<PAGE>

                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549

                                _______________

                                   FORM 10-K

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

                  For the fiscal year ended December 31, 2000
                        Commission File Number: 0-30757

                                _______________

                         Sunrise Telecom Incorporated
            (Exact name of Registrant as specified in its charter)

                                _______________

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

                22 Great Oaks Blvd., San Jose, California 95119
         (Address of principal executive offices, including zip code)


      Registrant's telephone number, including area code: (408) 363-8000

                                _______________

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

                   Common Stock, par value $0.001 per share
                               (Title of class)

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

              Yes [_]   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. [X]

At March 2, 2001, the aggregate market value of the Common Stock of the
registrant held by non-affiliates was $107,310,964.

As of March 2, 2001, there were 50,000,498 shares of the Registrant's Common
Stock outstanding, par value $0.001.

                      DOCUMENTS INCORPORATED BY REFERENCE

Portions of the proxy statement for the 2001 Annual Meeting of Shareholders are
incorporated by reference in Part III.
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                         SUNRISE TELECOM INCORPORATED
                      Index to Annual Report on Form 10-K
                  For the fiscal year ended December 31, 2000

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                                    PART I.

Item 1.   Business.............................................................     3
Item 2.   Properties...........................................................    16
Item 3.   Legal Proceedings....................................................    16
Item 4.   Submission of Matters to a Vote of Security Holders..................    16

                                    PART II.

Item 5.   Market for Registrant's Common Equity
          and Related Stockholder Matters......................................    17
Item 6.   Selected Financial Data..............................................    18
Item 7.   Management's Discussion and Analysis of Financial Condition
          and Results of Operation.............................................    19
Item 7A.  Quantitative and Qualitative Disclosures About Market Risk...........    34
Item 8.   Financial Statements and Supplementary Data..........................    35
Item 9.   Changes in and Disagreements with Accountants
          on Accounting and Financial Disclosure...............................    54

                                   PART III.

Item 10.  Directors and Executive Officers of the Registrant...................    54
Item 11.  Executive Compensation...............................................    54
Item 12.  Security Ownership of  Certain Beneficial Owners and Management......    54
Item 13.  Certain Relationships and Related Transactions.......................    54

                                    PART IV.

Item 14.  Exhibits, Financial Statement Schedules, and Reports on Form 8-K.....    55
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                          FORWARD-LOOKING STATEMENTS

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

                                    PART I.

Item 1. Business

Overview

     We manufacture and market service verification equipment that enables
service providers to pre-qualify facilities for services, verify newly installed
services and diagnose problems relating to wireline access services including
the new DSL services, fiber optics, cable TV networks and signaling networks. We
design our products to maximize technicians' effectiveness in the field and to
provide realistic network simulations for equipment manufacturers to test their
products. Our customers include incumbent local exchange carriers, competitive
local exchange carriers, and other service providers, network infrastructure
suppliers and installers throughout North America, Latin America, Europe and the
Asia/Pacific region.

     Our objective is to be a leading provider of service verification test
equipment for a broad range of applications within the global telecommunications
industry. The key elements of our strategy are to maintain our position in
wireline access verification including DSL service verification equipment, to
increase our penetration in the growing market for verification test equipment
for fiber optics and cable TV/ modem, to continue to expand our remote testing
applications, alarm and surveillance and central office testing applications, to
continue to expand internationally, to pursue strategic acquisitions and joint
ventures and to pursue follow-on sales opportunities by continuing to develop
and market hardware modules which can be inserted into the chassis of our
service verification equipment.

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


Recent Developments

Acquisition of Avantron Technologies, Inc.

     In January 2001, we acquired Avantron Technologies, Inc., a Canadian
company which specializes in the design and manufacture of spectrum analyzers
and performance monitoring systems for approximately Cdn. $17.6 million
(approximately U.S. $11.7 million) in cash and short-term notes payable. The
transaction will be accounted for under the purchase method.


Industry Background

Demand for High-Speed Data Access

     The telecommunications industry is undergoing fundamental change and growth
worldwide. Following the Telecommunications Act of 1996, competitive local
exchange carriers in the United States have been allowed to compete with
incumbent local exchange carriers, including the regional Bell operating
companies, for local carrier services. The regulatory developments in the
telecommunications industry have coincided with a surge in demand for high-speed
Internet access and data transmission service. 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

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services, such as highly graphical Web sites, audio, video and software
downloads. As an increasing number of Internet users access more and different
content, the ability to connect to and receive data from the Internet at high
speeds has become and will continue to be more important. Businesses have even
greater requirements for high-speed access to implement e-commerce strategies,
to access the Internet for a variety of purposes and to provide employees with
effective telecommuting capabilities. Outside the United States, there is
evidence to suggest that deregulation and the availability of broadband service
will continue and will follow the general trends in the United States.

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

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

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

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

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

     We believe that the increasing demand for high-speed bandwidth access and
the increasing development and availability to end users of technologies, such
as those described above, that support this access will propel the continued
growth of the Internet and of network service providers.

Challenges of High-Speed Data Services Deployment

     Regardless of the type of technology, the successful deployment of high-
speed broadband services poses several major challenges to service providers.
Physical impairments in cable TV lines and the copper telephone wires upon which
DSL technology depends can degrade the quality of the broadband access and, in
some cases, prevent any service from being delivered. Examples of physical
impairments include the following:

     .    shorts, which occur when the twisted pair conductors are touching each
          other or when one of them comes into contact with a grounded piece of
          metal;

     .    opens, which occur in a variety of ways including when a splice
          joining two cable segments fails or when a construction crew cuts
          through a buried cable ;

     .    power crosses, which occur when the telephone wire comes into contact
          with a live AC power source; and

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     .    wet cables, which occur when the aerial cable is subjected to rain or
          when the underground cable comes into contact with ground water and
          the pressurization system (if any) is inadequate to handle the
          leakage.

          In addition to the challenges stated above, asymmetric DSL, or ADSL,
service for residential end users faces its own particular challenges. ADSL is
designed to share the existing copper telephone wires using splitters or
microfilters at the customer premises and central office to break the single
line into two service appearances. Although a customer may have a working voice
line, several line impairments can kill ADSL service. These impairments include:

     .    load coils, which are inductors sometimes placed at 6000 foot
          intervals on telephone lines to optimize voice transmission;

     .    bridge taps, which occur when an existing spare telephone line to one
          customer location is "tapped" into prior to its endpoint to provide
          service to another location that has exhausted its supply of existing
          copper telephone lines, with the result that the line then has two
          separate customer ends, one at the original location and the other at
          the new location;

     .    AM radio interference, where the AM radio spectrum covers the same
          frequencies used in ADSL, high bit-rate DSL, or HDSL, high speed
          symmetric DSL, or SDSL, and T1 frequencies; and

     .    intra-cable crosstalk between high frequency service twisted pairs,
          where the twisted pairs act as long antennas placed in the same cable
          bundles, effectively transmitting onto one another creating excessive
          levels of background noise.

Because these problems may only be diagnosed and repaired effectively in the
field, many DSL service providers send field technicians to verify every line
before they hand over service to their customers.

          Cable TV and fiber optic networks face similar challenges. The cable
TV network was used originally to support one-way analog transmission of video
images. Now, digital cable TV networks also support voice and interactive high-
speed data services and customers require the same level of reliability as
provided by the existing telephone network. Potential problems for reliable and
high quality broadband access through cable TV lines include signal return path
interference and downstream signal degradation. As a result, cable TV providers
believe that cable plant pre-qualification and verification is a prerequisite
for the successful implementation of the technology. The widespread deployment
of fiber optic technologies into the cable TV and telecommunications access
networks also requires field verification equipment to verify and diagnose
service problems with these links.


The Need for Service Verification Equipment

          In order to deploy successfully and maintain the new 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 three types: field verification, remote testing and alarm and
surveillance.

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

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

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

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


The Sunrise Solution

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

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

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

     .    Handheld Design.  We design most of our products to be used in the
          field. Most of our field products weigh less than three pounds and
          offer handheld convenience. The compact, lightweight design of these
          products enable field technicians to access problems and verify line
          operation quickly. The SunSet OCx for example, is the first truly
          handheld asynchronous transfer mode or ATM-compatible fiber optic
          field test set for SONET, or synchronous optical network, which is the
          North American standard for transmissions using fiber optics, which is
          small enough to be grasped in the palm of the technician's hand.
          Similarly, our SunSet SDH offers the same flexibility as the SunSet
          OCx for different international standards.

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

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

     .    Improved Network Quality and Reliability.  Field and office
          technicians use our products to diagnose and locate a variety of
          problems and degradations in broadband service. For example, our xDSL
          products allow extensive diagnosis and analysis of the physical layers
          of the copper wire network. This allows service providers to identify
          and repair problems and to restore service efficiently. As a result,
          our products support our customers' need to provide high quality and
          reliable service.

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Strategy

          Our objective is to be a leading provider of service verification test
equipment for a broad range of applications within the global telecommunications
industry. The following are the key elements of our strategy:

     .    Maintain Our Position in DSL Service Verification Equipment. We intend
          to maintain our position in DSL service verification equipment by
          continuing to enhance the features and functionality of our existing
          products to serve our customers' rapidly changing needs. In
          particular, we expect to introduce additional products to address new
          DSL technologies. We also plan to expand our relationships with the
          top DSL service providers in the United States and in international
          markets. In addition, during 2000 we began to supply Lucent
          Technologies with a customized copper loop test head for their Stinger
          DSL Access Multiplexor product, which provides service providers with
          a DSL test solution for DSL line deployment, maintenance and
          diagnostics functions.

     .    Penetrate the Growing Market for Fiber Optic Cable Verification
          Testing Equipment.  We plan to capitalize on the expanding use of
          fiber optic cable in the telecommunications industry. Our SunSet OCx
          and SunSet SDH products support testing of higher bandwidth fiber
          optic networks and we plan to continue to increase the data rates
          supported by our optical products and develop additional products to
          support new network applications and technologies based on gigabit
          optical rates.

     .    Provide New Cable TV Verification Solutions.  We intend to penetrate
          the growing market for verification equipment for cable TV by adding
          features and functionality to increase the applicability of our
          product offerings. For example, in 2000 we introduced our CM1000,
          which employs modules to test digital networks with broadband access
          capabilities. Our modular architecture allows technicians to use a
          single unit to test a variety of cable TV/ modem services, and the
          flexibility of the modular architecture also protects a customer's
          investment in the test equipment. We expect to add new features in
          this modular form in the future. In January 2001, we acquired Avantron
          Technologies, a Canadian company which specializes in the design and
          manufacture of spectrum analyzers and performance monitoring systems.
          We intend to further address the convergence of voice and data across
          cable TV networks.

     .    Expand Beyond Field Verification Testing.  We intend to leverage our
          expertise in field verification testing to expand into remote testing,
          alarm and surveillance and central office testing applications. Our
          Ghepardo signaling products allow technicians to remotely access
          signaling probes distributed throughout the network. In addition, our
          Ghepardo products provide alarm and surveillance monitoring and enable
          equipment developers to exercise and evaluate their network elements'
          signaling and VoIP capabilities. We have also introduced products
          aimed at central office testing that are a natural extension of our
          field testing products. For example, the Copper Loop Test Head ("CLT")
          is a central office remote testing service for DSL services.

     .    Grow Internationally.  We plan to expand from our presence in over 60
          countries to meet the growing demand for high-speed access solutions
          and increase our brand recognition internationally. We believe
          existing service providers in Asia, Europe and Latin America will
          gradually convert their installed base of analog voice equipment to
          more efficient DSL equipment due to the advantages of the technology,
          its superior economics compared to readily available alternatives and
          the increasing demand for it. In 2000, we introduced a new fiber
          optics testing product, the Sunset SDH, which provides a combination
          of SONET/SDH for testing international gateway areas. We intend to add
          features to our existing products to make our solutions more
          attractive to service providers in other countries.

     .    Pursue Strategic Acquisitions.  We plan to continue to make
          acquisitions and enter into joint ventures on a selected basis. We
          expect that acquisitions and joint ventures may provide an efficient
          way of expanding our business, product offerings and access to
          different customers and market niches.

     .    Pursue Follow-On Sales Opportunities.  We plan to continue to develop
          hardware modules that allow our customers to increase the
          functionality of the products which they have purchased from us. For
          example, our CM1000 and SunSet xDSL products allow technicians to add
          hardware cartridges to test different types of services. This feature
          allows customers to protect their investment in test equipment and
          generates follow-on sales opportunities as we develop new modules in
          the future.

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Products

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


Broadband Access Service Verification Products

     Our broadband access service verification products support a wide range of
access technologies, including DSL, cable TV and fiber optics, and within each
of these technologies, different transmission types, frequencies or speeds and
protocols for U.S. and international standards.

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

     Sales of our DSL products accounted for 100% of our net sales in 1998,
approximately 98% in 1999 and approximately 80% in 2000. Although we have
recently introduced or acquired fiber optic, cable TV and signaling products, we
expect that sales of DSL products will continue to account for a majority of our
net sales for the foreseeable future.

     We offer a three-year warranty on our DSL and fiber optic products sold in
the United States and a one-year warranty for those sold overseas with a two-
year extended warranty option at the time of sale. We offer a one-year warranty
on our cable TV and signaling products.

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

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

     SunSet xDSL Full
     Chassis                  .    Handheld unit for DSL service verification that also supports the testing of lines
                                   for physical impairments. This module supports all Sunrise DSL modules to allow field
                                   technicians to test various types of DSL technologies with a single product.

