted to resolve the litigation through mediation, but were unsuccessful. In
May 2008, the court granted the Companys motion to dismiss the plaintiffs claims for a third time based on the insufficiency of the complaint, but left the plaintiff with the ability to further amend the complaint. In June 2008, Stovall
filed a third amended complaint alleging similar legal claims arising primarily out of the historic stock option grant practices of the Company, including prior to the Companys initial public offering. In August 2008, the court denied the
Companys motion to dismiss the plaintiffs claims against it and the individual defendants. In October 2008, the court denied the individual defendants motion to dismiss the plaintiffs claims and allowed plaintiffs
claims to proceed. In January 2009, the Company answered the complaint with a general denial and asserted all available affirmative defenses. In February 2009, the court granted the motion of one individual defendant to compel arbitration of the
claims against him, and the other individual defendants filed a motion to separately try the issues related to the plaintiffs standing to sue. A hearing on the individual defendants motion to separately try the issues related to the
plaintiffs standing to sue was held on April 10, 2009. The court has not yet ruled on that motion.



The Company intends to continue to assert all available defenses. The parties may continue with their mediation efforts in the future. The outcome of this
litigation is uncertain and should the Company experience an unfavorable ruling, there exists the possibility of a material adverse impact on its financial condition, results of operations and cash flows for the period in which the ruling occurs. No
amount was accrued for this contingency as of December 31, 2008, as a loss is not considered probable or estimable.



Settlement with Wind River, Inc.



In June 2008, one of the Companys suppliers, Wind River, Inc. (Wind River) asserted that the Company may have under reported and under paid
royalties, after conducting a license compliance review. The Company reviewed the relevant license agreements and disputed Wind Rivers claims.



On October 30, 2008, the Company and Wind River entered into a Settlement Agreement and Target Application License Agreement. Through these agreements, the
Company and Wind River resolved the dispute regarding the amount of royalties the Company owed Wind River for the Companys prior use and distribution of applicable products. Under the terms of the Settlement Agreement, the Company agreed to
pay approximately $0.4 million as full payment for licenses distributed by the Company to end user customers during the period from January 1, 1998 through March 31, 2008. The Company expensed this amount in cost of sales in the three
months ended March 31, 2008. Under the terms of the Settlement Agreement, upon the Companys payment of an additional $0.3 million, Wind River granted the Company the perpetual right to reproduce and distribute an unlimited number of
copies of specified products for use in specified products of the Company to end user customers in the future. The Company will capitalize and amortize this amount as products are sold to end users.



Other Legal Contingencies



From time to time, the Company may be involved in litigation or other legal proceedings relating to claims arising out of its
day-to-day operations or otherwise. Litigation is inherently uncertain, and the Company could experience unfavorable rulings. Should the Company experience an unfavorable ruling, there exists the possibility of a material adverse impact on its
financial condition, results of operations, cash flows or on its business for the period in which the ruling occurs and/or future periods.



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SUNRISE TELECOM INCORPORATED AND SUBSIDIARIES



Notes to Consolidated Financial Statements(Continued)



(17)    Quarterly Financial Data (unaudited) (in thousands, except per share data)



|                                      |  |              |        |   |              |   |        |               |  |   |              |   |              |   |        |              |   |        |               |  |   |              |   |  |   |        |   |  |   |        |  
|------------------------------------- |  | ------------ | ------ | - | ------------ | - | ------ | ------------- |  | - | ------------ | - | ------------ | - | ------ | ------------ | - | ------ | ------------- |  | - | ------------ | - |  | - | ------ | - |  | - | ------ | -
|                                      |  | Mar. 31,2008 |        |   | June 30,2008 |   |        | Sept. 30,2008 |  |   | Dec. 31,2008 |   | Mar. 31,2007 |   |        | June 30,2007 |   |        | Sept. 30,2007 |  |   | Dec. 31,2007 |  
|Net sales                             |  | $            | 19,967 |   |              | $ | 20,172 |               |  | $ | 18,966       |   |              | $ | 21,545 |              | $ | 20,140 |               |  | $ | 23,047       |   |  | $ | 22,934 |   |  | $ | 27,270 |  
|Gross profit                          |  | $            | 8,816  |   |              | $ | 12,393 |               |  | $ | 10,765       |   |              | $ | 11,397 |              | $ | 13,442 |               |  | $ | 13,484       |   |  | $ | 14,298 |   |  | $ | 16,149 |  
|Income (loss) from operations         |  | $            | (8,627 | ) |              | $ | (3,828 | )             |  | $ | (21,944      | ) |              | $ | 6,344  |              | $ | (5,112 | )             |  | $ | (3,206       | ) |  | $ | (3,351 | ) |  | $ | (2,110 | )
|Net income (loss)                     |  | $            | (7,002 | ) |              | $ | (3,548 | )             |  | $ | (20,956      | ) |              | $ | 5,442  |              | $ | (4,869 | )             |  | $ | (2,586       | ) |  | $ | (2,917 | ) |  | $ | (2,184 | )
|Net income (loss) per share:          |  |              |        |   |              |   |        |               |  |   |              |   |              |   |        |              |   |        |               |  |   |              |   |  |   |        |   |  |   |        |  
|Basic                                 |  | $            | (0.14  | ) |              | $ | (0.07  | )             |  | $ | (0.41        | ) |              | $ | 0.11   |              | $ | (0.09  | )             |  | $ | (0.05        | ) |  | $ | (0.06  | ) |  | $ | (0.04  | )
|Diluted                               |  | $            | (0.14  | ) |              | $ | (0.07  | )             |  | $ | (0.41        | ) |              | $ | 0.11   |              | $ | (0.09  | )             |  | $ | (0.05        | ) |  | $ | (0.06  | ) |  | $ | (0.04  | )
|Shares used in per share computation: |  |              |        |   |              |   |        |               |  |   |              |   |              |   |        |              |   |        |               |  |   |              |   |  |   |        |   |  |   |        |  
|Basic                                 |  |              | 51,349 |   |              |   | 51,349 |               |  |   | 51,349       |   |              |   | 51,349 |              |   | 51,349 |               |  |   | 51,349       |   |  |   | 51,349 |   |  |   | 51,349 |  
|Diluted                               |  |              | 51,349 |   |              |   | 51,349 |               |  |   | 51,349       |   |              |   | 51,349 |              |   | 51,349 |               |  |   | 51,349       |   |  |   | 51,349 |   |  |   | 51,349 |  



|(1) |  | During the quarter ended September 30, 2008, the Company recorded various impairment charges related to its goodwill of $12.8 million, intangible assets of $1.2 million and long-lived
assets of $4.8 million.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(2) |  | During the quarter ended December 31, 2008, the Company recognized a gain of $8.3 million on the sale of PPG.
|--- |  | -------------------------------------------------------------------------------------------------------------



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



None.



ITEM 9A.    CONTROLS AND PROCEDURES



EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES



Our management, with the participation of our Chief Executive Officer and Chief
Financial Officer, evaluated the effectiveness of our disclosure controls and procedures, as that term is defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the Exchange Act) as of
December 31, 2008. We determined that, as a result of the material weaknesses in internal control over financial reporting described below, our disclosure controls and procedures were not effective to ensure that information required to be
disclosed by us in reports that we file or submitted under the Exchange Act was recorded, processed, summarized and reported within the time periods specified in SEC rules and forms. Notwithstanding the material weaknesses discussed below, our
management, based upon the substantial work performed during the preparation of this report, has concluded that information we are required to disclose in this Form 10-K under the Exchange Act was accumulated and communicated to our management,
including the Chief Executive Officer and Chief Financial Officer, to allow decisions regarding required disclosures.



MANAGEMENTS REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING



Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under
the Exchange Act. Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting
as of December 31, 2008 using the criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).



The Public Company Accounting Oversight Boards Auditing Standard No. 5,
An Audit Of Internal Control Over Financial Reporting That Is Integrated With An Audit Of Financial Statements, defines a material weakness as a deficiency, or combination of deficiencies, in internal control over financial reporting, such
that there is a reasonable possibility that a material misstatement of the Companys annual or interim financial statements will not be prevented or detected on a timely basis. As a result of the material weaknesses described below, management
concluded that the Company did not maintain effective internal control over financial reporting as of December 31, 2008 based on criteria established in Internal ControlIntegrated Frameworkissued by COSO.



Controls over inventory management



Our controls over the tracking and costing of inventories did not operate effectively
resulting in adjustments to our inventories and delays in the completion of our financial statements. These deficiencies were due to turnover of staff at both the senior and junior levels during 2008 and when combined, led to a material weakness
over inventory management.



Subsequent to December 31, 2008
management implemented the following actions intended to remediate this material weakness:



| |  |  | Additional resources have been hired to ensure that the controls over inventory management are operating effectively.
| | - |  | ---------------------------------------------------------------------------------------------------------------------



| |  |  | Procedures related to physical inventory counts were modified and a cycle count program was implemented in the first quarter of 2009 to ensure accurate tracking of the
physical movement of inventories.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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Controls over financial reporting



Our controls over financial reporting did not operate effectively resulting in several audit adjustments and delays in the completion
of our financial statements. These deficiencies were due to the turnover of staff in Finance including the San Jose Controller, Director of Tax & Treasury, Corporate Controller, Assistant Controller and the Broadband Controller all leaving
in the second half of 2008. The turnover in staff resulted in deficiencies in the review of account reconciliations and when combined, led to a material weakness over financial reporting.



Subsequent to December 31, 2008, management implemented the following actions intended to remediate this material weakness:



| |  |  | A new Corporate Controller was hired In December 2008.
| | - |  | ------------------------------------------------------



| |  |  | Management conducted a review of account reconciliations in the January 2009 to April 2009 time period.
| | - |  | -------------------------------------------------------------------------------------------------------



CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING



Controls as divisional level



As of September 30, 2008, we had a material weakness in internal control relating to our Broadband operating division. During the
fourth quarter of 2008, we instituted additional internal control policies and procedures intended to remediate this material weakness. Specifically, management moved the accounting functions previously performed at the Broadband division to the
corporate headquarters to provide improved oversight of financial reporting resulting in the elimination of our Broadband controller and a change in many of our business processes. As a result of these actions, we remediated this material weakness
at the Broadband division. There were no other changes in internal control over financial reporting during the fourth quarter of 2008 that have materially affected, or are reasonably likely to materially affect, our internal control over financial
reporting.



INHERENT LIMITATIONS ON INTERNAL CONTROL



A control system, no matter how well conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of the control system are met. Further, the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of
controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision making can be faulty, and that breakdowns can occur
because of simple errors or mistakes. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls is also based
in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Because of the inherent limitations in a
cost-effective control system, misstatements due to error or fraud may occur and not be detected.



This annual report does not include an attestation report of the Companys registered public accounting firm regarding internal control over financial
reporting. Managements report was not subject to attestation by the Companys registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only
managements report in this annual report.



ITEM
9B.    OTHER INFORMATION



None.



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Part III.



ITEM 10.    DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE



Set forth below are the names, ages and positions of each of our directors and
executive officers, as of January 1, 2009:



|                      |  |     |  |                                              
|--------------------- |  | --- |  | ---------------------------------------------
|Name                  |  | Age |  | Position                                     
|Patrick Peng-Koon Ang |  | 49  |  | Director                                     
|Henry P. Huff         |  | 64  |  | Chairman of the Board                        
|Robert C. Pfeiffer    |  | 46  |  | Vice Chairman                                
|Jennifer J. Walt      |  | 52  |  | Director                                     
|Lyron L. Bentovim     |  | 39  |  | Director                                     
|Paul A. Marshall      |  | 51  |  | Director, Chief Executive Officer, President 
|Richard D. Kent       |  | 52  |  | Chief Financial Officer                      
|Robert Heintz         |  | 52  |  | Vice PresidentWorld Wide Sales              
|Kirk O. Williams      |  | 39  |  | Chief Legal and Compliance Officer, Secretary



The following are brief
biographies of each of our current directors and executive officers. There are no family relationships among our directors and executive officers.