     SunSet xDSL Light
     Chassis                  .    Handheld unit for DSL service verification only. This product supports all Sunrise
                                   DSL modules to allow field technicians to test various types of DSL technologies.

     xDSL RAM                 .    Rack-mount unit to be used in central office applications by central office
                                   technicians and frame technicians. The xDSL RAM holds up to six DSL modules for DSL
                                   service verification and supports the testing of lines for physical impairments.

     Copper Loop Test Head    .    Customized copper loop test head for Lucent Technologies' Stinger DSL Access
                                   Multiplexor product. Provides service providers with a DSL test solution for DSL line
                                   deployment, maintenance and diagnostics functions.

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

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

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

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

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

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<TABLE>
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 International DSL
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<C>                      <S>
                         We design international DSL products specifically for testing lines outside the North American
                         market and to support protocols common to the international market such as E1, a standard for
                         international digital transmission used by large businesses for broadband access.

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

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

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

     SunSet PDH               .    Handheld unit that supports transmission testing for E1 and higher transmission rates.

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Cable TV Products
-------------------------------------------------------------------------------------------------------------------------

     CR1200R                  .    Portable unit to support field transmission analysis for digital and analog cable TV
                                   networks for both inbound and outbound signals. It also finds common transmission
                                   problems in cable TV digital networks that would inhibit the networks' use for
                                   Internet services. The unit is water resistant, portable and can be used without
                                   additional equipment.

     CM-1000                  .    Handheld installation and troubleshooting unit that fully tests DOCSIS Cable Modem
                                   installations. The CM1000 uses a built-in cable modem to fully exercise the network
                                   on both the downstream and upstream paths. It communicates with the Cable Modem
                                   Termination System (CMTS) to characterize the digital performance in both directions.

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

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

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Fiber Optic Products
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     SunSet OCx               .    Handheld unit that supports transmission testing for SONET, synchronous optical
                                   network, a family of fiber optic transmission rates with many electrical digital
                                   signals with different capacities. It includes both electrical and optical signal
                                   testing and performs service verification for various services such as asynchronous
                                   transfer mode, a very high speed transmission technology, which allows telephone
                                   companies to mix formerly incompatible signals, such as voice, video, and data. The
                                   SunSet OCx is currently the smallest multi-rate optical test set available.

     SunSet SDH               .    Handheld unit that supports fiber optic transmission types, such as SONET and
                                   synchronous digital hierarchy, a set of international fiber-optic standards, as well
                                   as traditional North American and international digital transmission types. Also
                                   supports testing for asynchronous transfer mode. The SunSet SDH offers the ability to
                                   test SONET and synchronous digital hierarchy in a single unit and facilitates testing
                                   in areas where international and U.S. standards co-exist.

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

     VoIP Explorer            .    Portable unit that provides analysis and simulation for next generation Voice over IP
                                   networks using SIP (Session Initiation Protocol), MGCP (Media Gateway Control
                                   Protocol), and PacketCable's NCS (Network Call Signaling) protocols. Allows
                                   developers to test and stress VoIP equipment and enables service providers to
                                   thoroughly evaluate the performance of their networks prior to deployment in the
                                   field. The VoIP Explorer's bundled set of tools include quality of service
                                   measurements for each call, live call trace and audio monitoring, protocol analysis,
                                   as well as simulation and load generation.

-------------------------------------------------------------------------------------------------------------------------
</TABLE>

Customers

     Our customers include telecommunications service providers, network
infrastructure suppliers and installers, technicians and engineers in North
America, Latin America, Europe and the Asia/Pacific region. The following is a
selected list of our customers in 2000.

<TABLE>
<S>                                              <C>
  AT&T Corporation                               SBC Communications Inc. (consisting of
  AOL Time Warner, Inc.                          Ameritech Corporation, Nevada Bell, Pacific
  Allegiance Telecom, Inc.                       Bell, Southern New England Telephone, Advanced
  Bell Canada Enterprises, Inc.                  Solutions, Inc. and Southwestern Bell
  BellSouth Telecom, Inc.                        Telephone Company)
  Chunghwa Telecom Co., Ltd.                     Sprint Corporation
  Covad Communications Group, Inc.               Telefonica S.A.
  France Telecom                                 Telephonos de Mexico, S.A.
  Korea Telecom                                  Teligent, Inc.
  Lucent Technologies, Inc.                      Telkom SA, Ltd
  Network Telephone Corp.                        Verizon Communications, Inc.
</TABLE>

As of December 31, 2000, we had sold versions of our products to over 1,800
customers in over 60 countries. Affiliates of SBC Communications accounted for
approximately 41% of our net sales in 1999 and 16% in 2000. Additionally, in
2000, approximately 17% of our net sales were generated from an OEM product sold
to Solectron, a new customer who integrates this product into the Stinger DSLAM
that it manufactures for Lucent Technologies. Besides SBC Communications and
Solectron, no individual customer accounted for 10% or more of our net sales in
1998, 1999 or 2000. We expect that we will continue to depend upon a relatively
limited number of customers for substantially all of our revenues in future
periods. See "Item 7 --Factors Affecting Future Operating Results--Customer
Concentration."

Sales, Marketing and Customer Service

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

     In the United States, we sell our products through 15 manufacturers'
representatives companies who are supported by our in-house direct sales force.
Manufacturers' representatives are paid on a commission basis to sell our
products and have exclusive rights in their respective regions. Our
manufacturers' representatives solicit orders from the customer, and we ship our
products directly to the customer. We pay commissions once payment is received
from the customer. Our direct sales force consists of 20 employees who focus on
sales in the United States, including a team of regional sales managers who
direct the efforts of our manufacturers' representatives, regional account
managers who focus on specific accounts within a region and our Vice President
of North American Sales, who directs the sales effort in North America.

                                       11
<PAGE>

        Outside the United States, we sell our products through 90 independent
distributor organizations, which are directed by our regional directors of
marketing and sales. Once a sale is made, we sell our product to the distributor
who then resells the product to the end user. We sell our products to our
independent distributor organizations at a discount off our list price.
International sales were $12.0 million or approximately 42% in 1998, $12.2
million or approximately 20% in 1999 and $29.7 million or approximately 26% in
2000. We expect that international sales will continue to account for a
significant portion of our net sales in future periods. In addition to our
network of international distributors, we have sales people located in Beijing,
China; Tokyo, Japan; Seoul, Korea and Modena, Italy. Additionally, in January
2001 we acquired Avantron Technologies and now maintain a sales office in
Montreal, Canada and plan to open new offices in other locations in the future.
See "Item 7 --Factors Affecting Future Operating Results--Risks of International
Operations." For information regarding export sales and international
operations, see Note 14 of notes to consolidated financial statements of
Sunrise.

        We sell our products predominantly to large telecommunications service
providers. These prospective customers generally commit significant resources to
an evaluation of our and our competitors' products and require each vendor to
expend substantial time, effort and money educating the prospective customer
about the value of the vendor's solutions. Consequently, sales to this type of
customer generally require an extensive sales effort throughout the prospective
customer's organization and final approval by an executive officer or other
senior level employee. The result is lengthy sales and implementation cycles,
which make sales forecasting difficult. In addition, even after a large
telecommunications service provider has approved our product for purchase, their
future purchases are uncertain because we do not enter into long-term supply
agreements or requirements contracts with those parties. Delays associated with
potential customers' internal approval and contracting procedures, procurement
practices, 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 24
months.

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

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

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

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

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

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

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

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

     .  providing rapid instrument repair services;

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

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

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

                                       12
<PAGE>

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 carrier, voice and data
switching technology, local loop equipment and operations support systems. We
spent approximately $6.2 million on research and development in 1998, $10.7
million in 1999 and $17.6 million in 2000. Research and development represents
our largest direct employment expense. At December 31, 2000, we had a total of
117 employees engaged in research and development in San Jose, California;
Norcross, Georgia; Springfield, Virginia; and Modena, Italy.

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


Regulations and Industry Standards

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


Manufacturing

       Our production process consists of planning, procurement, fabrication,
rework, system assembly, system final test, software option customization and
shipping. We purchase substantially all parts, including resistors, integrated
circuit boards, LCDs and printed circuit boards, from distributors and
manufacturers worldwide. We package these parts into kits and send them to
contract manufacturers to assemble them into printed circuit boards. We perform
substantially all remaining manufacturing operations. We maintain sourcing and
manufacturing operations in San Jose, California; Norcross, Georgia; Taipei,
Taiwan and Modena, Italy. In January 2001, we acquired Avantron Technologies,
and now also maintain manufacturing facilities in Montreal, Canada. In 2000, we
performed the majority of sourcing, contract manufacturing and final assembly in
San Jose, California. We have obtained ISO-9001 certification for our San Jose,
California and Modena, Italy operations.

       In 1998, we formed a subsidiary in Taiwan, Taiwan Sunrise Telecom Company
Limited, as a turn-key manufacturer and local procurement operation. We also own
an equity interest of approximately thirteen percent in Top Union, an assembly
company located in Taipei, Taiwan that performs module assembly as part of the
Taiwan Sunrise Telecom Company Limited turn-key operation. We intend to increase
the use of outsource manufacturing for our more mature products. We believe that
outsourcing will lower our manufacturing costs, in particular our labor costs,
provide us with more flexibility to scale our operations to meet changing demand
and allow us to focus our engineering resources on new product development and
product enhancements.

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

                                       13
<PAGE>

Competition

       The market for field verification test equipment is fragmented and
intensely competitive, both in and outside the United States, and is subject to
rapid technological change, evolving industry standards and regulatory
developments. 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
----------------                    ---------------------
Digital Subscriber Line             Acterna Corporation, Agilent Technologies,
                                    Inc., Tollgrade Communications, Inc. and
                                    Turnstone Systems, Inc.

Fiber Optics SONET/SDH              Digital Lightwave, Inc., Acterna Corporation
                                    and Agilent Technologies, Inc.

Cable TV                            Acterna Corporation and Agilent
                                    Technologies, Inc.

Signaling                           Inet Technologies, Inc. and GN Nettest


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

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

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

    .  speed of new product introductions to market;

    .  depth of product functionality;

    .  ease of installation, integration and use;

    .  system reliability and performance;

    .  price and financing terms;

    .  technical support and customer service;

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

    .  compliance with government and industry standards.


Intellectual Property and Proprietary Technology

       Our intellectual property, including our proprietary technology,
processes and know-how, trade secrets, patents, trademarks and copyrights, is
important to our business and to our continued success. We have two patents
relating to communications testers, and we have filed several applications for
additional patents with the U.S. Patent and Trademark Office. Additionally, our
newly acquired subsidiary, Avantron Technologies, has three additional patent
applications pending that relate to spectrum analyzers. 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 form of this intellectual property and proprietary technology is
material to our business. In addition, we incorporate software that we license
from several third party sources into our products. These licenses generally
renew automatically on an annual basis. We believe that alternative technologies
for this licensed software are available both domestically and internationally.

                                       14
<PAGE>

        We protect our proprietary technology by:

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

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

     .  entering into confidentiality agreements with our employees.

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


Employees

        At December 31, 2000, we had a total of 353 full-time employees,
consisting of 275 in the United States, 27 in Taiwan and 51 in Italy, and
approximately 14 temporary employees. Of the total permanent employees, 117 were
engaged in research and development, 81 were engaged in sales, marketing and
customer support, 108 were engaged in operations and 47 were engaged in
administration and finance. Additionally, in January 2001, we acquired Avantron
Technologies, a Canadian company with 41 employees, the majority of whom are
engineers and technologists. None of our employees is subject to a collective
bargaining agreement. The employees of our Pro.Tel subsidiary are protected by
certain provisions of Italian law. We believe that our relations with our
employees are good. See "Item 7 --Factors Affecting Future Operating Results--
Need for New Personnel" and "--Dependence on Key Employees."


Executive Officers

        The names and ages of our executive officers as of December 31, 2000 are
as follows:

Name                                Age  Position(s)
----                                ---  -----------
Paul Ker-Chin Chang...............   42  Chief Executive Officer, President and
                                         Director

Paul A. Marshall..................   43  Chief Operating Officer, Vice President
                                         Marketing and Director

Robert C. Pfeiffer................   38  Chief Technology Officer, Vice
                                         President Engineering and Director

Peter L. Eidelman.................   34  Chief Financial Officer and Treasurer

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

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

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

        Robert C. Pfeiffer co-founded Sunrise in October 1991 and has served as
Vice President of Engineering and director since that time. Additionally, Mr.
Pfeiffer served Sunrise as Secretary from October 1991 until July 2000 and Chief

                                       15
<PAGE>

Technology Officer since December 1999. From June 1989 to October 1991, Mr.
Pfeiffer was employed as a Telecommunication R&D Engineer for the Wiltron
division of Anritsu Corporation. Mr. Pfeiffer holds an M.B.A. and a B.S. in
Electrical Engineering from Santa Clara University. Mr. Pfeiffer has announced
that he will retire effective March 22, 2001.

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


Item 2. Properties

        Our current headquarters and manufacturing facility occupies
approximately 47,000 square feet in San Jose, California under a lease that
expires in November 2004. We are building near our current headquarters a new
91,700 square foot facility to accommodate our need for an increase in
manufacturing capacity and employees. The new facility is scheduled for
completion in March 2001. We also lease approximately 16,500 square feet of
office and manufacturing space in Norcross, Georgia; approximately 7,300 square
feet of office space in Springfield, Virginia; approximately 10,000 square feet
of office and manufacturing space in Modena, Italy; 6,000 square feet of office
space in Taipei, Taiwan; a liaison office in Beijing, China; and sales offices
in Seoul, Korea and Tokyo, Japan. Additionally, as a result of our acquisition
of Avantron Technologies in January 2001, we now lease an additional 10,000
square feet of office and manufacturing space in Montreal, Canada.


Item 3. Legal Proceedings

        We are not currently a party to any material legal proceedings. In
September 1999, the United States District Court for the Northern District of
California entered final judgment against Electrodata, Inc. stating that it had
literally infringed our U.S. Patent No. 5,619,489, entitled Handheld
Communications Tester. The court also entered judgment against Electrodata that
the patent claims at issue were valid and the patent was enforceable.
Electrodata thereupon appealed. On January 9, 2001, the United States Court of
Appeals for the Federal Circuit heard Electrodata's appeal. On January 13, 2001,
the Federal Circuit affirmed the judgment of the District Court. Electrodata has
since submitted payment to us in satisfaction of the judgment.


Item 4. Submission of matters to a vote of security holders.

        None.

                                       16
<PAGE>

                                   PART II.

Item 5. Market for Registrant's common equity and related stockholder matters.

Information About Our Common Stock

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

2000                                                       High    Low
----                                                       ----    ---
   Third Quarter........................................  $61.00  $27.50
   Fourth Quarter.......................................  $26.00  $ 3.25

       As of December 31, 2000, there were approximately 133 holders of record
of our common stock.

       We declared and paid a $0.015 per share cash dividend on our common stock
in 1999. We did not declare or pay any cash dividend on our common stock in
2000. In the future, our board of directors will determine whether we will pay
dividends on our common stock. Our line of credit restricts the payment of
dividends on our common stock to dividends payable in common stock and to $1.0
million payable in any one fiscal year.

Use of Our Initial Public Offering Proceeds

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

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

       We have used $2.4 million of the net proceeds from the offering to repay
amounts drawn under our line of credit and $979,000 to repay notes payable.
Additionally, in January 2001 we used $10.2 million of the net proceeds for the
acquisition of Avantron Technologies. Funds that have not been used have been
invested in money market funds, auction rate securities and marketable debt
securities. None of the costs and expenses related to the offering were paid
directly or indirectly to any director, officer, general partner of the Company
or its associates, persons owning 10 percent or more of any class of equity
securities of the Company or an affiliate of the Company.

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

                                       17
<PAGE>

Item 6. Selected Financial Data

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

<TABLE>
<CAPTION>
                                                                                Year Ended December 31,
                                                                                -----------------------
                                                                      1996     1997     1998      1999       2000
                                                                      ----     ----     ----      ----       ----
                                                                         (in thousands, except per share data)
<S>                                                                 <C>      <C>      <C>       <C>        <C>
Consolidated Statement of Net Income:
  Net sales....................................................     $20,174  $29,064  $28,535   $61,465    $ 113,481
  Cost of sales................................................       5,189    7,652    7,590    14,736       32,994
                                                                    -------  -------  -------   -------    ---------

     Gross profit..............................................      14,985   21,412   20,945    46,729       80,487

 Operating expenses:
     Research and development..................................       1,019    5,892    6,203    10,694       17,555
     Sales and marketing.......................................       5,444    7,645    7,764    15,215       22,694
     General and administrative................................       1,019    1,632    2,243     3,912        9,790
                                                                    -------  -------  -------   -------    ---------

     Total operating expenses..................................       9,514   15,169   16,210    29,821       50,039
                                                                    -------  -------  -------   -------    ---------

     Income from operations....................................       5,471    6,243    4,735    16,908       30,448
 Other income, net.............................................          51      112      224       327        1,909
                                                                    -------  -------  -------   -------    ---------

     Income before income taxes................................       5,522    6,355    4,959    17,235       32,357
 Income taxes..................................................       2,081    1,899    1,588     6,291       11,972
                                                                    -------  -------  -------   -------    ---------

          Net income...........................................     $ 3,441  $ 4,456  $ 3,371   $10,944    $  20,385
                                                                    =======  =======  =======   =======    =========

 Dividends.....................................................     $    60  $    89  $    89   $   223    $      --
                                                                    =======  =======  =======   =======    =========

 Earnings per share: /(1)/
          Basic................................................     $  0.08  $  0.10  $  0.08   $  0.25    $    0.43
                                                                    =======  =======  =======   =======    =========
          Diluted..............................................     $  0.08  $  0.10  $  0.07   $  0.24    $    0.41
                                                                    =======  =======  =======   =======    =========

 Shares used in computing earnings per share: /(1)/
          Basic................................................      44,954   44,645   44,537    44,667       47,374
                                                                    =======  =======  =======   =======     ========
          Diluted..............................................      45,071   44,896   45,003    45,824       49,610
                                                                    =======  =======  =======   =======     ========

                                                                                      December 31,
                                                                                      -----------
                                                                      1996     1997     1998      1999       2000
                                                                      ----     ----     ----      ----       ----
                                                                                             (in thousands)
Consolidated Balance Sheet Data:
   Cash and cash equivalents...................................     $   638  $ 2,409  $ 5,030   $ 8,615    $ 56,298
   Working capital.............................................       4,832    8,087   10,164    16,360      81,967
   Total assets................................................      11,260   14,678   17,193    38,266     125,556
   Notes payable, less current portion.........................          --       --       --       638       1,047
   Total stockholders' equity..................................       6,402   10,462   13,570    25,471     105,644
</TABLE>

_______________________

(1) See Note 1 of the notes to consolidated financial statements for a detailed
    explanation of the determination of the number of shares used to compute
    basic and diluted earnings per share.

                                       18
<PAGE>

Item 7. Managements' Discussion and Analysis of Financial Condition and Results
        of Operation.

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

Overview

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

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

Sources of Net Sales

       We sell our products predominantly to large telecommunications service
providers. These prospective customers generally commit significant resources to
an evaluation of our and our competitors' products and require each vendor to
expend substantial time, effort and money educating the prospective customer
about the value of the proposed solutions. Delays associated with potential
customers' internal approval and contracting procedures, procurement practices,
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 24 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.

       To date, a significant portion of our net sales has resulted from a small
number of relatively large orders from a limited number of customers. In 1999
and 2000, we sold approximately $25.8 million and $18.0 million, respectively,
of our products to affiliates of SBC Communications, which represented
approximately 41% and 16%, respectively, of our net sales. In 2000, sales to SBC
Communications affiliates decreased from the prior year primarily due to a
higher sales volume of light chassis DSL products which have lower average
selling prices than full chassis DSL products. As a percentage of sales, sales
to SBC Communications affiliates have decreased due to our expanding customer
base and the growth of our business as well as a change in the product mix
purchased. Additionally, in 2000, approximately $19.6 million or 17% of our net
sales were generated from an OEM product sold to Solectron, a new customer who
integrates this product into the Stinger DSLAM that it manufactures for Lucent
Technologies. We anticipate that our operating results for any given period will
continue to be dependent to a significant extent on large purchase orders, which
can be delayed or cancelled by our customers without penalty. In addition, we
anticipate that our operating results for a given period will continue to be
dependent on a small number of customers.

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

       During the last three years, a substantial portion of our net sales were
derived from customers located outside of the United States, and we believe that
continued growth will require expansion of our sales in international markets.
Currently, we maintain a procurement support and manufacturing facility in
Taipei, Taiwan, a representative liaison office in Beijing, China, a foreign
sales corporation in Barbados and manufacturing, research and development and
sales facilities in Modena, Italy and sales offices in Tokyo, Japan and Seoul,
Korea. As a result of our acquisition of Avantron Technologies in January 2001,
we now maintain research and development and sales facilities in Montreal,
Canada and expect to establish additional international sales and other offices
in the future. Prior to our acquisition of Pro.Tel, international sales have
been

                                       19
<PAGE>

denominated solely in U.S. dollars and, accordingly, we have not historically
been exposed to fluctuations in non-U.S. currency exchange rates related to
these sales activities. Since our acquisition of Pro.Tel in February 2000, we
now have a small amount of sales denominated in Euro and have begun to use
derivative instruments to hedge our foreign exchange risks. To date, foreign
exchange risks from these sales have not been material to our operations. We
have also been exposed to fluctuations in non-U.S. currency exchange rates
related to our procurement activities in Taiwan. In the future, we expect that a
growing portion of international sales may be denominated in currencies other
than U.S. dollars, thereby exposing us to gains and losses on non-U.S. currency
transactions. We may choose to limit such exposure by entering into various
hedging strategies. See "Factors Affecting Future Operating Results--Risks of
International Operations."

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


Cost of Sales

       Our cost of sales consist primarily of:

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

    .  production wages, taxes and benefits;

    .  production allocated occupancy costs;

    .  warranty costs;

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

    .  scrapped material used in the production process.

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

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

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


Operating Costs

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

                                       20
<PAGE>

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

     In 1999 and 2000, we recorded deferred stock-based compensation expense of
approximately $205,000 and $1,954,000, respectively, related to the grant of
options to purchase our common stock at exercise prices subsequently deemed to
be below fair market value. Total compensation expense related to options
granted in 1999 and the first quarter of 2000 will be amortized on a straight-
line basis to the departments in which the employees received these below market
option grants over the respective four-year vesting periods of the options. In
1999 and 2000, we allocated amortization of deferred stock-based compensation
expense of $17,000 and $264,000, respectively, to cost of sales, $111,000 and
$773,000, respectively, to research and development expense, $58,000 and
$586,000, respectively, to sales and marketing expense and $18,000 and $331,000,
respectively, to general and administrative expense. At December 31, 2000,
approximately $6,611,000 of deferred stock-based compensation expense remained
to be amortized at a rate not exceeding $549,000 per quarter.

Acquisitions

     In July 1999, we acquired Hukk Engineering ("Hukk"), a manufacturer of
digital cable testing equipment. We accounted for the Hukk Engineering
acquisition as a purchase and recorded goodwill and other intangibles of
approximately $2.5 million to be amortized on a straight-line basis over the
next five years. In February 2000, we acquired Pro.Tel. S.r.l. ("Pro.Tel"), an
Italian manufacturer of distributed network signaling analysis equipment, and
its U.S. affiliate and the assets of an unrelated U.S. distributor. We accounted
for the Pro.Tel acquisition as a purchase and recorded goodwill and other
intangibles of approximately $9.4 million to be amortized on a straight-line
basis over the next two to five years, based on the expected life of the
underlying assets. In addition, we recorded stock-based compensation for stock
options granted to employees of Pro.Tel in the first quarter of 2000 in the
amount of approximately $6.5 million to be amortized on a straight-line basis
over their four year vesting period. In January 2001, we acquired all of the
outstanding stock of Avantron Technologies, a Canadian company which specializes
in the design and manufacture of spectrum analyzers and performance monitoring
systems for approximately Cdn. $17.6 million (approximately U.S. $11.7 million)
in cash and short-term notes payable. The transaction will be accounted for
under the purchase method. We believe that acquisitions and joint ventures may
be an important part of our growth and competitive strategy. "Factors Affecting
Future Operating Results--Acquisitions."

Results of Operations

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

<TABLE>
<CAPTION>
                                                                                          Percentage of Net Sales
                                                                                          -----------------------

                                                                                         Year Ended December 31,
                                                                                         -----------------------
                                                                               1998              1999              2000
                                                                               -----             -----             -----
  <S>                                                                          <C>               <C>               <C>
  Net sales...........................................................           100.0%            100.0%            100.0%
  Cost of sales.......................................................            26.6              24.0              29.1
                                                                                 -----             -----             -----
   Gross profit.......................................................            73.4              76.0              70.9
  Operating expenses:
   Research and development...........................................            21.7              17.4              15.5
   Sales and marketing................................................            27.2              24.7              20.0
   General and administrative.........................................             7.9               6.4               8.6
                                                                                 -----             -----             -----
   Total operating expenses...........................................            56.8              48.5              44.1
                                                                                 -----             -----             -----
   Income from operations.............................................            16.6              27.5              26.8
  Other income, net...................................................             0.8               0.5               1.7
                                                                                 -----             -----             -----
   Income before income taxes.........................................            17.4              28.0              28.5
  Income taxes........................................................             5.6              10.2              10.5
                                                                                 -----             -----             -----
   Net income.........................................................            11.8%             17.8%             18.0%
                                                                                 =====             =====             =====
</TABLE>


                                       21
<PAGE>

Comparison of Years Ended December 31, 1999 and 2000

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

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

     International sales increased to approximately $29.7 million, or 26% of net
sales in 2000 from approximately $12.2 million or 20% of net sales in 1999. The
increase in international sales is primarily due to increased sales of our DSL
product line and our expanded international operations.

     Cost of Sales. Cost of sales consists primarily of direct material,
warranty and personnel costs related to the manufacturing of our products and
allocated overhead. Cost of sales increased approximately 124% from $14.7
million in 1999 to $33.0 million in 2000. Cost of sales represented
approximately 24% of net sales in 1999 and approximately 29% in 2000. The
increase as a percentage of net sales resulted primarily from a higher sales
volume of light chassis DSL products which have lower average selling prices
than full chassis DSL products and the introduction of our new fiber optics and
cable TV product lines which generated lower gross margins than the mix of
products sold during the prior year. We expect that cost of sales expenses will
continue to increase as a percentage of sales for the foreseeable future as our
OEM relationships expand and our light chassis DSL and cable TV products
increase as a percentage of our overall product mix.