|     Patrick Peng-Koon Ang | Mr. Ang has served as one of our directors of Sunrise Telecom since March 2000. Mr. Ang has served as the Chair of the Corporate Governance/Nominating Committee since February 2006 and also serves as a
member of the Audit Committee and the Strategy Committee. Mr. Ang served as a member of the Compensation Committee from March 2006 to October 2008. Since November 1, 2007, Mr. Ang has served as Vice PresidentMarketing of UniRAM
Technology, Inc., developer of high performance memory solutions. From July 2006 to November 2007, Mr. Ang managed his personal investments. Mr. Ang served as the Chief Executive Officer of PicoNetics, Inc., a developer of low power IC
technology, from January 2005 to July 2006. Mr. Ang served as Executive Vice President and Chief Operating Officer of ESS Technology, Inc., a developer of highly integrated, mixed-signal semiconductor, hardware, software and system solutions
from December 2001 to October 2004. Mr. Ang holds a B.S. in Electrical Engineering from the National University of Singapore.
|--------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|     Henry P. Huff | Mr. Huff has served as one of our directors of Sunrise Telecom since March 2000 and has served as the Chairman of the Audit Committee since that time. Mr. Huff has served as Chairman of the Board since
February 2006. Mr. Huff also serves as a member of
|------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| | the Compensation Committee, Strategy Committee and the Corporate Governance/Nominating Committee. Since September 2000, Mr. Huff has served as the part-time Chief
Financial Officer of Cambrian Ventures, a venture capital fund. Mr. Huff was Vice President, Finance and Chief Financial Officer of NorthPoint Communications Group Inc., a provider of DSL service from June 1998 until his retirement in May 2000.
Mr. Huff holds a B.S. in Business Administration from the University of California at Berkeley and is a Certified Public Accountant in the State of California.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|     Robert C. Pfeiffer | Mr. Pfeiffer co-founded Sunrise Telecom in October 1991 and has served as one of our directors since that time. Mr. Pfeiffer has also served as the Vice-Chairman of the Board since February 2006. He has
served as a member of the Strategy Committee since October 2008. Mr. Pfeiffer served as interim Vice President of Engineering from April 2006 to November 2006, as Vice President of Engineering from October 1991 to December 1999 and as our Chief
Technology Officer from December 1999 until March 2001. Mr. Pfeiffer served as our Secretary from October 1991 to July 2000. Mr. Pfeiffer holds an M.B.A. and a B.S. in Electrical Engineering from Santa Clara University.
|------------------------ | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|     Jennifer J. Walt | Ms. Walt has served as one of our directors of Sunrise Telecom and as the Chair of its Compensation Committee since March 2000. Ms. Walt serves as the Chair of the Compliance Subcommittee of the Audit
Committee and as a member of the Audit Committee and the Corporate Governance/Nominating Committee. Ms. Walt has been an attorney with the law firm of Littler Mendelson, P.C. since 1983 and is a shareholder of that firm. Ms. Walt holds a
J.D. from the University of California, Hastings College of the Law and a B.A. in History from Stanford University.
|---------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|     Lyron L. Bentovim | Lyron L. Bentovim has served as a Director of Sunrise Telecom and as Chair of the Strategy Committee since October 2008. Mr. Bentovim also serves as a member of the Audit Committee and the Compensation Committee.
Mr. Bentovim has been a Managing Director of SKIRITAI Capital LLC since 2002. From 2000 to 2001, he served as President and COO of WebBrix, Inc. Prior to that, Mr. Bentovim served as a
|----------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| | strategy consultant with USWeb/CKS, the Mitchell Group and McKinsey & Company. Mr. Bentovim is also a director of Top Image Systems, Argonaut Technologies, Inc.,
Manhattan Bridge Capital and Three Five Systems, Inc. Mr. Bentovim has an MBA from Yale Business School and a Law Degree from the Hebrew University in Jerusalem.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|     Paul A. Marshall | Mr. Marshall co-founded Sunrise Telecom in October 1991 and has served as Chief Executive Officer since February 2006. Mr. Marshall has served as a member of the Strategy Committee since October 2008.
Mr. Marshall served as Chief Operating Officer from December 1999 to February 2006, as Vice President of Marketing from March 1992 to February 2006, and as one of our directors since October 1991. Mr. Marshall also served as the
Companys Chief Financial Officer of Sunrise from March 1992 until December 1999 and Acting Chief Financial Officer from October 2002 to February 2005. 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.
|---------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|     Richard D. Kent | Mr. Kent joined Sunrise Telecom as Chief Financial Officer in February 2005. Mr. Kent was Vice-President of Finance from February 2003 to January 2005 at Natural Selection Foods, LLC, a producer of organic
fruits and vegetables. Prior to his employment with Natural Selection Foods, he was Managing Director from June 2002 to February 2003 at RAMP Partners, an accounting and financial management firm. Mr. Kent served as Chief Financial Officer,
Chief Operating Officer and Corporate Secretary from January 1997 to January 2002 at Cidco Incorporated, a publicly-traded producer of telecommunications products and personal Internet communications products and services. Mr. Kent holds a B.S.
in Business Administration with an emphasis in Finance and Accounting from the University of California at Berkeley. Mr. Kent is a Certified Public Accountant and a member of the American Institute of Certified Public Accountants.
|--------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|     Robert G. Heintz | Mr. Heintz joined Sunrise Telecom as Vice PresidentNorth American Sales and served in that capacity from June 2004 through August 2006, at which time he was appointed Vice President of
|---------------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| | Worldwide Sales and Marketing. In July 2008, Mr. Heintz became Vice President Worldwide Sales. Prior to joining Sunrise Telecom, Mr. Heintz was a founder and
Chairman of Axcelerant, a managed security services provider, which he founded in January 2001, and sold to GRIC Communications in December 2003. Mr. Heintz holds a B.S. in Electrical Engineering from Stanford University.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|     Kirk O. Williams | Mr. Williams joined Sunrise Telecom in December 2002 and has served as its Chief Legal and Compliance Officer, Secretary since February 2007. Mr. Williams served as the Companys Vice President, General
Counsel and Secretary from December 2004 to February 2007, and as General Counsel and Secretary from January 2003 to December 2004. Prior to joining the Company, Mr. Williams served in positions of increasing responsibility in the Legal
Department of Exodus Communications, Inc., an internet hosting company, from October 1999 through March 2002, with his final position being Vice President, Legal and Corporate Affairs, and Assistant General Counsel. Mr. Williams holds a JD from
New York University School of Law and a dual B.A. in Economics and Political Science from Stanford University.
|---------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



For a description of material proceedings to which our directors or officers are a party, see Part I, Item 3, Legal Proceedings.



Section 16(a) Beneficial Ownership Reporting Compliance



Section 16(a) of the Securities Exchange Act requires our officers and directors
and persons who beneficially own more than 10% of a registered class of our equity securities to file certain reports regarding their ownership of, and transactions in, our securities with the SEC. Such officers, directors and 10% stockholders are
also required by SEC rules to furnish us with copies of all Section 16(a) forms that they file.



Based solely on our review of such forms furnished to us and written representations from certain reporting persons, we believe that all filing requirements
applicable to our executive officers, directors and more than 10% stockholders were complied with during the fiscal year ended December 31, 2008, except that director Lyron Bentovims Form 3 was not timely filed upon his appointment as a
director due to an administrative error.



Code of Business Conduct and Ethics



In May 2003, the Companys Corporate Governance/Nominating
Committee and our Board adopted our Code of Business Conduct and Ethics that applies to all of our employees, officers, directors, and independent contractors (including our principal executive officer, principal financial officer, principal
accounting officer, controller, and senior financial officers). On August 12, 2008, the Companys Board of Directors approved a revised Code of Business Conduct and Ethics for the Company. The revisions included changes dealing with
specific regulatory areas, such as



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export and import matters, immigration, government contracts, political contributions, and technical and administrative updating. Our Code of Business Conduct and
Ethics is posted on our website and can be accessed electronically at http://www.sunrisetelecom.com/ig/sunrise_code_business_conduct_ethics.pdf.We will post amendments to or waivers from a provision of the Code of Business Conduct and Ethics
on our website at http://www.sunrisetelecom.com/company/amendments_waivers.phpunder Investors/GovernanceCorporate GovernanceCode of Business Conduct and Ethics and Amendments and Waivers. Stockholders may request free
printed copies of our Code of Business Conduct and Ethics from: Sunrise Telecom Incorporated, Attn: Investor Relations, 302 Enzo Drive, San Jose, California 95138.



Stockholder Director Nominations



The Corporate Governance/Nominating Committee will consider director candidates properly submitted by stockholders in accordance with the procedures set forth in
our Bylaws. During 2008, we did not make any material changes to the procedures by which our stockholders may recommend nominees to our Board of Directors.



Audit Committee and Audit Committee Financial Expert



The Audit Committee is currently composed of Messrs. Huff, Ang and Bentovim and Ms. Walt. Mr. Huff serves as the Chairman of the Audit Committee. Our
Board has determined that all members of the Audit Committee are independent as required by the applicable listing standards of the NASDAQ Stock Market. In addition, the Board has determined that Mr. Huff qualifies as the
Companys audit committee financial expert as defined in the rules of the SEC.



BOARD OF DIRECTORS MEETINGS AND COMMITTEES



Board of Directors



The Board is currently composed of six members: Messrs. Ang, Huff,
Marshall, Pfeiffer and Bentovim and Ms. Walt. Mr. Huff serves as Chairman of the Board and Mr. Pfeiffer serves as Vice Chairman of the Board. During 2008, Lyron Bentovim was added as a member of the Board.



The Board held 17 meetings during fiscal year 2008, four of which were regularly
scheduled meetings and 13 of which were special meetings. Each Director attended at least 75% of the aggregate of all of our Board meetings and committee meetings on which such Director served during fiscal year 2008 and was eligible to attend.



The Board has an Audit Committee, a Compensation Committee, a Strategy
Committee and a Corporate Governance/Nominating Committee. Each committee operates under a charter that has been approved by the Board. Copies of the charters are posted in the Investor/Governance section of our website at www.sunrisetelecom.com.



Audit Committee



The Audit Committee is currently composed of Messrs. Huff, Ang, Bentovim and Ms. Walt. Mr. Huff serves as the Chairman of
the Audit Committee. The Audit Committee held eight meetings during fiscal year 2008, four of which were regularly scheduled meetings and four of which were special meetings.



The responsibilities of the Audit Committee include:



| |  |  | Reviewing Sunrise Telecoms audit and related services at least annually;
| | - |  | -------------------------------------------------------------------------



| |  |  | Appointing, determining funding for and overseeing Sunrise Telecoms auditors and ensuring their independence, including pre-approving all audit services and permissible
non-audit services provided by the auditors;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Reviewing Sunrise Telecoms annual and interim financial statements;
| | - |  | --------------------------------------------------------------------



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| |  |  | Reviewing and actively discussing with Sunrise Telecoms auditors the results of the annual audit of Sunrise Telecoms financial statements and all significant
issues, transactions and changes;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Reviewing and actively discussing with Sunrise Telecoms auditors the results of the SAS 100 quarterly reviews of Sunrise Telecoms condensed consolidated financial
statements and all significant issues, transactions and changes;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Overseeing the adequacy of Sunrise Telecoms system of internal accounting controls, including obtaining from the auditors management letters or summaries on such
internal accounting controls;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Reviewing and establishing procedures for the receipt, retention and treatment of complaints received by Sunrise Telecom regarding accounting, internal controls or any
auditing matters; and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Overseeing Sunrise Telecoms finance function and compliance with SEC requirements, and reviewing the status of any legal matters that could have a significant impact on
Sunrise Telecoms financial statements.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Compliance
Subcommittee of the Audit Committee



The Compliance Subcommittee of
the Audit Committee is currently composed of one member, Ms. Walt, who serves as its Chair. The Subcommittee did not hold any formal meetings during fiscal year 2008. However, the Subcommittee worked closely with management on its compliance
initiatives.



Compensation Committee



The Compensation Committee is currently composed of Ms. Walt and Messrs. Huff and
Bentovim. Ms. Walt serves as Chair of the Compensation Committee. Mr. Ang served on the Compensation Committee until December 2008. During 2008, the Compensation Committee held eight meetings, of which four were regularly scheduled
meetings and four were special meetings.



The responsibilities of the
Compensation Committee include:



| |  |  | Establishing and reviewing Sunrise Telecoms general compensation policies and compensation levels applicable to Sunrise Telecoms Chief Executive Officer and
President, and other executive officers;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Establishing and reviewing Sunrise Telecoms general compensation policies applicable to all Sunrise Telecom employees;
| | - |  | -----------------------------------------------------------------------------------------------------------------------



| |  |  | Reviewing and advising the Board concerning the performance of Sunrise Telecoms Chief Executive Officer and President, and other executive officers; and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Overseeing the administration of the stock compensation plans that Sunrise Telecom may adopt from time to time, including the determination of employees and other parties who
are to receive grants of stock or stock options, and the terms of such grants or options.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Strategy Committee



The Strategy Committee
is current composed of Messrs. Bentovim, Huff, Pfeiffer, Ang and Marshall. Mr. Bentovim serves as Chairman of the Strategy Committee. During 2008, the Strategy Committee held two meetings, of which one was a regularly scheduled meeting and one
was a special meeting.



The Strategy Committees duties and
responsibilities include:



| |  |  | Reviewing and advising the Board regarding strategic business issues, including but not limited to acquisitions, mergers, divestitures, financings, capital structure and
joint ventures; and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Meeting with the CEO and other members of Company management and reviewing and evaluating long-range financial and strategic plans of the Company on a periodic basis.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------



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Corporate Governance/Nominating Committee



The Corporate Governance/Nominating Committee is currently composed of Messrs. Huff, Pfeiffer and Ang and Ms. Walt. Mr. Ang serves as the
Chairman of the Corporate Governance/Nominating Committee. The Corporate Governance/Nominating Committee held four regularly scheduled meetings during fiscal year 2008.



The responsibilities of the Corporate Governance/Nominating Committee include:



| |  |  | Evaluating periodically and recommending to the Board any changes in the size and composition of the Board;
| | - |  | -----------------------------------------------------------------------------------------------------------



| |  |  | Reviewing and evaluating director nominees to the Board, including incumbent directors;
| | - |  | ---------------------------------------------------------------------------------------



| |  |  | Evaluating the performance and operations of the Board and the performance of the individual directors;
| | - |  | -------------------------------------------------------------------------------------------------------



| |  |  | Evaluating the performance, operations, composition, authority and charter of each of the Board committees and the performance of the individual committee members; and
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Reviewing and recommending to the Board any changes in corporate governance policy, including any changes suggested or recommended by our stockholders.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------



The Corporate Governance/Nominating Committee
recommends nominees for election to the Board of Directors. In evaluating director nominees, the Corporate Governance/Nominating Committee considers the following factors:



| |  |  | The appropriate size of the Board of Directors;
| | - |  | -----------------------------------------------



| |  |  | The changing needs of Sunrise Telecom;
| | - |  | --------------------------------------



| |  |  | The character and integrity of the candidate;
| | - |  | ---------------------------------------------



| |  |  | The candidates knowledge of Sunrise Telecom and its industry;
| | - |  | --------------------------------------------------------------



| |  |  | The candidates desire to represent the best interests of the stockholders as a whole;
| | - |  | --------------------------------------------------------------------------------------



| |  |  | The value of the candidates experience as a director of Sunrise Telecom;
| | - |  | -------------------------------------------------------------------------



| |  |  | The availability of new director candidates who may offer unique contributions;
| | - |  | -------------------------------------------------------------------------------



| |  |  | The knowledge, skills and experience of the candidate, including experience in technology, business, finance, administration or public service;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Any potential conflicts of interest; and
| | - |  | ----------------------------------------



| |  |  | The candidates commitment to dedicate the necessary time and attention to Sunrise Telecom.
| | - |  | -------------------------------------------------------------------------------------------



The Corporate Governance/Nominating Committee considers each new director candidate and
each incumbent director carefully, including considering other factors as it may deem are in the best interests of Sunrise Telecom and its stockholders. The Corporate Governance/Nominating Committee will consider director candidates properly
submitted by stockholders in accordance with the procedures set forth in the Sunrise Telecom Bylaws. The Board has determined that each of the members of the Corporate Governance/Nominating Committee is an independent director as defined
in Rule 5605 of the NASDAQ Listing Rules.