     Research and Development. Research and development expenses consist
primarily of the costs of payroll and benefits for engineers, equipment and
consulting services. Research and development expenses increased approximately
64% from $10.7 million in 1999 to $17.6 million in 2000. The increase in
absolute dollars was primarily due to costs associated with increased staffing
dedicated to research and development activities. These research and development
expenses represented approximately 17% of net sales during 1999 and
approximately 15% in 2000. The decrease as a percentage of net sales in 2000 was
primarily attributable to increased product sales relative to research and
development expenditures. We expect that research and development expenses will
increase in absolute dollars for the foreseeable future as we intend to continue
to invest in product development.

     Sales and Marketing. Sales and marketing expenses consist primarily of
manufacturers' representatives and direct sales commissions, personnel, travel
and facilities expenses related to sales and marketing, and trade show and
advertising expenses. Sales and marketing expenses increased approximately 49%
from $15.2 million in 1999 to $22.7 million in 2000. The increase in absolute
dollars in 2000 was primarily related to increased staffing to support expanded
product offerings and increased marketing and promotional activities. These
sales and marketing expenses represented approximately 25% of net sales during
1999 and approximately 20% in 2000.  The decrease as a percentage of net sales
during 2000 was primarily due to increased OEM sales which have led to lower
commission, occupancy, and salary and related expenses as a percentage of sales.
We expect that sales and marketing expenses will increase in absolute dollars
for the foreseeable future as we intend to continue to invest in our sales and
marketing capabilities.

     General and Administrative. General and administrative expenses consist
primarily of personnel, facilities and other costs of our finance and
administrative departments, legal and accounting expenses as well as the
amortization of goodwill and other intangible assets related to acquisitions
treated as purchase business combinations. General and administrative expenses
increased approximately 150% from $3.9 million in 1999 to $9.8 million in 2000.
These general and administrative expenses represented approximately 6% of net
sales during 1999 and approximately 9% in 2000.  The increase in both absolute
dollars and as a percentage of net sales was primarily related to increased
staffing and related costs associated with the growth of our business,
amortization of goodwill and other intangible assets related to recent business
acquisitions and amortization of deferred stock-based compensation. We
anticipate that general and administrative expenses will continue to increase in
absolute dollars for the foreseeable future as we accommodate our growth, add
related infrastructure and incur expenses related to being a public company.

                                       22
<PAGE>

     Other Income, Net. Other income, net represents primarily interest earned
on cash and investment balances net of interest expense on notes payable and
short-term borrowings under our line of credit. In 2000, we also recorded a
$381,000 gain on a forward contract. Other income, net increased from $327,000
in 1999 to $1.9 million in 2000. The increase in 2000 resulted primarily from
increased interest earned on higher balances of cash and cash equivalents
resulting from increased cash flow from operations, a gain on a forward contract
and interest income earned on the net proceeds received from our initial public
offering in July 2000.

     Income Taxes. Income taxes consist of federal, state and international
income taxes. We recorded income tax expense of $6.3 million in 1999 and $12.0
million in 2000. Our effective income tax rates were 32% in 1999 and 37% in
2000. The effective income tax rate is higher in 2000 than in 1999 primarily due
to higher levels of income, charges from non-cash amortization of goodwill and
deferred stock-based compensation, and an increased concentration of sales in
local jurisdictions with higher tax rates.

Comparison of Years Ended December 31, 1998 and 1999

     Net Sales. Net sales increased approximately 115.4% from $28.5 million in
1998 to $61.5 million in 1999. Sales of our xDSL products accounted for
approximately $30.0 million of the $33.0 million increase in net sales in 1999.
Sales to affiliates of SBC Communications represented approximately $22.8
million of the increase in 1999. We also introduced two new products in the
second half of 1999, the SunSet OCx and SS500, to address the fiber optic
transmissions testing market.

     Cost of Sales. Cost of sales increased approximately 94.2% from $7.6
million in 1998 to $14.7 million in 1999. Cost of sales represented
approximately 26.6% of net sales in 1998 and approximately 24.0% in 1999. The
decrease as a percentage of net sales during 1999 resulted primarily from an
increase in domestic sales, which have higher gross margins than international
sales as a percentage of net sales and lower manufacturing costs due to volume
discounts.

     Research and Development. Research and development expenses increased
approximately 72.4% from $6.2 million in 1998 to $10.7 million in 1999. The
increase in absolute dollars was primarily due to costs associated with
increased staffing dedicated to research and development activities. These
research and development expenses represented approximately 21.7% of net sales
during 1998 and approximately 17.4% in 1999. The decrease as a percentage of net
sales in 1999 was primarily attributable to increased product sales relative to
research and development expenditures.

     Sales and Marketing. Sales and marketing expenses increased approximately
96.0% from $7.8 million in 1998 to $15.2 million in 1999. The increase in
absolute dollars in 1999 was primarily related to increased staffing to support
expanded product offerings, increased marketing and promotional activities and
an increase in commissions paid to the independent manufacturers'
representatives. These sales and marketing expenses represented approximately
27.2% of net sales during 1998 and approximately 24.7% in 1999. The decrease as
a percentage of net sales during 1999 was primarily due to relatively higher
growth in sales in North America as a percentage of net sales.

     General and Administrative. General and administrative expenses increased
approximately 74.4% from $2.2 million in 1998 to $3.9 million in 1999. The
increase in absolute dollars was primarily related to increased staffing and
related costs associated with the growth of our business and professional and
legal fees associated with our successful patent lawsuit against Electrodata,
Inc. These general and administrative expenses represented approximately 7.9% of
net sales during 1998 and approximately 6.4% in 1999. The slight decrease as a
percentage of net sales during 1999 was primarily due to relatively higher
growth in net sales and our ability to leverage our base of resources to support
a larger organization.

     Other Income, Net. Other income, net increased from $224,000 in 1998 to
$327,000 in 1999. The increase in 1999 resulted from increased interest earned
on higher balances of cash and cash equivalents resulting from increased cash
flow from operations, partially offset by interest expense attributable to notes
payable.

     Income Taxes. We recorded income tax expense of $1.6 million in 1998 and
$6.3 million in 1999. Our effective income tax rates were 32.0% in 1998 and
36.5% in 1999. The effective income tax rate was higher in 1999 than in 1998
primarily due to higher levels of income as well as an increased concentration
of sales in local jurisdictions with higher tax rates.

                                       23
<PAGE>

Backlog

     Our backlog of customer orders at December 31, 2000 was approximately $8.0
million compared to approximately $11.0 million at December 31, 1999. 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. Accordingly, we believe that our backlog cannot be considered a
meaningful indicator of our future financial results.

Seasonality

     Our sales have been seasonal in nature with the largest portion of
quarterly sales tied to the buying patterns of our customers which, in past
years, have often increased during the last calendar quarter of the year as
customers spent the unused portion of their yearly budget. As a result, in the
past, our first quarter sales tended to decrease from the prior quarter.
However, in the fourth quarter of 2000, we did not see a sales increase
resulting from customers spending available budget dollars. In the future, we
expect that our quarterly operating results may fluctuate significantly and will
be difficult to predict given the nature of our business. Many factors could
cause our operating results to fluctuate from quarter to quarter in the future,
including the lengthy and unpredictable buying patterns of our customers, and
the degree to which our customers allocate and spend their yearly budgets.

Liquidity and Capital Resources

     Historically, we have financed our operations and satisfied our capital
expenditure requirements primarily through cash flow from operations and
borrowings under our line of credit. Additionally, in July of 2000, we received
net proceeds totaling approximately $51.6 million from our initial public
offering. As of December 31, 1999 and 2000, we had working capital of
approximately $16.3 million and $82.0 million, respectively, and cash and short-
term investments of approximately $8.6 million and $62.6 million, respectively.

     Cash provided by operating activities was approximately $4.5 million in
1998, $10.1 million in 1999 and $13.4 million in 2000. Operating cash flows
increased during 2000 as compared with the prior year as a result of increases
in accounts receivable and inventory required to meet our expected future sales
targets, increases in prepaid expenses and other assets for deposits related to
both our new building and our increased marketing activities, and an increase in
deferred income taxes. These uses of cash were partially offset by positive cash
flow generated from increased levels of income from operations, increased non-
cash charges for depreciation and amortization and amortization of deferred
stock-based compensation, and an increase in accounts and commissions payable
and accrued compensation and related benefits.

     Cash used in investing activities was approximately $1.7 million in 1998,
$6.2 million in 1999 and $16.9 million in 2000. Our use of cash in investing
activities in 1999 was primarily related to a $2.7 million cash deposit for the
purchase of land for and construction of our new facility, a $782,000 payment
relating to the Hukk Engineering acquisition and $2.7 million of purchases of
property and equipment. In 2000, cash used in investing activities included
approximately $4.7 million for acquisitions, $6.3 million for purchases of
marketable equity securities, $5.6 million for capital expenditures and $241,000
for the purchase of a long-term investment. Cash used for capital expenditures
increased in 2000 primarily as a result of purchases of general office equipment
to support our growth, research and development laboratory equipment and
demonstration equipment required for the introduction of new products and an
increase in the number of our distribution channels. We believe that capital
expenditures in the first quarter of 2001 will include approximately $18.0
million relating to the construction of our new facility in San Jose,
California, which we are building to accommodate our need for an increase in
manufacturing capacity and employees, and approximately $3.0 million for
additional equipment, furniture and fixtures relating to the new facility.

     During 1998 and 1999, we used approximately $263,000 and $311,000 in cash
for financing activities, respectively, as compared to the same period in 2000
where we generated approximately $51.2 million. Our use of cash in financing
activities in 1999 was primarily related to the repurchase of $202,000 of our
common stock and cash dividends of $223,000, offset by proceeds of $177,000 from
the exercise of stock options. In 2000, cash provided by financing activities
was primarily due to net proceeds of approximately $51.6 million from our
initial public offering in July 2000, net proceeds of approximately $500,000
received from stock issued pursuant to our employee stock purchase plan, and
$798,000 received from the exercise of stock options, partially offset by $1.6
million used for repayments of notes payable.

     Currently, we have a line of credit from Bank of America, N.A. for up to
$9.0 million in borrowings at the bank's prime rate less 0.25% which expires on
May 1, 2001. At December 31, 1999 and 2000, there were no balances outstanding

                                       24
<PAGE>

under the line of credit. Borrowings under the line of credit are secured by our
inventory and accounts receivable. The agreement governing the line of credit
contains covenants, which we were in compliance with at December 31, 1999 and
2000, that, among other things:

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

     .    limits capital expenditures;

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

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

          We believe that the net proceeds received by us from our initial
public offering, together with current cash balances, cash flows from operations
and available borrowings under our line of credit will be sufficient to meet our
anticipated cash needs for working capital, capital expenditures and other
activities for at least the next 12 months. After that, if current sources are
not sufficient to meet our needs, we may seek additional equity or debt
financing. In addition, any material acquisition of complementary businesses,
products or technologies or material joint venture could require us to obtain
additional equity or debt financing. We cannot assure you that such additional
financing would be available on acceptable terms, if at all.

Factors Affecting Future Operating Results

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

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

     .    the size and timing of orders from our customers, in each case
          exacerbated by the lengthy and unpredictable buying patterns of our
          customers, and our ability to ship these orders on a timely basis;

     .    the degree to which our customers have allocated and spent their
          yearly budgets, which has, in some cases, resulted in higher net sales
          in our fourth quarter;

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

     .    the varied degree of price, product and technology competition, which
          has been buffeted by the rapid changes in the telecommunications
          industry and our customers' and competitors' responses to these
          changes;

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

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

          The factors listed above may affect our business and stock price in
          several ways, including the following:

     .    Given the high fixed costs relating to overhead, research and
          development, and advertising and marketing, among others, if our net
          sales are below our expectations in any quarter, the negative effect
          may be magnified by our inability to adjust spending in a timely
          manner.

     .    As a result of the above, our stock price may decline and may be
          volatile, particularly if public market analysts and investors
          perceive these factors to exist, whether or not that perception is
          accurate.

     .    Finally, 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.

                                       25
<PAGE>

Customer Concentration--A limited number of customers account for a high
     percentage of our net sales, and any adverse factor affecting these
     customers or our relationship with these customers could cause our net
     sales to decrease.

          Our customer base is highly concentrated, and a relatively small
number of companies have accounted for a large percentage of our net sales. Net
sales from our top five customers in the United States represented approximately
16% of net sales in 1998, 49% in 1999 and 42% in 2000. Our largest customers
over this period have been affiliates of SBC Communications Inc., which include
Pacific Bell Telephone Company, Southwestern Bell Telephone Company, Ameritech
Corporation, Nevada Bell, Advanced Solutions, Inc. and Southern New England
Telephone and which in total accounted for approximately 41% of net sales in
fiscal 1999 and 16% in 2000. Additionally, sales to a new customer in 2000,
Solectron, a contract manufacturer for Lucent Technologies' Stinger DSLAM,
represented approximately 17% of sales in 2000. No customer is presently
obligated to purchase a specific amount of products or to provide us with
binding forecasts of purchases for any period. We expect that we will continue
to depend upon SBC Communications' affiliates and other major customers for a
substantial portion of our net sales in future periods. We cannot guarantee that
our future net sales, including those from SBC Communications' affiliates, will
be comparable to our fiscal 2000 net sales. The loss of a major customer or the
reduction, delay or cancellation of orders from one or more of our significant
customers could cause our net sales and, therefore, profits to decline. In
addition, many of our customers are able to exert substantial negotiating
leverage over us. As a result, they may cause us to lower our prices and
negotiate other forms and provisions that may negatively affect our business and
profits.

Dependence on DSL--Substantially all of our sales have been from our DSL
     products. If the market for DSL services does not continue to grow as we
     anticipate, our net sales could decline.

          In 1999 and 2000, sales of our DSL products represented approximately
98% and 80% of our net sales, respectively. Currently, our DSL products are
primarily used by a limited number of incumbent local exchange carriers,
including the regional Bell operating companies, and competitive local exchange
carriers, who offer DSL services. A competitive local exchange carrier is a
company that, following the Telecommunications Act of 1996, is authorized to
compete in a local communications services market. These parties, and other
Internet service providers and users, are continuously evaluating alternative
high-speed data access technologies, including cable modems, fiber optics,
wireless technology and satellite technologies, and may at any time adopt these
competing technologies. These competing technologies may ultimately prove to be
superior to DSL services and reduce or eliminate the demand for our DSL
products.

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

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

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

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

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

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

Accordingly, our future success is substantially dependent upon whether DSL
technology gains widespread market acceptance by these companies, end users of
their services and other Internet service providers and users.

          To date, our customers have deployed DSL equipment, including our
products, in substantially larger volumes than their current subscriber count.
The inability of our current or future customers to acquire and retain
subscribers as planned, or to respond to competition for their services or
reduced demand for their services, could cause them to reduce or eliminate their
DSL deployment plans. If our customers are forced to reduce or eliminate their
DSL deployment plans, our sales to them will decline.

                                       26
<PAGE>

Use of Field Technicians--If service providers reduce their use of field
     technicians and successfully implement a self-service installation model,
     demand for our products could decrease.

          To ensure quality service, our major service provider customers,
including SBC Communications, historically sent a technician who uses our
product into the field to verify service for installations. SBC Communications,
Qwest Communications and Verizon Communications encourage customers to install
DSL themselves. By encouraging customers to install DSL themselves, these phone
companies intend to reduce their expenses and expedite installation for their
customers. To encourage self-installation, these companies offer financial
incentives. Additionally, SBC Communications has created a subsidiary, Advanced
Solutions, Inc., to provide installation services which further reduces the need
for the local telephone company technician to carry a test set that can emulate
both a DSL modem and find DSL physical layers problems. If SBC Communications
and other service providers successfully implement these plans or choose to send
technicians into the field only after a problem has been reported, or if
alternative methods of verification become available, such as remote
verification, the need for field technicians and the need for our products could
decrease.

Sales Implementation Cycles--The length and unpredictability of the sales and
     implementation cycles for our products makes it difficult to forecast
     quarterly revenues.

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

          Other sources of delays that lead to long sales cycles, or even a
sales loss, include: potential customers' internal approval and contracting
procedures, procurement practices, and testing and acceptance processes. As a
result, the sales cycle for larger deployment of selected products typically
ranges from six to 24 months for new deployment of selected product sales, and
up to six months for occasional large selected product sales. The deferral or
loss of one or more significant sales could significantly affect operating
results in a particular quarter, especially if there are significant sales and
marketing expenses associated with the deferred or lost sales.

Product Enhancements--If we are unable to enhance our existing products and
     successfully manage the development of new products, our future success may
     be threatened.

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

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

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

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

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

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

                                       27
<PAGE>

We cannot assure you 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.

Potential Product Liability--Our products are complex, and our failure to detect
     errors and defects may subject us to costly repairs, product returns under
     warranty and product liability litigation.

          Our products are complex and may contain undetected defects or errors
when first introduced or as enhancements are released. These errors may occur
despite our testing and may not be discovered until after a product has been
shipped and used by our customers. Many of the products that we ship contain
known imperfections that we consider to be insignificant at the time of
shipment. We may misjudge the seriousness of a product imperfection and allow it
to be shipped to our customers. These risks are compounded by the fact that we
offer over 20 products, with multiple hardware and software modifications, which
makes it more difficult to ensure high standards of quality control in our
manufacturing process. The existence of these errors or defects could result in
costly repairs and/or returns of products under warranty and, more generally, in
delayed market acceptance of the product or damage to our reputation and
business.

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


Managing Growth--We may have difficulties managing our expanding operations,
     which could reduce our chances of maintaining our profitability.

          We have recently experienced rapid growth in revenues and in our
business generally that has placed, and we expect will continue to place, a
significant strain on our management and operations. For example, our revenues
have increased from approximately $28.5 million in 1998 to $61.5 million in 1999
and to $113.5 million in 2000, our number of employees has increased from 118 at
December 31, 1998 to 353 at December 31, 2000, and we have made three
significant acquisitions, that of Hukk Engineering, Pro.Tel, and Avantron
Technologies. As a result of our historical and expected growth, we face several
risks, including:

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

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

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

We cannot assure you that we will be able to manage this growth profitably.


Competition--Competition could reduce our market share and decrease our net
     sales.

          The market for our products is fragmented and intensely competitive
both in 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.

                                       28
<PAGE>

Product Category                   Principal Competitors
----------------                   ---------------------
Digital Subscriber Line            Acterna Corporation, Agilent Technologies,
                                   Inc., Tollgrade Communications, Inc. and
                                   Turnstone Systems, Inc.

Fiber Optics SONET/SDH             Digital Lightwave, Inc., Acterna Corporation
                                   and Agilent Technologies, Inc.

Cable TV                           Acterna Corporation and Agilent Technologies,
                                   Inc.

Signaling                          Inet Technologies, Inc. and GN Nettest


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 do.

          We expect that, as our industry and market evolves, new competitors or
alliances among competitors with existing and new technologies could emerge and
acquire significant market share. We anticipate that competition in our market
will increase and we will face greater threats to our market share, price
pressure on our products and the likelihood that, over time, our profitability
may decrease. In addition, it is difficult to assess accurately the market share
of our products or of Sunrise overall because of the high degree of
fragmentation in the market for DSL service verification equipment, in
particular, and for high-speed data access technology, in general. As a result,
it may be difficult for us to forecast accurately trends in the market, which of
our products will be the most competitive over the longer term and, thus, what
is the best use of our human and other forms of capital. We cannot assure you
that we will be able to compete effectively.

Need for New Personnel--If we cannot hire and train the R&D, manufacturing,
     sales, and marketing personnel we need to support our anticipated growth,
     our plans for continued expansion will be hampered.

          Our business requires engineers, technicians and other highly trained
and experienced personnel. In particular, since our products require a
sophisticated selling effort targeted at several key people within our
prospective customers' organizations, we have a special need for experienced
sales personnel as well as specialized engineers. In addition, the complexity of
our products and the difficulty of configuring and maintaining them require
highly trained customer service and support personnel. If we continue to grow,
we will need to hire a significant number of engineering, sales, marketing and
customer service and support personnel in the future, in and outside the United
States. Given that competition for such persons is intense, especially in the
San Francisco Bay Area, we may not be successful in attracting and retaining
these individuals. Our failure to hire, train and keep these kinds of employees
could impair our ability to grow profitably. In addition, if we do hire new
personnel, the addition of significant numbers of new personnel will require us
to incur significant start-up expenses, including procurement of office space
and equipment, initial training costs, and may result in low productivity rates
of these new personnel. These start-up expenses may adversely affect our future
operating results.

Reliance On Non-U.S. Workers--If U.S. immigration policies prevent us from
     hiring or retaining the workers we need, our growth may be limited.

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

Dependence on Key Employees--If one or more of our senior managers were to
     leave, we could experience difficulties in replacing them and our operating
     results could suffer.

          Our success depends to a significant extent upon the continued service
and performance of a relatively small number of key senior management,
technical, sales and marketing personnel. The loss of Paul Ker-Chin Chang and
Paul A. Marshall,

                                       29
<PAGE>

in particular, could likely harm our business. Neither of these individuals is
bound by an employment agreement with us, and we do not carry key man life
insurance on them. In addition, competition for senior level personnel with
telecommunications knowledge and experience is intense. If any of our senior
managers were to leave Sunrise, we would need to devote substantial resources
and management attention to replace them. As a result, management attention may
be diverted from managing our business and we may need to pay higher
compensation to replace these employees.


Risks of International Operations--Our plan to expand sales in international
  markets could lead to higher operating expenses and may subject us to
  unpredictable regulatory and political systems.

     Sales to customers located outside of the United States represented 42% of
our net sales in 1998, 20% in 1999 and 26% in 2000, and we expect international
revenues to continue to account for a significant percentage of net sales for
the foreseeable future. In addition, an important part of our strategy calls for
further expansion into international markets. As a result, we will face various
risks relating to our international operations, including:

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

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

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

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

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

     In addition, the Asia/Pacific region has experienced instability in many of
its economies and significant devaluations in local currencies. Approximately
20% of our sales in 1998, 9% of our sales in 1999 and 9% of our sales in 2000
were derived from customers located in this region. These instabilities may
continue or worsen, which could have a materially adverse effect on our results
of operations. If international revenues are not adequate to offset the
additional expense of expanding international operations, our future growth and
profitability could suffer.


Dependence on Sole and Single Source Suppliers--Because we depend on a limited
  number of suppliers and some sole and single source suppliers that are not
  contractually bound in the long-term, our future supply of product components
  is uncertain. This could lead to manufacturing difficulties.

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

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

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

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

                                       30
<PAGE>

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

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

In addition, the purchase of these components on a sole source basis subjects us
to risks of price increases and potential quality assurance problems. This
dependence magnifies the risk that we may not be able to ship our products on a
timely basis to satisfy customers' orders. We cannot assure you 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.

Manufacturing Capacity--If demand for our products exceeds our manufacturing
  capacity, our revenues may suffer.

     In the past, demand for our products has put increased pressure on our
manufacturing capacity. For example, our revenues have increased from
approximately $28.5 million in 1998 to $61.5 million in 1999 and to $113.5
million in 2000. If we are not able to increase our manufacturing capacity in
the time necessary to meet demand, if we experience difficulty in obtaining
parts or components needed for manufacturing, or if demand exceeds our
expectations, we may experience insufficient manufacturing capacity. If our
manufacturing capacity does not keep pace with product demand, we will not be
able to fulfill orders in a timely manner which in turn could have a material
adverse effect on our revenues and on our overall business.

Acquisitions--We have acquired three significant companies and intend to pursue
  further acquisitions in the future. These activities involve numerous risks,
  including the use of cash, amortization of goodwill and the diversion of
  management attention.

     Recently, we acquired three companies, Hukk Engineering in July 1999,
Pro.Tel in February 2000, and Avantron Technologies in January 2001. As a result
of these and other smaller acquisitions, we face numerous risks, including:

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

  .  combining manufacturing, administrative and management information and
     other control systems into our corresponding systems;

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

  .  developing compatible or complementary products and technologies from
     previously independent operations. For Hukk Engineering and Avantron
     Technologies, this means addressing the convergence of telephony and cable
     products.

The risks stated above will be made more difficult because Hukk Engineering is
located in Norcross, Georgia; Avantron Technologies is located in Montreal,
Canada and Pro.Tel is located in Modena, Italy and Springfield, Virginia. 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 Hukk Engineering, Pro.Tel, and Avantron Technologies.

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

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

  .  negotiating and closing these transactions;

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

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

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

                                       31
<PAGE>

Risks of the Telecommunications Industry--We face several risks regarding the
  telecommunications industry, including the possible effects of its rapid and
  unpredictable growth, the possible effects of consolidation among our
  principal customers and the risk that deregulation will slow.

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

     The telecommunications industry has been experiencing consolidation among
its primary participants, such as incumbent local exchange carriers and
competitive local exchange carriers, several of whom are our primary customers.
For example, in recent years, SBC acquired Pacific Bell and Ameritech, both of
which were customers of ours. Continued consolidation may cause delay or cause
cancellation of orders for our products. In addition, 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.

     Because the market for our products has grown with the deregulation of
portions of the telecommunications industry, we face the risk that these trends
may slow or may be reversed. For example, in the United States, there is
litigation pending that challenges the validity of the Telecommunications Act of
1996 and the local telephone competition rules adopted by the Federal
Communications Commission to implement that act. If deregulation in
international markets and in the United States were to slow or to take an
unanticipated course, the telecommunications industry might suffer the following
effects:

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

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

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

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

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


Intellectual Property Risks--Policing any unauthorized use of our intellectual
  property by third parties and defending any intellectual property infringement
  claims against us could be expensive and disrupt our business.

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

     Much of our intellectual property and proprietary technology is not
protected by patents. If unauthorized persons were to copy, obtain or otherwise
misappropriate our intellectual property or proprietary technology without our
approval, the value of our investment in research and development would decline,
our reputation and brand could be diminished and we would likely suffer a
decline in revenue. We believe these risks, which are present in any business in
which intellectual property and proprietary technology play an important role,
are exacerbated by the difficulty in finding unauthorized use of

                                       32
<PAGE>

intellectual property in our business, the increasing incidence of patent
infringement in our industry in general and the difficulty of enforcing
intellectual property rights in some foreign countries.

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

Concentration of Control--Our executive officers and directors retain
  significant control over us, which allows them to decide the outcome of
  matters submitted to stockholders for approval. This influence may not be
  beneficial to all stockholders.