ITEM 11.    EXECUTIVE COMPENSATION



Compensation Discussion and Analysis



This
Compensation Discussion and Analysis contains a discussion of the principles underlying our executive compensation policies and decisions and material elements of executive compensation awarded to the named executive officers listed in the Summary
Compensation TableFiscal 2008 below. The discussion below should be read in conjunction with the tables and related disclosures set forth below in this section.



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General Objectives and Policies



We believe that the telecommunications test equipment industry is a highly competitive business environment and that it is important to develop an executive
compensation program that attracts, motivates and retains qualified executives by rewarding excellence, leadership and long-term company performance. Accordingly, our compensation strategy is generally market and performance oriented and designed to
link executive compensation to our strategic business objectives, specific financial performance objectives and the enhancement of stockholder returns. In 2008, our executive compensation arrangements were affected by the national economic slowdown
and our liquidity and economic performance.



As described in more detail
below, the material elements of our executive compensation program for our named executive officers during fiscal year 2008 were as follows:



|                                 |  |                     |  |                                                                                                                                                                                                                                                             
|-------------------------------- |  | ------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Element                          |  | Form ofCompensation |  | Purpose                                                                                                                                                                                                                                                     
|Base Salary                      |  | Cash                |  | Fixed compensation to attract and retain exceptional executive talent.                                                                                                                                                                                      
|                                 |  |                    
|Management by Objective Bonus    |  | Cash                |  | Recognize individual contributions.                                                                                                                                                                                                                         
|                                 |  |                    
|Change of Control Severance Plan |  | Cash                |  | Motivate executive officers to continue employment with the Company until the completion of a change of control transaction and to provide compensation in the event a named executive officer is terminated
as a result of a change of control transaction.
|                                 |  |                    
|2000 Stock Plan                  |  | Equity              |  | Equity ownership to attract and retain employees.                                                                                                                                                                                                           



How We Determine Compensation



The Compensation Committee meets regularly during the year and is
responsible for the determination of all executive compensation matters. The Compensation Committee conducts an annual review of executive compensation, typically in the first quarter of the year, at which it reviews the elements of executive
compensation for each named executive officer and makes compensation decisions for the year, including setting any performance targets for incentive compensation plans. In developing these decisions, the Committee receives and considers
recommendations from the Chief Executive Officer. In its annual review, the Compensation Committee considers many factors, including:



| |  |  | the relationship between executive compensation and corporate performance and returns to stockholders;
| | - |  | ------------------------------------------------------------------------------------------------------



| |  |  | the qualitative or quantitative measures of corporate performance to be used in the determination of executive compensation;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------



| |  |  | the roles, responsibilities and performance of individual executives; and
| | - |  | -------------------------------------------------------------------------



| |  |  | the relative compensation of different executives and the long-term value of each executive.
| | - |  | --------------------------------------------------------------------------------------------



The Compensation Committee reviewed each element of executive compensation for 2008 described above for our named executive officers.
In late 2008 the Compensation Committee considered the difficult economic conditions facing the Company in determining to reduce executive officer compensation temporarily.



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Role of Compensation Consultant



Neither the Company nor the Compensation Committee retained the services of an independent compensation consultant in 2008 in
connection with our determination of executive compensation for 2008. The Company and the Compensation Committee used internal resources and the Radford compensation surveys in determining 2008 executive compensation.



Role of Executive Officers in Determining 2008 Compensation



Our management provides background information relevant to the Compensation
Committees deliberations on executive compensation matters, and our Chief Executive Officer recommends compensation for other named executive officers but does not participate in the Compensation Committees consideration of his own
compensation. In March 2008, our Chief Executive Officer provided the Compensation Committee recommended base salaries for all named executive officers, including the Chief Executive Officer, to be in effect for fiscal year 2008. The Compensation
Committee has the authority to accept, reject or modify these recommendations, and it accepted them with some adjustments. The Chief Executive Officer did not recommend equity compensation awards in 2008 because the Company was not current with its
periodic SEC reporting requirements and was unable to issue any equity compensation under a registration statement on Form S-8.



In making his recommendations to the Compensation Committee, the Chief Executive Officer reviewed the scope of each named executive officers responsibilities,
the executives background, training and experience, the Companys ability to find a replacement for the individual and internal pay equity considerations. He also reviewed the performance of the individual executives. He referred to the
2008 Radford Executive Survey, which contains market data and compensation alternatives to consider in making compensation decisions for our named executive officers. We believe that this survey is a commonly-used resource for technology companies
in our geographic area. We reviewed the amounts reported in the Radford survey for telecommunications companies with average revenue ranging between $50 million and $199 million, to match our industry and company size.



Elements of Compensation



Base Salary



Our goal is to pay base salaries to our executive officers that are competitive with the base salaries paid
to similar executives of companies with which we believe we compete to attract and retain executives. We generally target executive officer base salaries at the 50thpercentile of the Radford Executive Survey. However, due to the general macroeconomic environment and the Companys overall lack of financial liquidity, we are unable to meet our long-term goals in that regard, with overall compensation
packages, including executive compensation, generally falling at or below the 25thpercentile of the Radford Executive Survey in 2008. The Compensation Committee
reviewed the base salaries for each named executive officer in the first quarter of 2008 in light of the Radford data and market dynamics. Executive officer base salaries were also evaluated as part of the total compensation package for each named
executive officer, with a general target that total compensation should be approximately the 50thpercentile of the relevant Radford data. The weight given to different
compensation elements may differ from individual to individual, as the Compensation Committee deems appropriate, based on each executive officers position, performance and relative experience. We may adjust base salary during the year as
warranted to address market conditions, retention issues or to reflect promotions or other changes in the scope or breadth of an executives role or responsibilities. In December 2008, the Board of Directors approved reduction of our Chief
Executive Officers base salary to the legally-required minimum of $33,280 per year.



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2008 Management by Objective Bonus and Performance Measures



We believe that a significant portion of executive compensation should generally be
contingent on individual performance and the overall financial performance of our business in order to create performance incentives for executives. We consider the level of non-equity incentive compensation to be significant if it represents a
potential bonus of approximately 30% of base salary, although the specific amount of non-equity incentive compensation should vary between one officer and another. We believe this allocation of base salary and incentive compensation in proportion to
total compensation appropriately balances our goals of aligning the interests of executives and stockholders and providing predictable benefit amounts that reward an executives service.



Messrs. Marshall, Kent, Beenen and Williams participated in the Management by Objective
Plan (MBO Plan), for 2008. Under the MBO Plan, participants could earn incentive bonuses for achievement of individual performance objectives and for Company performance relative to a January 2008 revenue target of $101.8 million and a
January 2008 net income target of $7.2 million. The targets were substantially revised in July 2008. Nonetheless, such targets were not achieved and no bonus based on Company performance was paid. Some executives earned incentive bonuses for
achievement of individual performance objectives, as described below under Payments under 2008 Management by Objective Plan.



The target bonus for each of Messrs. Marshall, Kent, Beenen and Williams was 30% of the participants annual base salary. Half of the target bonus is earned if
the individuals performance objectives are achieved, regardless of Company performance; one quarter is earned if the Companys revenue target is achieved; and one quarter is earned if the Companys net income target is achieved. The
target bonus based on revenue performance is payable if the Companys revenue target is fully achieved; payment for this element starts when the Company meets 75% of its revenue target and breakeven profitability. The target bonus based on net
income performance is payable if the Companys net income target is fully achieved; payment for this element starts when the Company meets breakeven profitability. In addition, the Compensation Committee may award discretionary bonuses, not to
exceed three times the participants annual base salary, if Company revenue and net income targets are exceeded. The Compensation Committee reserved the discretion to reduce or eliminate incentive bonuses if Company revenue and net income
targets were not achieved. See, Option Exercises and Stock VestedFiscal 2008Employment Agreements.



Mr. Heintz did not participate in the 2008 Management by Objective Plan, but Mr. Heintz received commissions during 2008 based on revenue and sales margin
targets, with a commission target of $120,000 at the Companys targeted worldwide sales for 2008. The Compensation Committee in its discretion could have awarded Mr. Heintz an extra bonus based on Company performance above targets, not to
exceed two times his annual base salary.



Equity-Based Incentive
Awards



We believe that an important element of compensation for our
named executive officers is equity-based compensation, because its value can be directly linked to the value realized by our stockholders. In recent years we have not been able to utilize this form of compensation, due to being delinquent with our
SEC reports. As a result, our Compensation Committee did not grant stock option awards in 2006, 2007 or 2008.



On March 30, 2009 at its first meeting held after the Company became current with its SEC periodic reporting requirements, the Compensation Committee granted
stock options to our employees, including our named executive officers (other than our CEO) with an exercise price equal to the closing sale price of our common stock on March 31, 2009. Like many technology companies, our common stock price is
highly volatile, so the value of stock awards rises or falls with the market price of our common stock. The named executive officers will only realize value on their stock options if the market price of our common stock rises above the exercise
price on the date of grant.



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We believe that stock options also function as a retention incentive for our named executives as they vest over a
four year period following the grant date in accordance with the following schedule: 25% vest on the first anniversary of the date of the grant and the remaining 75% vest in equal monthly installments of approximately 2% per month thereafter.
The vesting of the grants issued on March 30, 2009 will accelerate and be exercisable in full upon change of control of 100% of the Companys stock. If the change of control is greater than 70%, but less than 100%, acceleration of vesting
will occur if the employee also losses his or her job within two months before or following the change of control.



We typically make an initial stock option award to a new executive officer at the first regularly scheduled Compensation Committee meeting held following the new
executives date of hire or promotion and we make annual equity award grants to our current executives at the first regularly scheduled Compensation Committee meeting of each year. The Compensation Committee takes a number of factors into
account in determining the number of shares of our common stock subject to annual awards to executives in order to create meaningful equity based incentives: the executives current position with the Company: the size of comparable awards to
comparable executives at comparable companies: the individuals potential for increased responsibility and promotion over the award term: the individuals personal performance and contributions in recent periods and the individuals
anticipated contribution to meeting the Companys long term strategic performance goals. The Compensation Committee also takes into account the number of unvested equity awards held by the named executive officer in order to maintain an
appropriate level of retention incentive for that individual. However, the Compensation Committee does not adhere to any specific guidelines as to the relative equity award holdings of the Companys named executive officers.



Perquisites and Other Benefits



Our executive officers receive the same benefits package that is available to other
regular full time employees of the Company. In general, our executive officers do not receive any special perquisites or other benefits solely by virtue of the fact that they are executive officers.



Change of Control Severance Plan



In June 2006, the Compensation Committee approved and adopted a Change of Control
Severance Plan to promote our executive compensation objectives to motivate and retain qualified executives by offering severance arrangements designed to provide reasonable compensation to departing executives under certain circumstances. Because
many change of control transactions involve significant management turnover, we believe that the potential for a change of control transaction involving the Company creates uncertainty among our executives about their continued employment and might
lead to unwanted turnover. The Change of Control Severance Plan allows named executives to remain focused on Company business during a time of Company uncertainty.



In order to encourage our executive officers to remain employed with the Company during an important time when their prospects of
continued employment following a change in control transaction are uncertain, we provide Messrs. Kent, Heintz and Williams with severance benefits pursuant to our Change of Control Severance Plan. As a principal stockholder, our Chief Executive
Officer, Paul Marshall, does not participate in the Change of Control Severance Plan or any other severance arrangement. Pursuant to the terms of the plan, the Company may amend the plan at any time.



Please see the section below titled Potential Payments Upon Termination or Change
of Control for a description of the potential payments that may be made to our named executive officers in connection with their termination of employment in connection with a change of control.



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EXECUTIVE COMPENSATION FOR 2008



2008 Annual Base Salaries



On March 10, 2008, the Compensation Committee approved 2008 annual base salaries for the Companys executive officers, effective as of January 7,
2008, as follows:



|                       |  |                                               |  |                 
|---------------------- |  | --------------------------------------------- |  | ----------------
|Name Executive Officer |  | Title                                         |  | 2008 Base Salary
|Paul A. Marshall       |  | Chief Executive Officer and President         |  | $345,000        
|Gerhard Beenen         |  | President and General Manager                 |  | $235,000        
|Richard Kent           |  | Chief Financial Officer                       |  | $234,600        
|Robert Heintz          |  | Vice President, World Wide Sales              |  | $208,000        
|Kirk O. Williams       |  | Chief Legal and Compliance Officer, Secretary |  | $206,000        



On December 18, 2008, in
support of the Companys efforts to lower its operating expenses, the Board of Directors approved the reduction of Mr. Marshalls base salary to the legally-required minimum of $33,280 per year, until such time as the Company posts
its next quarterly financial results that show a net profit. Mr. Marshalls salary will return to its previous 2008 level effective as of the beginning of the first month of the next completed fiscal quarter in which the Company recognizes
net profits (giving full effect to accrual of his base salary the level of $345,000 per year). The full salary would be neither earned nor paid unless the company remains profitable after the accrual of the salary from the beginning of that quarter.