     Paul Ker-Chin Chang, Paul A. Marshall and Robert C. Pfeiffer beneficially
own approximately 26%, 24% and 13% of our outstanding shares of common stock.
Consequently, these three individuals, acting together, are able to control the
election of our directors and the approval of significant corporate transactions
that must be submitted to a vote of stockholders. In addition, Mr. Chang, Mr.
Marshall and Mr. Pfeiffer constitute three of the six members of the board of
directors and have significant influence in directing the actions taken by the
directors. The interests of these persons may conflict with your interests as
stockholders, and the actions they take or approve may be contrary to those
desired by other stockholders. This concentration of ownership and control of
the management and affairs of our company may also have the effect of delaying
or preventing a change in control of our company that stockholders may consider
desirable.

Anti-takeover Provisions--Anti-takeover provisions in our charter documents
  could prevent or delay a change of control, and as a result, negatively impact
  our stockholders.

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

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

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

  .  prohibiting cumulative voting in the election of directors;

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

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

  .  prohibiting stockholder action by written consent; and

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

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

                                       33
<PAGE>

Item 7A.   Qualitative and Quantitative Disclosure about Market Risk

     We sell our products in North America, Asia, Latin America and Europe. As a
result, our financial results could be affected by factors such as changes in
foreign currency exchange rates. Prior to our acquisition of Pro.Tel,
international sales had been denominated solely in U.S. dollars and,
accordingly, we had not historically been exposed to fluctuations in non-U.S.
currency exchange rates related to these sales activities. Since our acquisition
of Pro.Tel in February 2000, we now have a small amount of sales denominated in
Euro and have begun to use derivative instruments to hedge our foreign exchange
risks.  To date, foreign exchange risks from these sales have not been material
to our operations.

     We are exposed to the impact of interest rate changes and changes in the
market values of our investments. Our exposure to market rate risk for changes
in interest rates relates primarily to our investment portfolio.  We have not
used derivative financial instruments in our investment portfolio.  We invest
our excess cash in debt instruments of the U.S. Government and its agencies, and
in high-quality corporate issuers and, by policy, limit the amount of credit
exposure to any one issuer.  We protect and preserve our invested funds by
limiting default, market and reinvestment risk.

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

                                       34
<PAGE>

Item 8.   Financial Statements and Supplementary Data


                         INDEX TO FINANCIAL STATEMENTS


<TABLE>
<CAPTION>
Audited Consolidated Financial Statements of Sunrise Telecom Incorporated                                          Page
<S>                                                                                                                <C>
  Independent Auditors' Report..................................................................................      36

  Consolidated balance sheets as of December 31, 1999 and 2000..................................................      37

  Consolidated statements of net income
  for the years ended December 31, 1998, 1999 and 2000..........................................................      38

  Consolidated statements of stockholders' equity and comprehensive income
  for the years ended December 31, 1998, 1999 and 2000..........................................................      39

  Consolidated statements of cash flows
  for the years ended December 31, 1998, 1999 and 2000..........................................................      40

  Notes to consolidated financial statements....................................................................      41
</TABLE>

                                       35
<PAGE>

                          INDEPENDENT AUDITORS' REPORT

The Board of Directors and Stockholders
Sunrise Telecom Incorporated

     We have audited the accompanying consolidated balance sheets of Sunrise
Telecom Incorporated and subsidiaries as of December 31, 1999 and 2000, and the
related consolidated statements of net income, stockholders' equity and
comprehensive income, and cash flows for each of the years in the three-year
period ended December 31, 2000. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

     We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

     In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Sunrise
Telecom Incorporated and subsidiaries as of December 31, 1999 and 2000, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2000, in conformity with accounting
principles generally accepted in the United States of America.


                                         /s/ KPMG LLP

Mountain View, California
January 24, 2001

                                       36
<PAGE>

                 SUNRISE TELECOM INCORPORATED AND SUBSIDIARIES

                          CONSOLIDATED BALANCE SHEETS

                       (in thousands, except share data)

<TABLE>
<CAPTION>
                                                                                           December 31,
                                                                                      ------------------------
                                      ASSETS                                          1999                2000
                                                                                      ----                ----
<S>                                                                                   <C>              <C>
Current assets:
   Cash and cash equivalents.................................................          $ 8,615         $56,298
   Investment in marketable debt securities..................................               --           6,300
   Accounts receivable, net of allowance
     of $252 and $982, respectively..........................................            9,524          18,419
   Inventories...............................................................            7,612          13,330
   Prepaid expenses and other assets.........................................              214           1,748
   Deferred tax asset........................................................            2,050           4,245
                                                                                       -------        --------
Total current assets.........................................................           28,015         100,340
Property and equipment, net..................................................            4,417           8,580
Intangible assets, net of accumulated amortization of $222 and $2,696,
   respectively..............................................................            2,324          11,725
Deferred tax asset                                                                          --             799
Other assets.................................................................            3,510           4,112
                                                                                       -------        --------
Total assets.................................................................          $38,266        $125,556
                                                                                       =======        ========

                       LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
   Accounts payable..........................................................          $  1,701       $  2,578
   Current portion of notes payable..........................................               219            780
   Other accrued expenses....................................................             6,688         12,581
   Income taxes payable......................................................             2,814          1,888
   Deferred revenue..........................................................               233            546
                                                                                       --------       --------
Total current liabilities....................................................            11,655         18,373
Deferred tax liability.......................................................               171             --
Notes payable, less current portion..........................................               638          1,047
Other liabilities............................................................               331            492
Commitments
Stockholders' equity:
   Preferred stock, $0.001 par value per share; 10,000,000 authorized
     shares; none issued and outstanding.....................................                --             --
   Common stock, $0.001 par value per share; 175,000,000 shares
     authorized; 44,913,000 and 49,941,000 shares issued and
     outstanding as of December 31, 1999 and 2000, respectively..............                45             50
   Additional paid-in capital................................................             3,915         68,317
   Deferred stock-based compensation.........................................            (2,065)        (6,611)
   Retained earnings.........................................................            23,576         43,961
   Accumulated other comprehensive loss......................................                --            (73)
                                                                                       --------       --------
Total stockholders' equity...................................................            25,471        105,644
                                                                                       --------       --------
Total liabilities and stockholders' equity...................................          $ 38,266       $125,556
                                                                                       ========       ========
</TABLE>

         See accompanying notes to consolidated financial statements.

                                       37
<PAGE>

                 SUNRISE TELECOM INCORPORATED AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF NET INCOME

                     (in thousands, except per share data)

<TABLE>
<CAPTION>
                                                                                     Years Ended December 31,
                                                                                     ------------------------
                                                                                  1998         1999         2000
                                                                                  ----         ----         ----
<S>                                                                              <C>          <C>         <C>
   Net sales .............................................................       $ 28,535      $61,465     $113,481
   Cost of sales..........................................................          7,590       14,736       32,994
                                                                                 --------      -------     --------

      Gross profit........................................................         20,945       46,729       80,487
                                                                                 --------      -------     --------
   Operating expenses:
      Research and development............................................          6,203       10,694       17,555
      Sales and marketing.................................................          7,764       15,215       22,694
      General and administrative..........................................          2,243        3,912        9,790
                                                                                 --------      -------     --------

      Total operating expenses............................................         16,210       29,821       50,039
                                                                                 --------      -------     --------

      Income from operations..............................................          4,735       16,908       30,448
   Other income, net......................................................            224          327        1,909
                                                                                 --------      -------     --------

      Income before income taxes..........................................          4,959       17,235       32,357
   Income taxes...........................................................          1,588        6,291       11,972
                                                                                 --------      -------     --------

      Net income..........................................................       $  3,371      $10,944     $ 20,385
                                                                                 ========      =======     ========

   Earnings per share:
      Basic...............................................................       $   0.08      $  0.25     $   0.43
                                                                                 ========      =======     ========

      Diluted.............................................................       $   0.07      $  0.24     $   0.41
                                                                                 ========      =======     ========

   Shares used in computing earnings per share:

      Basic...............................................................         44,537       44,667       47,374
                                                                                 ========      =======     ========

      Diluted.............................................................         45,003       45,824       49,610
                                                                                 ========      =======     ========
</TABLE>

         See accompanying notes to consolidated financial statements.

                                       38
<PAGE>

                  SUNRISE TELECOM INCORPORATED AND SUBSIDIARIES

                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                            AND COMPREHENSIVE INCOME

                     (in thousands, except per share data)


<TABLE>
<CAPTION>
                                                              Deferred                Accumulated
                                                              Stock-based                Other
                                    Common Stock  Additional    Compen-                Compre-       Total        Comprehensive
                                    ------------    Paid-in     -------    Retained     hensive    Stockholders'  -------------
                                   Shares  Amount   Capital     sation     Earnings       Loss         Equity        Income
                                   ------  ------   -------     ------     --------       ----         ------        ------
<S>                                <C>     <C>      <C>         <C>       <C>            <C>           <C>           <C>
Balances, December 31, 1997.......  44,616   $ 45     $   467   $     --      $ 9,950        $  --       $ 10,462
Exercise of stock options.........      39     --          21         --           --           --             21
Repurchase of common stock........    (136)    --          (7)        --         (188)          --           (195)
Cash dividend of $.006 per
  share...........................      --     --          --         --          (89)          --            (89)
Net income........................      --     --          --         --        3,371           --          3,371     $ 3,371
                                    ------   ----     -------   --------      -------        -----       --------    --------
Comprehensive income. ............                                                                                    $ 3,371
                                                                                                                     ========
Balances, December 31, 1998.......  44,519     45         481         --       13,044           --         13,570
                                    ------   ----     -------   --------      -------        -----       --------
Exercise of common stock
  options.........................     229     --         177         --           --           --            177
Repurchase of common stock........    (135)    --         (13)        --         (189)          --           (202)
Issuance of stock in connection
  with Hukk acquisition...........     300     --       1,000         --           --           --          1,000
Deferred stock-based
  compensation....................      --     --       2,270     (2,270)          --           --             --
Amortization of deferred stock-
  based compensation..............      --     --          --        205           --           --            205
Cash dividend of $.015 per
  share...........................      --     --          --         --         (223)          --           (223)
Net income........................      --     --          --         --       10,944           --         10,944     $10,944
                                    ------   ----     -------   --------      -------        -----       --------    --------
Comprehensive income. ............                                                                                    $10,944
                                                                                                                     ========
Balances, December 31, 1999.......  44,913     45       3,915     (2,065)      23,576           --         25,471
                                    ------   ----     -------   --------      -------        -----       --------
Exercise of common stock
  options.........................     671      1         797         --           --           --            798
Common stock issued under
   Employee Stock Purchase Plan...      40     --         501         --           --           --            501
Issuance of stock in
   connection with Pro.Tel
acquisition.......................     500     --       5,000         --           --           --          5,000
Common stock issued in Initial
    Public Offering...............   3,817      4      51,604         --           --           --         51,608
Deferred stock-based
  compensation ...................      --     --       6,500     (6,500)          --           --             --
Amortization of deferred stock-
  based compensation..............      --     --          --      1,954           --           --          1,954
Change in unrealized gain on
   available-for-sale
   investments, net...............      --     --          --         --           --            3              3           3
Cumulative translation
  adjustment......................      --     --          --         --           --          (76)           (76)        (76)
Net income........................      --     --          --         --       20,385           --         20,385      20,385
                                    ------   ----     -------   --------      -------        -----       --------    --------
Comprehensive income..............                                                                                    $20,312
                                                                                                                     ========
Balances, December 31, 2000.......  49,941   $ 50     $68,317   $ (6,611)     $43,961        $ (73)      $105,644
                                    ======   ====     =======   ========      =======        =====       ========
</TABLE>

         See accompanying notes to consolidated financial statements.