2008 Management by Objective Bonuses



In March 2009, the Compensation Committee authorized payment of 2008 MBO Plan bonuses
for the achievement of individual performance objectives to Mr. Kent ($16,891) and Mr. Williams ($22,248). No bonuses were paid based on Company performance metrics, which were not achieved. Mr. Marshall was also eligible to receive a
bonus for achievement of 2008 individual performance objectives, but declined the payment in light of the fact that he is a major stockholder of the Company and preferred that the Company preserve its cash resources. Mr. Beenen earned no MBO
bonus for 2008 because his employment had been terminated effective June 30, 2008. Mr. Heintz did not participate in the MBO Plan, but earned $93,333 for 2008 sales commissions based on revenue and sales margins.



Change of Control Severance Plan



In order to encourage our executive officers to remain employed with the Company
during a time when their prospects of continued employment following a change in control transaction are uncertain, the Company has provided Messrs. Kent, Heintz and Williams with severance benefits pursuant to our 2006 Change of Control Severance
Plan. As a principal stockholder, our Chief Executive Officer, Paul Marshall, does not participate in the Change of Control Severance Plan or any other severance arrangement.



Please see the section below titled Potential Payments Upon Termination or Change of Control for a description of the
potential payments that may be made to our named executive officers in connection with their termination of employment in connection with a change of control.



Equity-Based Incentive Awards for 2008



Our common stock was delisted from the NASDAQ Stock Market in December 2005 and subsequently began trading on the Pink Sheets under the symbol SRTI.PK.
We did not have an effective registration statement on Form S-8 on file with the SEC during 2006, 2007 or 2008. Therefore, our Compensation Committee did not grant stock option awards in 2006, 2007 and 2008.



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CHANGES TO EXECUTIVE COMPENSATION ARRANGEMENTS FOR 2009



On March 30, 2009, the Compensation Committee approved a temporary reduction in employee salaries to reduce operating expenses.
Exempt employees, including executive officers, generally will have a temporary salary reduction of 7.5% and all non-exempt employees generally will have a temporary salary reduction of 5%. Salaries will be restored to their levels prior to this
reduction as of the first day of the fiscal quarter after we have publicly announced that we recognized a total of $1.2 million in net profits for the immediately preceding two completed fiscal quarters. This reduced salary will not be used to
calculate severance benefits for Messrs. Heintz, Kent and Williams under the 2006 Change of Control Severance Plan, severance benefits.



On March 30, 2009, the Compensation Committee also approved a Strategic Alternatives Incentive Bonus program, under which key employees, including executive
officers and the chairman of the Special Committee of Independent Directors, may be compensated for their contributions to the Companys success in its strategic alternatives discussions. Potential payments under this program amount to 1% of
the value of a Company strategic transaction. Messrs. Bentovim, Heintz, Kent and Williams could receive bonuses under the program in the amounts of 0.1825%, 0.1625%, 0.175% and 0.1125% of the value of the strategic transaction, respectively.



On March 30, 2009, the Compensation Committee also approved a plan
to pay Mr. Heintz variable commission-based incentive compensation, based on worldwide sales revenue and product gross margin for 2009. The target level of this commission-based incentive compensation is $90,000, to be paid on a monthly basis
in accordance with the Companys past practice.



On March 30,
2009, the Compensation Committee also granted options to purchase shares of Company common stock to each of its non-employee directors and to each of Messrs. Heintz, Kent and Williams, at a price per share equal to the closing price of Company
common stock on March 31, 2009. Vesting of these options accelerates and the options become immediately exercisable in full upon a 100% change of control of the Company (as a result of stock sales, tender offer, merger, or sale of assets) or if
the Company or its successor terminates the employment of the option holder without cause within two months prior to or following a 70% change of control of the Company.



COMPLIANCE WITH INTERNAL REVENUE CODE SECTION 162(m)



Section 162(m) of the Internal Revenue Code of 1986, as amended, which we refer to herein as the Code, generally disallows a tax deduction to
public companies for certain compensation in excess of $1 million paid to the named executive officers. Certain compensation, including qualified performance-based compensation, will not be subject to the deduction limit if certain requirements
are met. The Compensation Committee reviews the potential effect of Section 162(m) periodically and generally seeks to structure the long-term incentive compensation granted to its executive officers in a manner that is intended to avoid
disallowance of deductions under Section 162(m). Nevertheless, there can be no assurance that compensation attributable to long-term incentive awards will be treated as qualified performance-based compensation under Section 162(m). In
addition, the Compensation Committee reserves the right to use its judgment to authorize compensation payments that may be subject to the limit when the Compensation Committee believes such payments are appropriate and in our and our
stockholders best interests, after taking into consideration changing business conditions and the performance of its employees.



COMPENSATION OF NAMED EXECUTIVE OFFICERS



The Summary Compensation Table below quantifies the value of the different forms of compensation earned by, or awarded to, our named executive officers in
2008. The primary elements of each named executive officers total compensation reported in the table are base salary and bonuses. The Summary Compensation TableFiscal 2008 should be read in conjunction with the tables and narrative
descriptions that follow. A description of the material terms



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of each named executive officers base salary and annual bonus is provided immediately following the Summary Compensation Table. The Company did not grant any
equity awards to our executive officers in 2008, but the Company did grant non-equity incentive awards. The Outstanding Equity Awards at Fiscal YearEnd 2008 and Option Exercises and Stock VestedFiscal 2008 tables provide further
information on the named executive officers potential realizable value and actual value realized with respect to their equity awards. The discussion of the potential payments due upon a termination of employment resulting from a change in
control that follows is intended to further explain the potential future payments that are, or may become, payable to our named executive officers under certain circumstances.



Summary Compensation TableFiscal 2008



The following table summarizes the compensation of our Chief Executive Officer, our Chief Financial Officer, and our other three most
highly compensated executive officers during the year ended December 31, 2008. We refer to these individuals as the named executive officers elsewhere in this report.



|                                              |      |      |         |           |        |          |     |        |                    |         |                                            |   |                              |     |         |         
|--------------------------------------------- | ---- | ---- | ------- | --------- | ------ | -------- | --- | ------ | ------------------ | ------- | ------------------------------------------ | - | ---------------------------- | --- | ------- | --------
|Name and Principal Position                   |      | Year |         | Salary($) |        | Bonus($) |     |        | OptionAwards($)(3) |         | Non-EquityIncentivePlanCompensation($) (4) |   | All OtherCompensation($) (5) |     |         | Total($)
|Paul A. Marshall                              |      | 2008 |         | 339,503   |        |         |     |        | 10,350             |         |                                           |   |                             |     |         | 349,853 
|Chief Executive Officer and President         |      | 2007 |         | 357,752   |        |         |     |        | 10,896             |         |                                           |   |                             |     |         | 368,648 
|                                              | 2006 |      | 344,008 |           | 65,000 |          |     | 24,234 |                    |        |                                            |  |                              |     | 433,242
|                                              |      |      |         |           |        |          |    
|Richard D. Kent,                              |      | 2008 |         | 234,423   |        |         |     |        | 41,393             |         | 16,891                                     |   |                             |     |         | 292,707 
|Chief Financial Officer                       |      | 2007 |         | 229,115   |        | 17,250   | (2) |        | 41,280             |         | 20,700                                     |   |                             |     |         | 308,345 
|                                              |      | 2006 |         | 207,000   |        | 59,500   | (2) |        | 41,280             |         |                                           |   |                             |     |         | 307,780 
|                                              |      |      |         |           |        |          |    
|Gerhard J. Beenen (1)                         |      | 2008 |         | 127,189   |        |         |     |        |                   |         | 32,642                                     |   | 44,831                       | (6) |         | 204,662 
|Chief Operating Officer                       |      | 2007 |         | 234,808   |        | 19,167   | (2) |        |                   |         |                                           |   |                             |     |         | 253,975 
|                                              |      | 2006 |         | 72,539    |        | 25,000   |     |        |                   |         |                                           |   | 16,680                       | (7) |         | 114,219 
|                                              |      |      |         |           |        |          |    
|Robert G. Heintz                              |      | 2008 |         | 207,692   |        |         |     |        | 32,813             |         | 93,333                                     |   |                             |     |         | 333,838 
|Vice President, World Wide Sales              |      | 2007 |         | 199,269   |        | 15,083   | (2) |        | 55,685             |         | 107,992                                    |   |                             |     |         | 378,029 
|                                              | 2006 |      | 181,000 |           | 30,167 | (2)      |     | 55,685 |                    | 104,747 |                                            |  |                              |     | 371,599
|                                              |      |      |         |           |        |          |    
|Kirk O. Williams                              |      | 2008 |         | 205,769   |        |         |     |        | 3,317              |         | 22,248                                     |   |                             |     |         | 231,334 
|Chief Legal and Compliance Officer, Secretary |      | 2007 |         | 199,519   |        | 15,625   | (2) |        | 6,201              |         | 24,000                                     |   |                             |     |         | 245,345 
|                                              | 2006 |      | 185,154 |           | 41,250 | (2)      |     | 13,103 |                    |        |                                            |  |                              |     | 239,507



|(1) |  | Effective June 30, 2008, Mr. Beenen is no longer employed by the Company. Mr. Beenen joined the Company in August 2006 as President and General Manager of the Telecom Products
Group.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(2) |  | Represents amounts paid under the terms of a retention bonus program from April 2006 to May 2007.
|--- |  | -------------------------------------------------------------------------------------------------



|(3) |  | The amounts reported in this column represent the dollar amounts recognized for financial statement reporting purposes in accordance with FAS 123R. Pursuant to SEC rules, the amounts shown
exclude the impact of estimated forfeitures related to service-based vesting conditions. For additional information regarding stock option awards, see Outstanding Equity Awards At Year-end Fiscal 2008 table and notes.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(4) |  | The amounts reported in this column include the aggregate dollar amounts paid to the named executive officers under the terms of the MBO Plan and to Mr. Heintz under his commission
arrangements.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(5) |  | As permitted by rules established by the SEC, no amounts are shown with respect to certain perquisites where such amounts do not exceed in the aggregate the lesser of 10% of salary plus bonus
or $25,000. Mr. Beenens severance payment and relocation reimbursement is reflected in this column.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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|(6) |  | Consists of a severance payment to Mr. Beenen totaling eight weeks of salary plus a foregone salary increase calculated from January 7, 2008 to June 27, 2008. Please see the
discussion below entitled Employment Agreements for more information on Mr. Beenens severance payment.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(7) |  | Represents relocation cost reimbursement.
|--- |  | -----------------------------------------



Description of Employment Agreements, Salary and Bonus Amounts



As indicated in the Compensation Discussion and Analysis and discussed below, none of our current named executive officers is employed pursuant to an employment
agreement. As a result, their base salaries and bonus opportunities are not fixed by contract. Instead, in the first quarter of each fiscal year, the Compensation Committee establishes the base salary for each of our named executive officers for the
year. In making its determination, the Compensation Committee considers the factors discussed under Compensation Discussion and AnalysisElements of CompensationBase Salary.



Grants of Plan-based AwardsFiscal 2008



The following table presents information regarding estimated future payments to be made
to each of our named executive officers as of December 31, 2008 under the terms of our non-equity incentive plan, the MBO Bonus Plan. There were no grants of equity incentive plan-based awards in 2008.



|                  |  |            |  |               |  |            |     |  |            
|----------------- |  | ---------- |  | ------------- |  | ---------- | --- |  | -----------
|Name              |  | Grant Date |  | Threshold ($) |  | Target ($) |     |  | Maximum ($)
|Paul A. Marshall  |  | 03/10/08   |  |              |  | 103,500    | (1) |  | 1,035,000  
|Richard D. Kent   |  | 03/10/08   |  |              |  | 70,380     | (2) |  | 703,800    
|Gerhard J. Beenen |  | 03/10/08   |  |              |  | 70,500     | (3) |  | 705,000    
|Robert G. Heintz  |  | 03/10/08   |  |              |  | 120,000    | (4) |  | 416,000    
|Kirk O. Williams  |  | 03/10/08   |  |              |  | 61,800     | (5) |  | 618,000    



|(1) |  | Mr. Marshall did not receive any bonus under the 2008 MBO Bonus Plan.
|--- |  | ---------------------------------------------------------------------



|(2) |  | Mr. Kent received a bonus of $16,891 in March 2009 for achievement of individual performance objectives under the 2008 MBO Bonus Plan.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------



|(3) |  | Effective June 30, 2008, Mr. Beenen was no longer employed by the Company and therefore not eligible for any bonus under the 2008 MBO Bonus Plan.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------



|(4) |  | Mr. Robert G. Heintz did not participate in the 2008 MBO Bonus Plan, but earned $93,333 for 2008 sales commissions based on revenue and sales margins. His commission target was
$120,000 at the Companys targeted worldwide sales for 2008.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(5) |  | Mr. Williams received a bonus of $22,248 in March 2009 for achievement of individual performance objectives under the 2008 MBO Bonus Plan.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------



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Outstanding Equity Awards At Year-endFiscal 2008



The following table presents information regarding the outstanding share-based awards
held by each named executive officer, as of December 31, 2008, including the vesting dates for the portions of these awards that had not vested as of that date. This table also includes the amounts recognized for each of these awards for
financial statement reporting purposes for fiscal 2008 as reflected in the Summary Compensation Table  Fiscal 2008 above. For purposes of clarity, awards that were granted prior to December 31, 2008 but that were not outstanding as
of December 31, 2008 (for example, because the awards were forfeited, exercised, paid or otherwise settled prior to December 31, 2008) are also included in the table below if a charge was recognized for financial statement reporting
purposes for fiscal 2008 with respect to the award. Additional information regarding these awards is presented in the footnotes below and in the table below under Option Exercises and Stock Vested  Fiscal 2008.



|                      |                                                                |             |                                                                  |       |                             |      |                      |        
|--------------------- | -------------------------------------------------------------- | ----------- | ---------------------------------------------------------------- | ----- | --------------------------- | ---- | -------------------- | -------
|Name                  |                                                                | Options (1)
|                      | Number ofSecuritiesUnderlyingUnexercisedOptions (#)Exercisable |             | Number ofSecuritiesUnderlyingUnexercisedOptions (#)Unexercisable |       | OptionExercisePrice ($) (4) |      | OptionExpirationDate
|Paul A. Marshall (2)  |                                                                | 80,000      |                                                                  |      |                             | 3.98 |                      | 1/23/12
|                      |                                                                | 45,000      |                                                                  |      |                             | 1.91 |                      | 1/29/13
|                      |                                                                | 15,000      |                                                                  |      |                             | 4.09 |                      | 1/28/14
|                      |                                                                | 23,958      |                                                                  | 1,042 |                             | 3.20 |                      | 2/8/15 
|                      |                                                                |             |                                                                  |      
|Richard D. Kent       |                                                                | 95,833      |                                                                  | 4,167 |                             | 3.20 |                      | 2/8/15 
|                      |                                                                |             |                                                                  |      
|Gerhard J. Beenen (3) |                                                                |            |                                                                  |      |                             |     |                      |       
|                      |                                                                |             |                                                                  |      
|Robert G. Heintz      |                                                                | 150,000     |                                                                  |      |                             | 2.57 |                      | 7/21/14
|                      |                                                                | 9,583       |                                                                  | 417   |                             | 3.20 |                      | 2/8/15 
|                      |                                                                |             |                                                                  |      
|Kirk O. Williams      |                                                                | 18,800      |                                                                  |      |                             | 1.91 |                      | 1/29/13
|                      |                                                                | 4,000       |                                                                  |      |                             | 4.09 |                      | 1/28/14
|                      |                                                                | 7,666       |                                                                  | 334   |                             | 3.20 |                      | 2/8/15 



|(1) |  | Each stock option grant reported in the table above was granted under, and is subject to, the Stock 2000 Plan. The option expiration date shown above is the normal expiration date, and the
latest date that the options may be exercised. For each named executive officer, the unexercisable options above are also unvested and will generally terminate if the named executive officers employment terminates. (Each option vests over four
years with 25% vesting on the first anniversary of the date of grant and the remaining 75% vesting in 36 equal monthly installments thereafter.)
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(2) |  | On April 29, 2008, Paul Marshall returned two of his unexercised options to the company for permanent cancellation. The first option was dated January 10, 2001 for 80,000 shares at
$4.94 per share, and the second was dated June 6, 2002 for 24,000 shares at $1.76 per share.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(3) |  | Mr. Beenens employment with the Company terminated as of June 30, 2008 and Mr. Beenen relinquished any rights that he had with respect to option grants.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------



|(4) |  | The exercise prices of all options held by our named executive officers as of December 31, 2008 were higher than the fair market value of the Companys common stock, which was $0.48
per share.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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Option Exercises and Stock VestedFiscal 2008



None of our named executive officers exercised any stock options during 2008. None of
our named executive officers held restricted stock subject to vesting during 2008.



Employment Agreements



Effective June 30, 2008,
Mr. Beenen is no longer employed by us. On July 16, 2008, we and Mr. Beenen entered into a Separation Agreement, pursuant to which Mr. Beenen received separation pay consisting of (i) the 2008 salary increase that he
declined in March 2008, calculated from January 7, 2008 to June 27, 2008; (ii) the 2007 MBO Bonus payment that he declined in March 2008; and (iii) eight weeks of pay, for a total payment of approximately $77,473.



Except as described above, we do not have employment agreements with any of our other
executive officers.



Potential Payments upon Termination or Change of Control



Change of Control Severance Plan



Effective June 21, 2006, our Compensation Committee adopted a Change of Control
Severance Plan to provide designated employees with additional incentives to remain with us in the event of, and through the duration of, defined change of control events.



At the time of the adoption of the plan, our Chief Financial Officer, Richard D. Kent, and our Chief Legal and Compliance Officer, Secretary,
Kirk O. Williams, were the only named executive officers eligible to receive payments under the Change of Control Severance Plan. Under the terms of the plan, if either Mr. Kents or Mr. Williams employment is
terminated by us within four months prior to a change of control, or by us or our successor company within twelve months after a change of control, in each case by virtue of an involuntary termination other than for cause or a
voluntary termination for good reason (as such terms are defined in the plan), we or our successor company will provide severance benefits to Messrs. Kent and Williams, as the case may be, consisting of a lump sum payment equal to
12 months base salary in effect at the time of termination of employment, less applicable withholdings, and one year of reimbursements for payments for health coverage continuation. In order to receive such benefits, a general release of claims must
be executed by the terminated officer. Mr. Heintz was added to the plan in December 2007 and would receive a change of control severance benefit of twelve months of base salary and twelve months of reimbursement for health coverage
continuation.



Messrs. Kent, Williams and Heintz are entitled to
severance benefits pursuant to the Change of Control Severance Plan if their employment is terminated by us within four months prior to a change of control, or by us or our successor company within 12 months after a change of control. For Messrs.
Kent, Williams and Heintz, those benefits consist of a lump sum payment equal to 12 months of base salary and continued health care benefits paid for by the Company for twelve months after termination. Except as noted, none of our named executive
officers has an employment agreement that provides for severance benefits, a fixed position or duties, or a fixed base salary or actual or target annual bonus. As a result, we believe it appropriate that constructive termination also be included as
a potential trigger for severance benefits. Therefore, the change in control arrangements we entered into with some of our named executive officers permit the named executive officers to terminate their employment and receive their benefits in
connection with a change in control for certain good reasons that we believe result in the constructive termination of the named executive officers employment.



In the event that a named executive officer becomes entitled to severance under the Change of Control Severance Plan, we believe that
it is appropriate to provide the named executive officers, in addition to cash severance benefits, with other severance protection, such as continued medical insurance coverage following termination for the period of



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the severance benefit. Similar to cash severance benefits, we believe these other severance benefits are consistent with the severance arrangements of our comparable
companies and provide the named executive officers with financial and personal security during a period of time when they are likely to be unemployed and seeking new employment.



We do not believe that the named executive officers should be entitled to severance benefits merely because a change in control
transaction occurs. Therefore, the payment of severance benefits is generally only triggered by an actual or constructive termination of employment in connection with a change in control. The Change of Control Severance Plan does not currently allow
for accelerated vesting of equity compensation; however, the employment arrangements for Messrs. Heintz and Kent extend this benefit to them for their initial stock grants in the event of a change of control and termination without cause.



Under our Change of Control Severance Plan:



| |  |  | change of control means the sale of all or substantially all of the Companys assets, a change in ownership of more than 50% of the outstanding common stock,
or a change in the Companys Board of Directors resulting in less than 50% of the Companys current directors remaining on the board.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | good reason means a change in primary duties, a reduction in base pay, material adverse modification of incentive compensation programs, and certain relocations.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------



Stock Option Agreements



In connection with Mr. Kents employment, the Company issued him a stock
option grant to purchase 100,000 shares of common stock at an exercise price equal to $3.20 per share. Pursuant to the terms of the stock option agreement, if Mr. Kents employment is terminated due to a change in control
within 12 months of such change in control or as a result of a reduction in force of at least five percent of the Companys domestic employee workforce, then the stock option would accelerate such that all shares would become fully-vested and
immediately exercisable. As of February 2009, this option is fully vested.



In July 2004 the Company granted Mr. Heintz an option to purchase 150,000 shares of our common stock at an exercise price equal to $2.57 per share. Concurrently with the execution of the stock option grant, Mr. Heintz and the
Company entered into an addendum to such stock option grant pursuant to which, in the event of a change of control, if Mr. Heintz is terminated other than for cause or he is constructively terminated within 12 months of
such change in control, his stock options will accelerate such that all shares would become fully-vested and immediately exercisable. As of July 2008, this option is fully vested.



In March 2009 the Compensation Committee of the Board of Directors granted options to
purchase shares of Company common stock to each of its non-employee directors and to each of Messrs. Heintz, Kent and Williams, at $.66 per share, the price equal to the closing price of the Companys common stock on March 31, 2009.
Vesting of these options accelerates and the options become immediately exercisable in full upon (a) a 100% change of control of the Company (as a result of stock sales, tender offer, merger, or sale of assets) or (b) the Company or its
successor terminating the option holder without cause within two months prior to or following a 70% change of control of the Company.



Potential Payments



The following section describes the benefits that may become payable to the named executive officers in connection with certain terminations of their employment
with us and/or a change in control of us. In calculating the amount of any potential payments to these named executive officers, we have assumed that the applicable triggering



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events (i.e. termination of employment in connection with a change of control) occurred on December 31, 2008, the last business day for fiscal year 2008, and that
the price per share of our common stock is equal to the closing price per share on such date, or $.48.



If Mr. Kents employment was terminated as a result of a change of control at December 31, 2008, Mr. Kent would not have received any benefit
from the acceleration of stock options because the closing sale price of our common stock on December 31, 2008, of $0.48 per share was less than the exercise price of his option granted in February 2005. However, Mr. Kent would have
received a cash payment of approximately $234,423, plus benefits valued at approximately $4,734 for health coverage continuation.



If Mr. Heintzs employment was terminated as a result of a change of control at December 31, 2008, Mr. Heintz would not have received any
benefit from the acceleration of his stock options because the closing sale price of our common stock on December 31, 2008, of $0.48 per share was less than the exercise price of his option granted in July 2004. However, if
Mr. Heintzs employment was terminated as a result of a change of control at December 31, 2008, Mr. Heintz would have received a cash payment of approximately $207,692, plus benefits valued at approximately $4,734 for health
coverage continuation.



If Mr. Williams employment was
terminated as a result of a change of control at December 31, 2008, Mr. Williams would have received a cash payment of approximately $205,769, plus benefits valued at approximately $4,734 for health coverage continuation.



The following table summarizes the dollar value of the payments and benefits payable to
our named executive officers assuming the applicable triggering events (i.e. termination of employment in connection with a change of control transaction) occurred on December 31, 2008 as described above.



|                 |  |                                |  |                   |         |                                      |   |      
|---------------- |  | ------------------------------ |  | ----------------- | ------- | ------------------------------------ | - | -----
|Name             |  | Acceleration ofStock Options $ |  | Severance Payment |         | Health Coverage ContinuationPremiums
|Paul A. Marshall |  |                               |  |                   |        |                                      |   |     
|Richard D. Kent  |  |                               |  | $                 | 234,423 |                                      | $ | 4,734
|Robert G. Heintz |  |                               |  | $                 | 207,692 |                                      | $ | 4,734
|Kirk O. Williams |  |                               |  | $                 | 205,769 |                                      | $ | 4,734



The value of payments and
benefits payable to our named executive officers assuming the triggering event of a termination of employment in connection with a change of control transaction occurring on a later date than December 31, 2008 may be different than disclosed
above.



Compensation of Non-employee DirectorsFiscal 2008



Each non-employee member of our Board of Directors is entitled to an
annual retainer of $35,000, meeting fees of $1,100 per day for meetings, regardless of the number of meetings attended, and reimbursement of expenses. The Chair of the Board receives an annual retainer of $50,000; the Chair of the Audit Committee
receives an annual retainer of $13,000; and the Chairs of the Compensation Committee, Governance Committee and Compliance Sub-Committee receive annual retainers of $7,500, $4,000, and $4,000, respectively. The Vice Chair of the Board receives an
annual retainer of $14,000. Each member of the Audit Committee, Compensation Committee and the Governance Committee, other than their respective Chairs, receives annual retainers of $6,000, $5,000 and $2,000, respectively. Each non-employee director
is also entitled to an annual award of an option to purchase 12,000 shares of Company common stock at fair market value. These options vest in full on the anniversary of the date of grant, provided the director continues to serve as a director at
that time. These options have a term of ten years and expire within 90 days of the directors termination of service, or one year if such termination is due to death or disability.



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On December 18, 2008, to lower our operating expenses, the Board of Directors approved suspension of certain
payments to our non-employee directors, as follows: $1,100 meetings fee; the $14,000 Vice Chairs annual retainer; and the committee members annual retainers (from $2,000 to $6,000 depending upon committee). Compensation to the
non-employee members of the Board of Directors will return to their former levels effective as of the beginning of the first month of the next completed fiscal quarter in which the Company recognizes net profits (giving full effect to accrual of
Mr. Marshalls base salary as CEO at the level of $345,000 per year and accrual of director compensation including suspended payments). The full compensation would neither be earned nor paid unless the company remains profitable after the
accrual of the compensation from the beginning of that quarter.



On
December 18, 2008, the Board of Directors also approved director compensation for Board member Lyron Bentovim, consisting of the standard annual retainer of $35,000 and an annual retainer of $7,500 for serving as the Chair of the
Boards Strategy Committee. The board also appointed Mr. Bentovim as the Chairman of the Special Committee of Independent Directors which was formed to examine the Companys strategic alternatives. On March 30, 2009, the
Compensation Committee approved a Strategic Alternatives Incentive Bonus program, under which key employees, and Mr. Bentovim as the Chairman of the Special Committee of Independent Directors, can earn bonuses for their contributions to the
Companys success in its strategic alternatives discussions. Bonus payments under this program amount to 1.0% of the value of a Company strategic transaction. Mr. Bentovim could receive a bonus under the program in the amount of 0.1825% of
the value of the strategic transaction.