                                       39
<PAGE>

                  SUNRISE TELECOM INCORPORATED AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                                (in thousands)


<TABLE>
<CAPTION>
                                                                                     Year Ended December 31,
                                                                                     -----------------------
                                                                                 1998         1999          2000
                                                                                 ----         ----          ----
<S>                                                                            <C>         <C>             <C>
        Cash flows from operating activities:
           Net income..................................................         $ 3,371     $ 10,944      $ 20,385
        Adjustments to reconcile net income to net cash provided by
           operating activities:
           Depreciation and amortization...............................             739        1,205         4,271
           Amortization of deferred stock-based compensation...........              --          205         1,954
           Loss (gain) on the sale of property and equipment...........             (21)         156            87
           Deferred income taxes.......................................              (1)      (1,055)       (3,183)
        Changes in operating assets and liabilities (net of acquisition
           balances):
           Accounts receivable.........................................           1,246       (4,721)       (8,205)
           Inventories.................................................            (406)      (4,536)       (5,775)
           Prepaid expenses and other assets...........................              44         (259)       (1,640)
           Other accrued expenses......................................          (1,619)       6,112         6,090
           Income taxes payable........................................             789        2,107          (977)
           Deferred revenue............................................             400          (32)          365
                                                                                -------     --------      --------
        Net cash provided by operating activities......................           4,542       10,126        13,372
                                                                                -------     --------      --------
        Cash flows from investing activities:
           Purchase of long-term investment............................            (607)         (39)         (241)
           Purchases of marketable debt securities.....................              --           --        (6,298)
           Capital expenditures........................................          (1,051)      (2,734)       (5,614)
           Acquisitions of Hukk and Pro. Tel, net of cash
           acquired....................................................              --         (782)       (4,717)
           Deposit on land and building................................              --       (2,675)           --
                                                                                -------     --------      --------
        Net cash used in investing activities..........................          (1,658)      (6,230)      (16,870)
                                                                                -------     --------      --------
        Cash flows from financing activities:
           Proceeds from short-term borrowings.........................              --           --         2,890
           Payment of short-term borrowing.............................              --           --        (2,890)
           Payments on notes payable...................................              --          (63)       (1,649)
           Repurchase of common stock..................................            (195)        (202)           --
           Cash dividends..............................................             (89)        (223)           --

           Net proceeds from issuance of common stock..................              --           --        52,108
           Proceeds from exercise of stock options.....................              21          177           798
                                                                                     --          ---           ---
        Net cash provided by (used in) financing activities............            (263)        (311)       51,257
                                                                                -------     --------      --------
        Effect of exchange rates on cash...............................              --           --           (76)
                                                                                -------     --------      --------
        Net increase in cash and cash equivalents......................           2,621        3,585        47,683
        Cash and cash equivalents, beginning of year...................           2,409        5,030         8,615
                                                                                -------     --------      --------
        Cash and cash equivalents, end of year.........................         $ 5,030     $  8,615      $ 56,298
                                                                                =======     ========      ========
        Supplement disclosures of cash flow information:
           Cash paid during the year:
             Interest..................................................         $     2     $      2      $    125
                                                                                =======     ========      ========
             Income taxes..............................................         $   799     $  5,365      $ 15,958
                                                                                =======     ========      ========
        Noncash investing and financing activities:

             Stock issued for acquisitions of Hukk and Pro.Tel.........         $    --     $ $1,000      $  5,000
                                                                                =======     ========      ========
             Unrealized gain on marketable securities and investments..         $    --     $     --      $      3
                                                                                =======     ========      ========
             Promissory note issued in connection with acquisition.....         $    --     $     --      $  1,000
                                                                                =======     ========      ========
             Deferred stock-based compensation.........................         $     --    $  2,270      $  6,500
                                                                                ========    ========      ========
</TABLE>

         See accompanying notes to consolidated financial statements.

                                       40
<PAGE>

                 SUNRISE TELECOM INCORPORATED AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(1) Business and Significant Accounting Policies

(a)  Business

       Sunrise Telecom Incorporated and subsidiaries (the "Company") was
    incorporated as Sunrise Telecom, Inc. in California in October 1991. In July
    2000, the Company reincorporated in Delaware and changed its name to Sunrise
    Telecom Incorporated (see Note 9. Capital Stock). The Company manufactures
    and markets service verification equipment to pre-qualify, verify and
    diagnose telecommunications and Internet networks. The Company markets and
    distributes its products via a worldwide network of manufacturers, sales
    representatives, distributors, and a direct sales force throughout six
    continents. The Company has wholly owned subsidiaries in Norcross, Georgia;
    Taipei, Taiwan; Modena, Italy; Seoul, Korea; Tokyo, Japan; a representative
    liaison office in Beijing, China; and a foreign sales corporation in
    Barbados.

(b)  Principles of Consolidation

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

(c)  Revenue Recognition

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

(d)  Warranty Cost

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

(e)  Research and Development

       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, tested, and is ready for commercial
    manufacturing. To date, hardware and software development projects have been
    completed concurrently with the establishment of commercial manufacturing
    and technological feasibility in the form of a working model, respectively.
    Accordingly, no development costs have been capitalized.

(f)  Cash Equivalents and Short-term Investments

       The Company considers all highly liquid investments with a maturity of 90
    days or less when acquired to be cash equivalents. Cash equivalents as of
    December 31, 1999 and 2000 consist primarily of cash on deposit with banks,
    money market funds, auction rate securities and marketable debt securities.
    The Company determines the appropriate classification of debt and equity
    securities at the time of purchase and reevaluates such designation as of
    each balance sheet date. Investments classified as available for sale are
    reported at market value, with the unrealized gains and losses, net of tax,
    reported as a separate component of other comprehensive income (loss) in
    stockholders' equity. Realized gains and losses on sales of investments and
    declines in value determined to be other than temporary are included in
    other income (expense).

                                       41
<PAGE>

(g)  Fair Value of Financial Instruments

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

(h)  Inventories

       Inventories are stated at the lower of cost or market. Cost is determined
    using the first-in, first-out method.

(i)  Property and Equipment

       Equipment, furniture, fixtures, and leasehold improvements are stated at
    cost. Depreciation and amortization is computed by the straight-line method
    over the shorter of the estimated useful life of the asset or the lease
    term. The estimated useful lives of all assets are five years.

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

(j)  Intangible Assets

       Intangibles include the fair value of issued and pending patents,
    technology, noncompete agreements, and goodwill. The Company amortizes such
    intangibles on a straight-line basis over two to five years based on
    expected lives of patents, technology, noncompete agreements, and goodwill.

       The Company reviews intangible assets for impairment based on a
    comparison of the fair value of the intangibles relating to the acquisition
    to their carrying value.


(k)  Income Taxes

       Income taxes are accounted for under the asset and liability method.
    Deferred tax assets and liabilities are recognized for the future tax
    consequences attributable to differences between the financial statement
    carrying amounts of existing assets and liabilities and their respective tax
    bases and operating loss and tax credit carryforwards. Deferred tax assets
    and liabilities are measured using enacted tax rates 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 rates is recognized in income in the period
    that includes the enactment date.


(l)  Business and Concentrations of Credit Risk

       Financial instruments, which potentially subject the Company to
    concentrations of credit risk, consist primarily of cash equivalents and
    accounts receivable. The Company's cash equivalents are primarily in highly
    liquid money market funds. The Company believes no significant
    concentrations of credit exist with respect to these financial instruments.
    Concentrations of credit risk with respect to trade receivables are limited
    as the majority of the Company's sales are derived from large telephone
    operating companies and other telecommunication companies located throughout
    the world. The Company performs ongoing credit evaluations of its customers.
    Based on management's evaluation of potential credit losses, the Company
    believes its allowances for doubtful accounts are adequate. The Company had
    one customer that accounted for 8%, 41%, and 16% of its net sales for the
    years ended December 31, 1998 , 1999 and 2000, respectively, and $2,833,000
    and $361,000 of its accounts receivable as of December 31, 1999 and 2000,
    respectively. A second customer accounted for 17% of sales for the year
    ended December 31, 2000, and $3,155,000 of the Company's accounts receivable
    as of December 31, 2000.

       The Company's customers are concentrated in the telecommunications
    industry. Accordingly, the Company's future success depends upon the buying
    patterns of such customers and the continued demand by such customers for
    the Company's products. Additionally, the telecommunications equipment
    market is characterized by rapidly changing technology, evolving industry
    standards, changes in end user requirement, and frequent new product
    introductions and

                                       42
<PAGE>

    enhancements. Furthermore, the telecommunications industry has experienced
    and is expected to continue to experience consolidation. The Company's
    continued success will depend upon its ability to enhance existing products
    and to develop and introduce, on a timely basis, new products and features
    that keep pace with technological developments and emerging industry
    standards. Furthermore, as a result of its international sales, the
    Company's operations are subject to risks of doing business abroad,
    including but not limited to, fluctuations in the value of currency, longer
    payment cycles, and greater difficulty in collecting accounts receivable.
    While to date these factors have not had an adverse material impact on the
    Company's consolidated results of operations, there can be no assurance that
    there will not be such an impact in the future.

(m)  Earnings per Share ("EPS")

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

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

<TABLE>
<CAPTION>
                                                                                 Years Ended December 31,
                                                                                 ------------------------
                                                                                 1998      1999      2000
                                                                                 ----      ----      ----
       <S>                                                                     <C>         <C>       <C>
       Basic EPS--weighted-average number of common
         shares outstanding...............................................       44,537    44,667    47,374

       Effect of dilutive common equivalent shares:
         Stock options outstanding........................................          466     1,157     2,111
         Stock issued in acquisition subject to put arrangement...........                              125
                                                                                 ------    ------    ------

       Diluted EPS--weighted-average number of common.....................
         shares and common equivalent shares outstanding..................       45,003    45,824    49,610
                                                                              ======    ======    ======
</TABLE>

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


(n)  Stock-Based Compensation

       The Company uses the intrinsic-value method in accordance with Accounting
    Principles Board ("APB") Opinion No. 25, Accounting for Stock-Issued to
    Employees, to account for employee stock-based compensation. Accordingly,
    compensation cost is recorded on the date of grant to the extent the fair
    value of the underlying share of common stock exceeds the exercise price for
    a stock option or the purchase price for a share of common stock. During
    1999, the Company issued stock options to employees which were subsequently
    determined to have been issued below the fair value of the stock on the date
    of grant. In addition, we recorded stock-based compensation for stock
    options granted to employees of Pro.Tel in the first quarter of 2000 in the
    amount of approximately $6.5 million. The compensation cost associated with
    these stock options is amortized as a charge against income on a straight-
    line basis over the four year vesting period of the options. The Company has
    allocated the amortization of deferred stock-based compensation to the
    departments in which the related employee's services are charged. Pursuant
    to Statement of Financial Accounting Standards ("SFAS") No. 123, Accounting
    for Stock-Based Compensation, the Company discloses the pro forma effect of
    using the fair value method of accounting for employee stock-based
    compensation arrangements.


(o)  Use of Estimates

       The preparation of financial statements in accordance with generally
    accepted accounting principles requires management to make estimates and
    assumptions that affect the reporting of assets and liabilities and the
    disclosure of

                                       43
<PAGE>

    contingent assets and liabilities at the date of the financial statements,
    and the reported amounts of revenues and expenses during the period.
    Accordingly, actual results could differ from those estimates.


(p)  Foreign Currency Translation

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

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

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


(q)  Comprehensive Income

       Comprehensive income comprises net income and other comprehensive income.
    Comprehensive income includes certain changes in equity of the Company that
    are excluded from net income, including foreign currency translation
    adjustments. The components of comprehensive income, net of tax, are as
    follows (in thousands):

<TABLE>
<CAPTION>
                                                              1999        2000
                                                              ----        ----
     <S>                                                      <C>         <C>
     Net income........................................       $10,944     $20,385
     Change in unrealized gain on
      available-for-sale investments, net..............             -           3
     Cumulative translation adjustment.................             -         (76)
                                                              -------     -------
     Total comprehensive income........................       $10,944     $20,312
                                                              =======     =======
</TABLE>


(r)  Advertising Expense

       The cost of advertising is expensed as incurred. Such costs are included
    in selling and marketing expense and totaled approximately $848,000,
    $1,023,000 and $1,866,000 during the years ended December 31, 1998, 1999 and
    2000, respectively.


(s)  Recent Accounting Pronouncements

       In June 1998, the Financial Accounting Standards Board issued SFAS No.
    133, Accounting for Derivative Instruments and Hedging Activities. SFAS No.
    133 establishes accounting and reporting standards, requiring that every
    derivative instrument be recorded in the balance sheet as either an asset or
    liability measured at its fair value. SFAS No. 133, as recently amended, is
    effective for fiscal years beginning after June 30, 2000. Management
    believes the adoption of SFAS No. 133 will not have a material effect on the
    Company's financial position or results of operations.

       In December 1999, the Securities and Exchange Commission issued Staff
    Accounting Bulletin ("SAB") No. 101 "Revenue Recognition in Financial
    Statements." The Company adopted SAB No. 101 in the fourth quarter of the
    current fiscal year. The adoption of SAB No. 101 has not had a material
    effect on the Company's financial position or results of operations.

       Effective July 1, 2000, the Company adopted Financial Accounting
    Standards Board Interpretation No. 44 ("FIN 44") "Accounting for Certain
    Transactions involving Stock Compensation - an Interpretation of Accounting
    Principles

                                       44
<PAGE>

    Board ("APB") Opinion No. 25." FIN 44 clarifies the application of APB
    Opinion No. 25. The adoption of FIN 44 has not had a material effect on the
    Company's financial position or results of operations.


(2) Related Party Transactions

     One of the significant stockholders of the Company is also the owner of
Telecom Research Center. During 1998, 1999 and 2000, the Company purchased
equipment used in its manufacturing process totaling $84,000, $58,000 and
$143,000, respectively, from Telecom Research Center. As of December 31, 1999
there were no accounts payable due to Telecom Research Center. As of December
31, 2000, there was $35,000 in accounts payable due to Telecom Research Center.
The terms of these transactions were similar to those of unrelated parties.

     During 1999 and 2000, the Company issued employee promissory notes in an
aggregate principal amount of $50,000 and $35,000, respectively. The notes bear
interest at rates up to 7.75% per annum and are payable monthly with the final
payment due in December 2004. As of December 31, 2000, the outstanding balances
totaled approximately $70,000.