Upon becoming a Board member,
Mr. Bentovim, under our 2000 Stock Plan, was entitled to be granted an option to purchase 12,000 shares of Company common stock at an exercise price per share equal to the fair market value of our common stock on the date of the Boards
first meeting after the Company becomes current in its public company reporting obligations (the Pricing Date). On December 18, 2008, the Board approved an additional option grant award to Mr. Bentovim, consisting of an option
to purchase 13,000 shares of Company common stock at an exercise price per share equal to the fair market value of our common stock on the Pricing Date. The Board of Directors also approved future option grants for certain non-employee directors an
option to purchase 36,000 shares of Company common stock each at an exercise price equal to the fair market value on the Pricing Date. These options were to be granted to each of Henry Huff, Patrick Ang, Robert C. Pfeiffer and Jennifer Walt, who did
not receive automatic annual option grants of 12,000 shares under our 2000 Stock Plan in 2006, 2007 or 2008. All such options were granted March 31, 2009 at an exercise price of $0.66 per share, which was the closing price of the Companys
common stock on that date. Vesting of these options accelerates and the options become immediately exercisable in full upon a 100% change of control of the Company (as a result of stock sales, tender offer, merger, or sale of assets) or if the
Company or its successor terminating the employment of the option holder without cause within two months prior to or following a 70% change of control of the Company.



The following table sets forth compensation paid to our non-employee directors for services rendered during fiscal 2008, consisting
entirely of cash payments of retainers and meeting fees:



|                            |  |             
|--------------------------- |  | ------------
|Name and Principal Position |  | Total($) (1)
|Patrick Peng-Koon Ang (2)   |  | 64,300      
|Henry P. Huff (3)           |  | 84,300      
|Robert C. Pfeiffer (4)      |  | 63,300      
|Jennifer J. Walt (5)        |  | 68,800      
|Lyron Bentovim (6)          |  | 30,000      



|(1) |  | The Company did not issue any options to its non-employee directors in 2006. 2007, or 2008.
|--- |  | -------------------------------------------------------------------------------------------



|(2) |  | At December 31, 2008, Mr. Ang held options to purchase 43,539 shares of our common stock.
|--- |  | -----------------------------------------------------------------------------------------



|(3) |  | At December 31, 2008, Mr. Huff held options to purchase 43,539 shares of our common stock.
|--- |  | ------------------------------------------------------------------------------------------



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|(4) |  | At December 31, 2008, Mr. Pfeiffer held options to purchase 41,872 shares of our common stock.
|--- |  | ----------------------------------------------------------------------------------------------



|(5) |  | At December 31, 2008, Ms. Walt held options to purchase 43,539 shares of our common stock.
|--- |  | ------------------------------------------------------------------------------------------



|(6) |  | At December 31, 2008, Mr. Bentovim held no options to purchase shares of our common stock. Mr. Bentovim was paid as a consultant to the Company prior to his becoming a
non-employee director in October 2008.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



COMPENSATION COMMITTEE
INTERLOCKS AND INSIDER PARTICIPATION



All of the Compensation
Committee members, whose names appear on the Compensation Committee Report below, were committee members during all of fiscal year 2008, except Lyron Bentovim who became a member in December 2008. No current member of the Compensation Committee is a
current or former officer or employee of ours or had any relationships or related persons transactions. None of our executive officers served as a director or a member of a Compensation Committee (or other committee serving an equivalent function)
of any other entity, the executive officers of which served as a director or member of our Compensation Committee during the fiscal year ended December 31, 2008.



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REPORT OF THE COMPENSATION COMMITTEE



The Compensation Committee of our Board of Directors has reviewed and discussed the Compensation Discussion and Analysis with
management and, based upon that review and discussion, the Compensation Committee recommended to the Board of Directors that the Compensation Discussion and Analysis be included in the Companys 2008 Annual Report on Form 10-K filed with the
SEC.



|                          
|--------------------------
|The Compensation Committee
|Jennifer J. Walt, Chair   
|Lyron Bentovim            
|Henry P. Huff             



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ITEM 12.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS



The following table sets forth certain
information with respect to beneficial ownership of our common stock as of June 30, 2008 for:



| |  |  | each person who we know beneficially owns more than 5% of our common stock;
| | - |  | ---------------------------------------------------------------------------



| |  |  | each of our directors;
| | - |  | ----------------------



| |  |  | each named executive officer; and
| | - |  | ---------------------------------



| |  |  | all of our directors and named executive officers as a group.
| | - |  | -------------------------------------------------------------



The number and percentage of shares beneficially owned are based on 51,349,058 shares of common stock outstanding as of March 31, 2009. Beneficial
ownership is determined under the rules and regulations of the SEC. Shares of common stock subject to options that are currently exercisable or exercisable within 60 days of March 31, 2009 are deemed to be outstanding and beneficially
owned and the percentage of ownership of that person, but are not deemed to be outstanding for the purposes of computing the percentage ownership of any other person. The persons listed in this table have sole voting and investment power with
respect to all shares of our common stock shown as beneficially owned by them, except as indicated in the footnotes to this table, and subject to applicable community property laws. The address of each person listed in this table is c/o Sunrise
Telecom Incorporated, 302 Enzo Drive, San Jose, California 95138, unless separately identified below.



|                                                                                             |                                    |                                                     |      |                 |      |  
|-------------------------------------------------------------------------------------------- | ---------------------------------- | --------------------------------------------------- | ---- | --------------- | ---- | -
|Beneficial Owner                                                                             |                                    | Amount and Nature ofCommon Stock Beneficially Owned |     
|                                                                                             | Number of SharesBeneficially Owned |                                                     |      | Percent ofClass |     
|Paul A. Marshall                                                                             |                                    | 11,664,760                                          | (1)  |                 | 22.7 | %
|Robert C. Pfeiffer                                                                           |                                    | 6,350,112                                           | (2)  |                 | 12.4 | %
|Tracy Tsuey Hwa Chang 45539 Antelope Drive Fremont, CA 94539                                 |                                    | 4,903,450                                           | (3)  |                 | 9.5  | %
|Paul Ker-Chin Chang 2255 Martin Ave. Suite G Santa Clara, CA 95050                           |                                    | 4,445,300                                           | (4)  |                 | 8.7  | %
|Aaron Braun WC
Capital Management, LLC 300 Drakes Landing Blvd., STE 230 Greenbrae, CA 94904 |                                    | 5,411,815                                           | (5)  |                 | 10.5 | %
|Jennifer J. Walt                                                                             |                                    | 445,593                                             | (6)  |                 | *    |  
|Robert G. Heintz                                                                             |                                    | 160,000                                             | (7)  |                 | *    |  
|Richard D. Kent                                                                              |                                    | 100,000                                             | (8)  |                 | *    |  
|Henry P. Huff                                                                                |                                    | 71,539                                              | (9)  |                 | *    |  
|Lyron L. Bentovim                                                                            |                                    | 56,082                                              | (10) |                 | *    |  
|Patrick Peng-Koon Ang                                                                        |                                    | 35,206                                              | (11) |                 | *    |  
|Kirk O. Williams                                                                             |                                    | 30,800                                              | (12) |                 | *    |  
|All directors and executive officers as a group (9 persons)                                  |                                    | 18,914,092                                          | (13) |                 | 36.8 | %



|* |  | Less than one percent of the outstanding shares of common stock.
|- |  | ----------------------------------------------------------------



|(1) |  | Includes 1,200 shares held as custodian, 9,853,560 shares held by the Marshall Family Revocable Trust and 85,000 shares issuable upon exercise of outstanding options.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(2) |  | Includes 41,872 shares issuable upon exercise of outstanding options.
|--- |  | ---------------------------------------------------------------------



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|(3) |  | Based upon a Schedule 13G filed with the Securities and Exchange Commission by Tracy Tsuey Hwa Chang on February 10, 2009.
|--- |  | --------------------------------------------------------------------------------------------------------------------------



|(4) |  | Based upon a Schedule 13G/A filed with the Securities and Exchange Commission by Paul Ker-Chin Chang on February 4, 2009.
|--- |  | -------------------------------------------------------------------------------------------------------------------------



|(5) |  | Based upon a Schedule 13G/A filed with the Securities and Exchange Commission by WC Capital Management, LLC on February 24, 2009.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------



|(6) |  | Includes 25,343 shares issuable upon exercise of outstanding options.
|--- |  | ---------------------------------------------------------------------



|(7) |  | Represents 160,000 shares issuable upon exercise of outstanding options.
|--- |  | ------------------------------------------------------------------------



|(8) |  | Represents 100,000 shares issuable upon exercise of outstanding options.
|--- |  | ------------------------------------------------------------------------



|(9) |  | Includes 43,539 shares issuable upon exercise of outstanding options.
|--- |  | ---------------------------------------------------------------------



|(10) |  | Represents shares held by Leonidas Opportunity Fund. Mr. Bentovim is the Managing Director of SKIRITAI Capital LLC, the General Partner of Leonidas Opportunity Fund, and shares
voting and disposition control of these shares. Mr. Bentovim disclaims beneficial ownership of these securities except to the extent of his pecuniary interest therein, and the inclusion of these shares in this report shall not be deemed an
admission of beneficial ownership of all of the reported shares for purposes of Section 16 or for any other purpose.
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(11) |  | Represents 35,206 shares issuable upon exercise of outstanding options.
|---- |  | -----------------------------------------------------------------------



|(12) |  | Represents 30,800 shares issuable upon exercise of outstanding options.
|---- |  | -----------------------------------------------------------------------



|(13) |  | Includes 521,760 shares issuable upon exercise of outstanding options.
|---- |  | ----------------------------------------------------------------------



Equity Compensation Plan InformationFiscal 2008



The following table provides information, as of December 31, 2008, regarding Sunrise Telecoms equity compensation plans under which Sunrise Telecom
common stock may be issued.



|                                                           |  |                                                                     |     |  |                                                     |      |                                                                                          |           |    
|---------------------------------------------------------- |  | ------------------------------------------------------------------- | --- |  | --------------------------------------------------- | ---- | ---------------------------------------------------------------------------------------- | --------- | ---
|Plan Category                                              |  | Number of Securitiesto be Issued UponExercise ofOutstanding Options |     |  | Weighted-AverageExercise Price ofOutstandingOptions |      | Number ofSecurities RemainingAvailable for FutureIssuance Under EquityCompensation Plans |          
|Equity compensation plans approved by security holders (1) |  | 2,075,715                                                           | (2) |  | $                                                   | 3.50 |                                                                                          | 9,532,317 | (3)
|Equity compensation plans not approved by security holders |  |                                                                    |     |  |                                                     |     |                                                                                          |          |    
|                                                           |  |                                                                     |     |  |                                                     |      |                                                                                          |           |    
|Total                                                      |  | 2,075,715                                                           |     |  | $                                                   | 3.50 |                                                                                          | 9,532,317 |    
|                                                           |  |                                                                     |     |  |                                                     |      |                                                                                          |           |    



|(1) |  | Our equity compensation plans approved by stockholders are Sunrise Telecoms 2000 Stock Plan, as amended and 2000 Employee Stock Purchase Plan. Our stockholders approved both equity
compensation plans in April 2000, and unless terminated sooner pursuant to their terms, these plans terminate automatically ten years after their effective dates in July 2010. Both equity compensation plans also contain automatic adjustment
provisions that authorize the Board of Directors to approve reserve increases based on the number of shares of our common stock outstanding on the last day of the prior fiscal year. The Board of Directors may also approve share reserve increases for
any lower number of shares it deems appropriate.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(2) |  | Represents shares of common stock issuable upon exercise of outstanding options under the 2000 Stock Plan.
|--- |  | ----------------------------------------------------------------------------------------------------------



|(3) |  | Amount includes 8,829,430 shares of common stock available for future issuance under the 2000 Stock Plan and 702,887 shares of common stock available for future issuance under the 2000
Employee Stock Purchase Plan.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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ITEM 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE



RELATED PARTY TRANSACTIONS



Under our Code of Business Conduct and Ethics, our employees, executive officers and
members of our Board of Directors are prohibited from entering into any business, financial, or other relationship with our existing or potential customers, competitors, partners or vendors that might impair, or appear to impair, the exercise of his
or her judgment or ethics with regards to Sunrise Telecom. Such relationships include situations involving Sunrise Telecom entering into a business transaction with an executive officer or director, a family member of an executive officer or
director, or a business in which such a person has any significant role. Our employees are obligated under the Code of Business Conduct and Ethics to disclose any existing or proposed transaction or relationship that reasonably could be expected to
give rise to a conflict of interest to our Ethics Review Board, which consists of our Chief Executive Officer, Chief Financial Officer and our Chief Legal and Compliance Officer. Our executive officers and directors are obligated under the Code of
Business Conduct and Ethics to disclose any existing or proposed transaction or relationship that reasonably could give rise to a conflict of interest to our Board of Directors. The Ethics Review Board or Board of Directors, as the case may be,
would review, approve, ratify or, at its discretion, take other action with respect to the transaction. Any related persons transaction would be required to be disclosed in accordance with SEC rules. If the related person at issue is a member of the
Ethics Review Board, the Board of Directors or an immediate family member of such person, then that member would not participate in the discussions.



In reviewing a proposed related person transaction, the Ethics Review Board or Board of Directors, as the case may be, considers all the relevant facts and
circumstances of the transaction on a case-by-case basis, including (i) the nature and terms of the transaction, (ii) the relationship with the related person, (iii) whether the terms of the transaction are fair to the Company and on
terms at least as favorable as would apply if the other party was not a related person, (iv) whether there are demonstrable business reasons for the Company to enter into the related party transaction, (v) whether the related party
transaction would impair the independence of a director, and (vi) whether the related party transaction would present an improper conflict of interest for any director, executive officer or employee of the Company, taking into account the size
of the transaction, the overall financial position of the director, executive officer or employee, the direct or indirect nature of the interest of the director, executive officer or employee in the transaction, the ongoing nature of any proposed
relationship, and any other factors the Ethics Review Board or Board of Directors, as the case may be, deems appropriate.



On August 12, 2008, the Board of Directors of Sunrise Telecom approved the revised Code of Business Conduct and Ethics for the Company. The revisions included
changes dealing with specific regulatory areas, such as export and import matters, immigration, government contracts, political contributions, and technical and administrative updating.



Other than the compensation arrangements set forth in Item 11 of this Form 10-K, since January 1, 2008 there has not been,
nor is there currently proposed, any transaction in which we were or will be a participant and in which the amount involved exceeded $120,000 and in which any executive officer, director, 5% beneficial owner of our common stock or member of the
immediate family of any of the foregoing persons had or will have a direct or indirect material interest.



DIRECTOR INDEPENDENCE



Four of our five
non-employee directors, Patrick Peng-Koon Ang, Henry P. Huff, Lyron Bentovim and Jennifer J. Walt, are independent directors under the NASDAQ Listing Rules. Mr. Pfeiffer does not qualify as an independent director due to his service
as the Companys interim Vice President of Engineering from April through November 2006. Mr. Marshall is not an independent director because he is the Company Chief Executive Officer.



103



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##### Table of Contents

ITEM 14.    PRINCIPAL ACCOUNTANT FEES AND SERVICES



Audit Committee Report



The responsibilities of the Audit Committee, among other things, include:



| |  |  | Reviewing Sunrise Telecoms audit and related services at least annually;
| | - |  | -------------------------------------------------------------------------



| |  |  | Appointing, determining funding for and overseeing Sunrise Telecoms auditors and ensuring their independence, including pre-approving all audit services and permissible
non-audit services provided by the auditors;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Reviewing Sunrise Telecoms annual and interim financial statements;
| | - |  | --------------------------------------------------------------------



| |  |  | Reviewing and actively discussing with Sunrise Telecoms auditors the results of the annual audit of Sunrise Telecoms financial statements and all significant
issues, transactions and changes;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Reviewing and actively discussing with Sunrise Telecoms auditors the results of the SAS 100 quarterly reviews of Sunrise Telecoms condensed consolidated financial
statements and all significant issues, transactions and changes;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Overseeing the adequacy of Sunrise Telecoms system of internal accounting controls, including obtaining from the auditors management letters or summaries on such
internal accounting controls;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Reviewing and establishing procedures for the receipt, retention and treatment of inquiries received by Sunrise Telecom regarding accounting, internal accounting controls or
any auditing matters; and
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Overseeing Sunrise Telecoms finance function and compliance with SEC requirements and reviewing the status of any legal matters that could have a significant impact on
Sunrise Telecoms financial statements.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The Audit
Committee operated pursuant to a charter approved by the Board of Directors. The Audit Committee has implemented procedures to ensure that during the course of each fiscal year it devotes the attention that it deems necessary or appropriate to each
of the matters assigned to it under the Audit Committees charter. The Audit Committee also has reviewed and reassessed the adequacy of its charter during the course of 2008.



Management is responsible for the preparation, presentation and integrity of Sunrise Telecoms financial statements, accounting
and financial reporting principles and internal controls and procedures designed to assure compliance with accounting standards and applicable laws and regulations. Sunrise Telecoms independent auditors are responsible for performing an
independent audit of the consolidated financial statements in accordance with auditing standards generally accepted in the United States.



In overseeing the preparation of Sunrise Telecoms consolidated financial statements, the Audit Committee met with both management and the independent auditors
to review and discuss all financial statements prior to their issuance and to discuss significant accounting issues. Management advised the Audit Committee that all financial statements were prepared in accordance with accounting principles
generally accepted in the United States. The Audit Committees review included discussion with the independent auditors of matters required to be discussed pursuant to Statement of Auditing Standards No. 61, Communications with Audit
Committees. The Audit Committee received the written disclosures and the letter from KPMG LLP required by the Public Company Accounting Oversight Board Rule 3526, Communication with Audit Committees Concerning Independence. The Audit
Committee also considered whether the provision of non-audit services by the independent auditors was compatible with maintaining the auditors independence. Additionally, the Audit Committee has had discussions with the auditors regarding the
auditors independence. In connection with monitoring Sunrise Telecoms internal control systems, the Audit Committee periodically consulted with the independent auditors about internal controls and the fairness and accuracy of Sunrise
Telecoms consolidated financial statements.



104



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##### Table of Contents

Based on the review referred to in the preceding paragraph, and subject to the limitations on the role and
responsibilities of the Audit Committee referred to in its charter, the Audit Committee recommended to the Board of Directors (and the Board approved) the inclusion of Sunrise Telecoms audited consolidated financial statements for the year
ended December 31, 2008 in this Annual Report on Form 10-K for filing with the Securities and Exchange Commission.



Audit CommitteeHenry P. Huff, ChairmanPatrick Peng-Koon AngJennifer J. WaltLyron Bentovim




INDEPENDENT AUDITORS



Fees Paid to Independent Auditors



KPMG LLP served as our independent registered public accounting firm for the years
ended December 31, 2008 and 2007. The following table sets forth the fees paid to KPMG LLP for the years ended December 31, 2008 and 2007.



Audit and Non-Audit Fees



|                   |  |            |  |           
|------------------ |  | ---------- |  | ----------
|                   |  | 2008       |  | 2007      
|Audit Fees (1)     |  | $1,240,000 |  | $1,250,000
|Audit-Related Fees |  |           |  |           
|Tax Fees           |  |           |  |           
|                   |  |            |  |           
|Total Fees         |  | $1,240,000 |  | $1,250,000
|                   |  |            |  |           



|(1) |  | Audit Fees relate to professional services rendered in connection with the audit of our annual financial statements included in our Form 10-K, quarterly review of financial statements
included in our Forms 10-Qs and audit services provided in connection with other statutory and regulatory filings.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Audit Committee Pre-approval Policies and Procedures



The services performed by KPMG LLP in 2007 and 2008 were preapproved by our Audit Committee in accordance with the requirements of the Audit Committee Charter.
Preapproval is generally provided at regularly scheduled meetings of the Audit Committee.



Part IV.



ITEM 15.    EXHIBITS, FINANCIAL STATEMENT SCHEDULES



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



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



Report on Independent Registered Public Accounting Firm



Consolidated Balance Sheets as of December 31, 2008 and December 31, 2007



Consolidated Statements of Operations for the years ended
December 31, 2008, 2007 and 2006



Consolidated
Statements of Stockholders Equity and Comprehensive Income (Loss) for the years

ended December 31, 2008, 2007 and 2006



Consolidated Statements of Cash Flows for the years
ended December 31, 2008, 2007 and 2006



105



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##### Table of Contents

Notes to Consolidated Financial Statements



| | (2) |  | Supplementary Consolidated Financial Statement Schedule as of and for the years ended December 31, 2008, 2007, and 2006:
| | --- |  | ------------------------------------------------------------------------------------------------------------------------



None.



All 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:
| | --- |  | ---------



(a) Exhibit Index.



|              |  |                                                                                                                                                             |  |                           |  |                 |  |               |  | 
|------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------- |  | --------------- |  | ------------- |  | 
|ExhibitNumber |  | Description                                                                                                                                                 |  | Incorporated by Reference
|              |  | Form                                                                                                                                                        |  | Date                      |  | ExhibitNumber   |  | FiledHerewith
|3.1           |  | Amended and Restated Certificate of Incorporation                                                                                                           |  | 10-K                      |  | March 16,2001   |  | 3.1           |  | 
|              |  |                                                                                                                                                             |  |                           | 
|3.2           |  | Amended and Restated Bylaws.                                                                                                                                |  | 10-K                      |  | November 2,2007 |  | 3.2           |  | 
|              |  |                                                                                                                                                             |  |                           | 
|4.1           |  | Specimen Stock Certificate.                                                                                                                                 |  | S-1/A                     |  | April 13,2000   |  | 4.1           |  | 
|              |  |                                                                                                                                                             |  |                           | 
|10.1          |  | Purchase and Sale Agreement and Escrow Instructions dated November 5, 1999 between Sunrise and Enzo Drive, LLC.                                             |  | S-1                       |  | March 9,2000    |  | 10.2          |  | 
|              |  |                                                                                                                                                             |  |                           | 
|10.2          |  | Form of Indemnification Agreement between Sunrise and each of its Officers and Directors.                                                                  |  | S-1                       |  | March 9,2000    |  | 10.6          |  | 
|              |  |                                                                                                                                                             |  |                           | 
|10.3          |  | 2000 Stock Option Plan.                                                                                                                                    |  | S-1/A                     |  | April 13,2000   |  | 10.7          |  | 
|              |  |                                                                                                                                                             |  |                           | 
|10.4          |  | 2000 Employee Stock Purchase Plan.                                                                                                                         |  | S-1/A                     |  | April 13,2000   |  | 10.8          |  | 
|              |  |                                                                                                                                                             |  |                           | 
|10.5          |  | Form of Nonstatutory Stock Option Agreement.                                                                                                               |  | S-8                       |  | August 8,2000   |  | 99.3          |  | 
|              |  |                                                                                                                                                             |  |                           | 
|10.6          |  | Form of Incentive Stock Option Agreement.                                                                                                                  |  | S-8                       |  | August 8,2000   |  | 99.4          |  | 
|              |  |                                                                                                                                                             |  |                           | 
|10.7          |  | Amended and Restated Employment Terms signed by the Company and Richard Kent dated February 9, 2005.                                                       |  | 8-K                       |  | February 8,2005 |  | 10.01         |  | 
|              |  |                                                                                                                                                             |  |                           | 
|10.8          |  | Employment Offer Letter Supplement signed by the Company and Richard Kent dated February 4, 2005.                                                          |  | 8-K                       |  | February 8,2005 |  | 10.02         |  | 
|              |  |                                                                                                                                                             |  |                           | 
|10.9          |  | Employment Offer Letter signed by the Company and Richard Kent dated January 27, 2005.                                                                     |  | 8-K                       |  | February 8,2005 |  | 10.03         |  | 
|              |  |                                                                                                                                                             |  |                           | 
|10.10         |  | Form of Nonstatutory Stock Option Agreement Addendum between the Company and Richard Kent dated February 8, 2005.                                          |  | 8-K                       |  | February 8,2005 |  | 10.04         |  | 
|              |  |                                                                                                                                                             |  |                           | 
|10.11         |  | Confidential Settlement Agreement made and entered into as of August 30, 2005 by and among Sunrise Telecom Incorporated, Acterna LLC and JDS Uniphase
Corp. |  | 10-Q                      |  | November 2,2007 |  | 10.01         |  | 
|10.12         |  | Settlement Agreement dated as of October 30, 2008 by and between Sunrise Telecom Incorporated and Wind River, Inc.                                          |  | 8-K                       |  | November 5,2007 |  | 99.1          |  | 
|              |  |                                                                                                                                                             |  |                           | 
|10.13         |  | Target Application License Agreement dated as of October 30, 2008 by and between Sunrise Telecom Incorporated and Winder River,
Inc.                        |  | 8-K                       |  | November 5,2008 |  | 99.2          |  | 



106



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##### Table of Contents

|              |  |                                                                                                                                                                                                        |  |                           |  |                  |  |               |  |  
|------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ------------------------- |  | ---------------- |  | ------------- |  | -
|ExhibitNumber |  | Description                                                                                                                                                                                            |  | Incorporated by Reference
|              |  | Form                                                                                                                                                                                                   |  | Date                      |  | ExhibitNumber    |  | FiledHerewith
|10.14         |  | Change of Control Severance Plan, effective June 21, 2006.                                                                                                                                            |  | 8-K                       |  | June 26,2006     |  | 10.01         |  |  
|              |  |                                                                                                                                                                                                        |  |                           | 
|10.15         |  | Separation Agreement between Sunrise Telecom Incorporated and Gerhard Beenen dated July 16, 2008.                                                                                                     |  | 8-K                       |  | July 21,2008     |  | 99.1          |  |  
|10.16         |  | Management By Objective Plan (effective January 1, 2007).                                                                                                                                             |  | 10-K                      |  | November 2,2007  |  | 10.22         |  |  
|              |  |                                                                                                                                                                                                        |  |                           | 
|10.17         |  | Loan and Security Agreement dated as of August 13, 2007 among Silicon Valley Bank, Sunrise Telecom Incorporated and Sunrise Telecom Broadband,
Inc.                                                    |  | 8-K                       |  | August 13,2007   |  | 10.01         |  |  
|              |  |                                                                                                                                                                                                        |  |                           | 
|10.18         |  | Amendment No. 1 to Loan and Security Agreement by and among Silicon Valley Bank, Sunrise Telecom Incorporated and Sunrise Telecom Broadband, Inc. dated
as of December 28, 2007.                       |  | 8-K                       |  | January 3,2008   |  | 10.01         |  |  
|              |  |                                                                                                                                                                                                        |  |                           | 
|10.19         |  | Amendment No. 2 and Limited Waiver to Loan and Security Agreement by and among Silicon Valley Bank, Sunrise Telecom Incorporated and Sunrise Telecom
Broadband, Inc., dated August 12, 2008.           |  | 8-K                       |  | August 14,2008   |  | 99.1          |  |  
|              |  |                                                                                                                                                                                                        |  |                           | 
|10.20         |  | Amendment No. 3, Consent and Limited Waiver to Loan and Security Agreement by and among Silicon Valley Bank, Sunrise Telecom Incorporated and Sunrise
Telecom Broadband, Inc., dated December 12, 2008 |  | 8-K                       |  | December 1,2008  |  | 99.1          |  |  
|              |  |                                                                                                                                                                                                        |  |                           | 
|10.21         |  | Incentive Stock Option Agreement between the Company and Robert Heintz dated July 21, 2004.                                                                                                           |  | 10-K                      |  | November 2,2007  |  | 10.24         |  |  
|              |  |                                                                                                                                                                                                        |  |                           | 
|10.22         |  | Addendum to 2000 Stock Plan Incentive Stock Option Agreement between the Company and Robert G. Heintz.                                                                                                |  | 10-K                      |  | November 2,2007  |  | 10.25         |  |  
|              |  |                                                                                                                                                                                                        |  |                           | 
|10.23         |  | Paul Marshall Letter to Compensation Committee Regarding Voluntary Surrender of Options dated April 29, 2008.                                                                                         |  | 10-K                      |  | October 2,2008   |  | 10.23         |  |  
|              |  |                                                                                                                                                                                                        |  |                           | 
|10.24         |  | Participation Purchase Agreement between the Company and LTE Innovations OY, Italy dated November 19, 2008                                                                                             |  | 8-K                       |  | November 24,2008 |  | 10.01         |  |  
|              |  |                                                                                                                                                                                                        |  |                           | 
|14.1          |  | Sunrise Telecom Code of Business Ethics and Conduct.                                                                                                                                                   |  | 8-K                       |  | August 14,2008   |  | 14.1          |  |  
|              |  |                                                                                                                                                                                                        |  |                           | 
|21.1          |  | List of Subsidiaries.                                                                                                                                                                                  |  |                           |  |                  |  |               |  | X
|              |  |                                                                                                                                                                                                        |  |                           | 
|23.1          |  | Consent of Independent Registered Public Accounting Firm.                                                                                                                                              |  |                           |  |                  |  |               |  | X
|              |  |                                                                                                                                                                                                        |  |                           | 
|31.1          |  | Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                |  |                           |  |                  |  |               |  | X
|              |  |                                                                                                                                                                                                        |  |                           | 
|31.2          |  | Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                |  |                           |  |                  |  |               |  | X
|              |  |                                                                                                                                                                                                        |  |                           | 
|32.1          |  | Certification of Principal Executive Officer and Principal Financial Officer Pursuant to 18 U.S.C. Section 1350.                                                                                       |  |                           |  |                  |  |               |  | X



| |  | Indicates management contract or compensatory plan, contract or arrangement.
|- |  | ----------------------------------------------------------------------------



107



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##### Table of Contents

Signatures



Pursuant to the requirements of Section 13 or 15(d) the Securities Exchange 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 May 1, 2009.



SUNRISE TELECOM INCORPORATEDBy:

/s/    PAUL A.
MARSHALLPAUL A. MARSHALLPresident and Chief Executive Officer




Pursuant to the
requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant in the capacities and on the dates indicated:



|                                                   |  |                                                                               |  |            
|-------------------------------------------------- |  | ----------------------------------------------------------------------------- |  | -----------
|Signature                                          |  | Title                                                                         |  | Date       
|                                                   |  |                                                                              
|/s/    PAUL A.
MARSHALL Paul A. Marshall           |  | President and Chief Executive Officer (Principal Executive Officer), Director |  | May 1, 2009
|                                                   |  |                                                                              
|/s/    RICHARD D.
KENT Richard D. Kent             |  | Chief Financial Officer (Principal Financial and Accounting Officer)          |  | May 1, 2009
|                                                   |  |                                                                              
|/s/    ROBERT C.
PFEIFFER Robert C. Pfeiffer       |  | Vice Chairman of the Board of Directors                                       |  | May 1, 2009
|                                                   |  |                                                                              
|/s/    PATRICK PENG-KOON
ANG Patrick Peng-Koon Ang |  | Director                                                                      |  | May 1, 2009
|                                                   |  |                                                                              
|/s/    LYRON
BENTOVIM Lyron Bentovim               |  | Director                                                                      |  | May 1, 2009
|                                                   |  |                                                                              
|/s/    HENRY P.
HUFF Henry P. Huff                 |  | Chairman of the Board of Directors                                            |  | May 1, 2009
|                                                   |  |                                                                              
|Jennifer J. Walt                                   |  | Director                                                                      |  | May 1, 2009



108



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##### Table of Contents

Exhibit Index



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



|              |  |                                                                                                                                                             |  |                           |  |                 |  |               |  | 
|------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------- |  | --------------- |  | ------------- |  | 
|ExhibitNumber |  | Description                                                                                                                                                 |  | Incorporated by Reference
|              |  | Form                                                                                                                                                        |  | Date                      |  | ExhibitNumber   |  | FiledHerewith
|3.1           |  | Amended and Restated Certificate of Incorporation                                                                                                           |  | 10-K                      |  | March 16,2001   |  | 3.1           |  | 
|              |  |                                                                                                                                                             |  |                           | 
|3.2           |  | Amended and Restated Bylaws.                                                                                                                                |  | 10-K                      |  | November 2,2007 |  | 3.2           |  | 
|              |  |                                                                                                                                                             |  |                           | 
|4.1           |  | Specimen Stock Certificate.                                                                                                                                 |  | S-1/A                     |  | April 13,2000   |  | 4.1           |  | 
|              |  |                                                                                                                                                             |  |                           | 
|10.1          |  | Purchase and Sale Agreement and Escrow Instructions dated November 5, 1999 between Sunrise and Enzo Drive, LLC.                                             |  | S-1                       |  | March 9,2000    |  | 10.2          |  | 
|              |  |                                                                                                                                                             |  |                           | 
|10.2          |  | Form of Indemnification Agreement between Sunrise and each of its Officers and Directors.                                                                  |  | S-1                       |  | March 9,2000    |  | 10.6          |  | 
|              |  |                                                                                                                                                             |  |                           | 
|10.3          |  | 2000 Stock Option Plan.                                                                                                                                    |  | S-1/A                     |  | April 13,2000   |  | 10.7          |  | 
|              |  |                                                                                                                                                             |  |                           | 
|10.4          |  | 2000 Employee Stock Purchase Plan.                                                                                                                         |  | S-1/A                     |  | April 13,2000   |  | 10.8          |  | 
|              |  |                                                                                                                                                             |  |                           | 
|10.5          |  | Form of Nonstatutory Stock Option Agreement.                                                                                                               |  | S-8                       |  | August 8,2000   |  | 99.3          |  | 
|              |  |                                                                                                                                                             |  |                           | 
|10.6          |  | Form of Incentive Stock Option Agreement.                                                                                                                  |  | S-8                       |  | August 8,2000   |  | 99.4          |  | 
|              |  |                                                                                                                                                             |  |                           | 
|10.7          |  | Amended and Restated Employment Terms signed by the Company and Richard Kent dated February 9, 2005.                                                       |  | 8-K                       |  | February 8,2005 |  | 10.01         |  | 
|              |  |                                                                                                                                                             |  |                           | 
|10.8          |  | Employment Offer Letter Supplement signed by the Company and Richard Kent dated February 4, 2005.                                                          |  | 8-K                       |  | February 8,2005 |  | 10.02         |  | 
|              |  |                                                                                                                                                             |  |                           | 
|10.9          |  | Employment Offer Letter signed by the Company and Richard Kent dated January 27, 2005.                                                                     |  | 8-K                       |  | February 8,2005 |  | 10.03         |  | 
|              |  |                                                                                                                                                             |  |                           | 
|10.10         |  | Form of Nonstatutory Stock Option Agreement Addendum between the Company and Richard Kent dated February 8, 2005.                                          |  | 8-K                       |  | February 8,2005 |  | 10.04         |  | 
|              |  |                                                                                                                                                             |  |                           | 
|10.11         |  | Confidential Settlement Agreement made and entered into as of August 30, 2005 by and among Sunrise Telecom Incorporated, Acterna LLC and JDS Uniphase Corp. |  | 10-Q                      |  | November 2,2007 |  | 10.01         |  | 
|              |  |                                                                                                                                                             |  |                           | 
|10.12         |  | Settlement Agreement dated as of October 30, 2008 by and between Sunrise Telecom Incorporated and Wind River, Inc.                                          |  | 8-K                       |  | November 5,2007 |  | 99.1          |  | 
|              |  |                                                                                                                                                             |  |                           | 
|10.13         |  | Target Application License Agreement dated as of October 30, 2008 by and between Sunrise Telecom Incorporated and Winder River, Inc.                        |  | 8-K                       |  | November 5,2008 |  | 99.2          |  | 
|              |  |                                                                                                                                                             |  |                           | 
|10.14         |  | Change of Control Severance Plan, effective June 21, 2006.                                                                                                 |  | 8-K                       |  | June 26,2006    |  | 10.01         |  | 



109



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|              |  |                                                                                                                                                                                                        |  |                           |  |                  |  |               |  |  
|------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ------------------------- |  | ---------------- |  | ------------- |  | -
|ExhibitNumber |  | Description                                                                                                                                                                                            |  | Incorporated by Reference
|              |  | Form                                                                                                                                                                                                   |  | Date                      |  | ExhibitNumber    |  | FiledHerewith
|10.15         |  | Separation Agreement between Sunrise Telecom Incorporated and Gerhard Beenen dated July 16, 2008.                                                                                                     |  | 8-K                       |  | July 21, 2008    |  | 99.1          |  |  
|              |  |                                                                                                                                                                                                        |  |                           | 
|10.16         |  | Management By Objective Plan (effective January 1, 2007).                                                                                                                                             |  | 10-K                      |  | November 2,2007  |  | 10.22         |  |  
|              |  |                                                                                                                                                                                                        |  |                           | 
|10.17         |  | Loan and Security Agreement dated as of August 13, 2007 among Silicon Valley Bank, Sunrise Telecom Incorporated and Sunrise Telecom Broadband, Inc.                                                    |  | 8-K                       |  | August 13,2007   |  | 10.01         |  |  
|              |  |                                                                                                                                                                                                        |  |                           | 
|10.18         |  | Amendment No. 1 to Loan and Security Agreement by and among Silicon Valley Bank, Sunrise Telecom Incorporated and Sunrise Telecom Broadband, Inc. dated as of December 28, 2007.                       |  | 8-K                       |  | January 3,2008   |  | 10.01         |  |  
|              |  |                                                                                                                                                                                                        |  |                           | 
|10.19         |  | Amendment No. 2 and Limited Waiver to Loan and Security Agreement by and among Silicon Valley Bank, Sunrise Telecom Incorporated and Sunrise Telecom Broadband,
Inc., dated August 12, 2008.           |  | 8-K                       |  | August 14,2008   |  | 99.1          |  |  
|              |  |                                                                                                                                                                                                        |  |                           | 
|10.20         |  | Amendment No. 3, Consent and Limited Waiver to Loan and Security Agreement by and among Silicon Valley Bank, Sunrise Telecom Incorporated and Sunrise Telecom Broadband, Inc., dated December 12,
2008 |  | 8-K                       |  | December 1,2008  |  | 99.1          |  |  
|              |  |                                                                                                                                                                                                        |  |                           | 
|10.21         |  | Incentive Stock Option Agreement between the Company and Robert Heintz dated July 21, 2004.                                                                                                           |  | 10-K                      |  | November 2,2007  |  | 10.24         |  |  
|              |  |                                                                                                                                                                                                        |  |                           | 
|10.22         |  | Addendum to 2000 Stock Plan Incentive Stock Option Agreement between the Company and Robert G. Heintz.                                                                                                |  | 10-K                      |  | November 2,2007  |  | 10.25         |  |  
|              |  |                                                                                                                                                                                                        |  |                           | 
|10.23         |  | Paul Marshall Letter to Compensation Committee Regarding Voluntary Surrender of Options dated April 29, 2008.                                                                                         |  | 10-K                      |  | October 2,2008   |  | 10.23         |  |  
|              |  |                                                                                                                                                                                                        |  |                           | 
|10.24         |  | Participation Purchase Agreement between the Company and LTE Innovations OY, Italy dated November 19, 2008                                                                                             |  | 8-K                       |  | November 24,2008 |  | 10.01         |  |  
|              |  |                                                                                                                                                                                                        |  |                           | 
|14.1          |  | Sunrise Telecom Code of Business Ethics and Conduct.                                                                                                                                                   |  | 8-K                       |  | August 14,2008   |  | 14.1          |  |  
|              |  |                                                                                                                                                                                                        |  |                           | 
|21.1          |  | List of Subsidiaries.                                                                                                                                                                                  |  |                           |  |                  |  |               |  | X
|              |  |                                                                                                                                                                                                        |  |                           | 
|23.1          |  | Consent of Independent Registered Public Accounting Firm.                                                                                                                                              |  |                           |  |                  |  |               |  | X
|              |  |                                                                                                                                                                                                        |  |                           | 
|31.1          |  | Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                |  |                           |  |                  |  |               |  | X
|              |  |                                                                                                                                                                                                        |  |                           | 
|31.2          |  | Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                |  |                           |  |                  |  |               |  | X
|              |  |                                                                                                                                                                                                        |  |                           | 
|32.1          |  | Certification of Principal Executive Officer and Principal Financial Officer Pursuant to 18 U.S.C. Section 1350.                                                                                       |  |                           |  |                  |  |               |  | X



| |  | Indicates management contract or compensatory plan, contract or arrangement.
|- |  | ----------------------------------------------------------------------------



110