(3) Financial Statement Details

  Inventories

     Inventory consisted of the following (in thousands):

                                                            December 31,
                                                            ------------
                                                         1999          2000
                                                         ----          ----

Raw materials.........................................     $2,553        $ 8,987
Work in process.......................................      2,704          2,070
Finished goods........................................      2,355          2,273
                                                           ------        -------
                                                           $7,612        $13,330
                                                           ======        =======

  Property and Equipment

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

                                                            December 31,
                                                            ------------
                                                         1999          2000
                                                         ----          ----

Equipment.............................................     $6,352        $11,786
Furniture and fixtures................................        494            937
Leasehold improvements................................        171            307
                                                           ------        -------
                                                            7,017         13,030
Less accumulated depreciation and amortization........      2,600          4,450
                                                           ------        -------
                                                           $4,417        $ 8,580
                                                           ======        =======


  Other Accrued Expenses

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

                                                            December 31,
                                                            ------------
                                                         1999          2000
                                                         ----          ----

Accrued compensation and other related benefits.......     $3,399        $ 5,988
Commissions payable...................................      1,344          2,052
Sales tax payable.....................................        857            222
Accrued warranty......................................        733          1,459
Other accrued expenses................................        355          2,860
                                                           ------        -------
                                                           $6,688        $12,581
                                                           ======        =======

                                       45
<PAGE>

(4) Valuation and Qualifying Accounts

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

<TABLE>
<CAPTION>
                                                  Balance at    Charged to                    Balance
                                                   Beginning     Costs and                     at End
                                                    of Year       Expenses     Deductions     of Year
                                                    -------       --------     ----------     -------
          <S>                                     <C>           <C>            <C>            <C>
          Allowance for doubtful accounts:
          1998................................            $ 21           $202          $  3        $220
          1999................................             220             32            --         252
          2000................................             252            852           122         982
</TABLE>


(5) Minority Investment

     During 1998, the Company acquired 1,666,667 shares (approximately 16.4%) of
the common stock of Top Union Electronics (Top Union), a Taiwan R.O.C.
corporation, for a purchase price of $607,000. Top Union is a subcontractor
manufacturer utilized by the Company for the manufacture of certain products.
During 1999 and 2000, the Company invested an additional $39,000 and $241,000,
respectively, in Top Union as part of two of three external rounds of third-
party financing obtained by Top Union. This investment by the Company was less
than 16.4% of the total financing raised by Top Union and, thus, diluted the
Company's ownership of Top Union to 13.4%. The Company accounts for this
investment using the cost method of accounting. The Company evaluates the fair
value of its investment based on the valuation associated with third party
external rounds of financing. To date no impairment charges have been
recognized.


(6) Other Assets and Commitments

     Other assets as of December 31, 1999 and 2000 consisted principally of a
deposit in the amount of $2,675,000 and $2,842,000, respectively, for the
Company's new facility, currently under construction, which is estimated to be
completed in March 2001. The total cost of the new facility is estimated to be
$18,000,000.


(7) Notes Payable and Line of Credit

     In connection with various acquisitions completed during 1999 and 2000, the
Company had four non-interest bearing notes payable outstanding at December 31,
2000. Annual amounts to be repaid under these notes total $738,000, $438,000,
$410,000 and $200,000 for 2001, 2002, 2003 and 2004, respectively.

     The Company has a $9,000,000 revolving line of credit with a financial
institution that expires on May 1, 2001, bearing interest at the bank's prime
rate less 0.25% (9.25% at December 31, 2000). The agreement, which is
collateralized by the receivables and inventories of the Company, contains
certain financial covenants and restrictions. As of December 31, 2000, there
were no balances outstanding under the line of credit.

     The remaining borrowings consisted of borrowings from various Italian
financial institutions, which bear interest at variable rates, ranging from
7.25% to 8% at December 31, 2000, based on the ABI prime rate. At December 31,
2000, approximately $50,000 had been drawn down under these facilities.
Generally, these foreign credit lines do not require commitment fees or
compensating balances and are cancelable at the option of the Company or the
financial institutions.

                                       46
<PAGE>

(8) Leases

     The Company leases its facilities under several operating lease agreements
which require the Company to pay property taxes and normal maintenance. Future
minimum lease payments, under these agreements, as of December 31, 2000, are as
follows (in thousands):

   Year Ending
   December 31,
   ------------
       2001............................................       $  983
       2002............................................        1,022
       2003............................................          931
       2004............................................          813
       2005............................................           68
                                                              ------
                                                              $3,817
                                                              ======

     Rent expense for the years ended December 31, 1998, 1999 and 2000 was
approximately $415,000, $511,000, and $931,000, respectively.


(9) Capital Stock

Common Stock

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

     Prior to its initial public offering, the Company established a program of
repurchasing common stock in order to offer liquidity to its stockholders.
Repurchases were offered based on valuations performed by the Company of the
fair value of its stock at the time of repurchase. During 1998 and 1999, the
Company repurchased approximately 136,000 and 135,000 shares of common stock for
$195,000 and $202,000, respectively.

Stock Issued in Acquisition Subject to Put Agreement

     On February 22, 2000, the Company issued 500,001 shares of its common stock
to the former Pro. Tel shareholders as part of the total purchase price for Pro.
Tel. (see Note 11. Acquisitions) and granted those shareholders the right to
"put" their shares back to the Company for cash at $10.00 per share on May 22,
2000.  On May 22, 2000, the former Pro. Tel shareholders elected not to sell
these shares back to the Company.

Recapitalization

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

Initial Public Offering

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


(10) Stock Compensation Plans

2000 Employee Stock Purchase Plan

In April 2000, the Company's Board of Directors approved the adoption of the
2000 Employee Stock Purchase Plan (the "Purchase Plan") and reserved 600,000
shares of common stock for issuance thereunder. The Purchase Plan became
effective upon the Company's initial public offering. The Purchase Plan permits
eligible employees to purchase common stock through payroll deductions of up to
15% of the employee's total base compensation, not to exceed $25,000 in any plan
year,

                                       47
<PAGE>

excluding bonuses, commissions and overtime at a price equal to 85% of the lower
of the fair market value of the common stock on the first day of the offering
period or on the last day of the purchase period.


Stock Option Plan

     In April 2000, the Company's Board of Directors approved the adoption of
the 2000 Stock Plan (the "Stock Plan.") The Stock Plan became effective upon the
Company's initial public offering. The total number of shares reserved for
issuance under the stock plan equals 3,750,000 shares of common stock plus
5,250,000 that remained reserved for issuance under the 1993 stock option plan
as of the date the stock plan becomes effective for a total of 9,000,000 shares.
All outstanding options under the 1993 stock option plan will be administered
under the 2000 Stock Plan but will continue to be governed by their existing
terms.

     Options may be granted as incentive stock options or nonstatutory stock
options at the fair market value of such shares on the date of grant as
determined by the Board of Directors. Options granted prior to 1996 expire 5
years from the date of grant and are exercisable in 3 equal annual installments
commencing 1 year from the date of grant. Upon termination of employment, the
optionee may exercise any such vested options within 30 days of termination.
Options granted subsequent to 1996 vest over a 4-year period, and expire at the
end of 10 years from the date of grant, or sooner, if terminated by the Board of
Directors.

     The options granted under the 1993 stock option plan include a provision
whereby the option holder may elect at any time to exercise the option prior to
the full vesting of the option. Unvested shares so purchased are subject to a
repurchase right by the Company at the original purchase price. Such right shall
lapse at a rate equivalent to the vesting period of the original option. As of
December 31, 1998, 1999 and 2000 shares issued and subject to repurchase were
6,750, 25,161 and 144,525, respectively.

     Option activity is summarized as follows:

<TABLE>
<CAPTION>
                                                                  Years Ended December 31,
                                                                  ------------------------
                                                1998                        1999                         2000
                                                ----                        ----                         ----
                                                      Weighted-                    Weighted-                      Weighted-
                                                       Average                      Average                        Average
                                      Number of       Price Per     Number of      Price Per      Number of       Price Per
                                       Options          Share        Options         Share         Options          Share
                                       -------          -----        -------         -----         -------          -----
<S>                                   <C>             <C>           <C>            <C>            <C>             <C>
Outstanding at beginning
 of period.......................       1,290,360           $0.91     1,811,145          $1.09      2,453,100          $ 1.46
Granted at market value..........         663,000            1.43            --             --        627,437           11.66
Granted at less than.............                                                                     650,001
 market value....................              --              --     1,079,100           1.88                             --
Exercised........................         (38,715)           0.55      (229,095)          0.77       (671,150)           1.19
Canceled.........................        (103,500)           1.20      (208,050)          1.14       (138,028)           3.83

Options at end of period.........       1,811,145            1.09     2,453,100           1.46      2,921,360            3.28
                                        =========                     =========                     =========

Weighted-average fair
 value of options granted
 during the period with
 exercise prices at fair
 value...........................                           $0.14                        $  --                         $ 5.89
                                                            =====                        =====                         ======

Weighted-average fair
 value of options granted
 during the period with
 exercise prices less than
 market value at date of
 grant...........................                           $  --                        $2.58                         $10.00
                                                            =====                        =====                         ======
</TABLE>


                                       48
<PAGE>

     Information regarding the stock options outstanding as of December 31,
2000, is summarized in the table below.

<TABLE>
<CAPTION>
                                                  Options Outstanding                      Vested Options
                                                  -------------------                      --------------
                                             Weighted-
                                              Average            Weighted-                               Weighted-
     Range of                                Remaining            Average                                 Average
     Exercise             Shares            Contractual           Exercise             Vested             Exercise
      Prices           Outstanding         Life (years)            Price               shares              Price
      ------           -----------         ------------            -----               ------              -----
<S>                    <C>                 <C>                   <C>                   <C>                <C>
      $0.00              650,001               9.16               $ 0.00                   --             $ 0.00
       0.60               99,950               5.28                 0.60               99,950               0.60
  1.10-1.50            1,053,650               7.55                 1.40              576,750               1.32
       2.17              527,850               8.78                 2.17              140,775               2.17
      10.00              406,245               9.21                10.00                   --              10.00
      11.00               92,963               9.50                11.00                   --              11.00
      15.00                5,001               9.53                15.00                   --              15.00
      20.38               85,700               9.80                20.38                   --              20.38
                        ---------                                                     -------

                        2,921,360                                                     817,475
                        =========                                                     =======
</TABLE>

   The Company uses the intrinsic-value based method to account for its
employees stock-based compensation plan. For options granted in 1998, no
compensation cost has been recognized in the accompanying consolidated financial
statements for options granted under this plan as the exercise price of each
option equaled or exceeded the fair value of the underlying common stock as of
the grant date. With respect to options granted in 1999 and 2000, the Company
has recorded unearned stock-based compensation of approximately $2,270,000 and
$6,500,010, respectively, for the difference at the grant date between the
exercise price and the fair value.

   The deferred compensation represents the aggregate difference, at the date of
grant, between the respective exercise price of stock options and the estimated
fair value of the underlying common stock. The total unearned stock-based
compensation recorded for all option grants through December 31, 2000, will be
amortized as follows for the years ending December 31: 2001, $2,192,000; 2002,
$2,192,000; 2003, $1,988,000; and 2004, $238,000. The amount of deferred stock
compensation expense to be recorded in future periods could decrease if options
for which accrued but unvested compensation has been recorded are forfeited.

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

                                                       Years Ended December 31,
                                                       ------------------------
                                                        1998     1999      2000
                                                        ----     ----      ----
       Net income applicable to common stock:
          As reported............................      $3,371  $10,944   $20,385
          Adjusted pro forma.....................       3,318   10,883    10,190

       Basic earnings per share:
          As reported............................        0.08     0.25      0.43
          Adjusted pro forma.....................        0.07     0.24      0.22

       Diluted earnings per share:
          As reported............................        0.07     0.24      0.41
          Adjusted pro forma.....................        0.07     0.24      0.21

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

                                       49
<PAGE>

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

                                                Years Ended December 31,
                                                ------------------------
                                              1998        1999       2000
                                              ----        ----       ----
Dividend yield ..........................      2.60%       None       None
Expected term............................   4 years     4 years    4 years
Risk-free interest rate..................      5.45%       5.66%      4.90%
Volatility rate..........................      None        None      0.602

(11) Acquisitions

 Hukk

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

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

       Intangibles include the fair value of technology and noncompete
agreements with resulting excess purchase price allocated to goodwill. The
Company amortizes such intangibles on a straight-line basis over four to five
years based on expected lives of technologies, noncompete agreements, and
goodwill. If the identified technologies are not successfully developed, the
Company may not utilize the value assigned to intangible assets.


Pro.Tel

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

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

       Current assets....................................                $1,068
       Property and equipment, net.......................                   177
       Intangible assets:
       Developed technology..............................     $4,365
       Acquired workforce................................        108
       Non-compete covenant..............................        500
       Goodwill..........................................      4,367
                                                              ------
       Total intangible assets...........................                 9,340
       Other long term assets............................                    29
       Current liabilities...............................                  (998)
                                                                         ------
                                                                         $9,616
                                                                         ======

                                       50
<PAGE>

     The Company amortizes such intangibles on a straight-line basis over two to
five years based on expected lives of technologies, non-compete agreements,
acquired workforce and goodwill. If the identified technologies are not
successfully developed, the Company may not utilize the value assigned to
intangible assets.


Pro.Tel USA

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

Pro Forma Results of Operations

     The following summary prepared on an unaudited pro forma basis reflects the
condensed consolidated results of operations for the years ended December 31,
1999 and 2000, assuming Hukk and Pro.Tel had been acquired at the beginning of
the periods presented (in thousands, except per share data):

                                                                 Year Ended
                                                                 December 31,
                                                                 ------------
                                                               1999       2000
                                                               ----       ----
     Net sales...........................................     $63,716   $113,725
     Net income..........................................     $ 7,885   $ 19,825
     Basic earnings per share............................     $  0.17   $   0.42
     Shares used in pro forma per share computation......      45,317     47,582

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


(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. These contributions vest annually over
seven years. Contributions to the Plan of $291,000, $747,000 and $639,000 were
made by the Company in 1998, 1999, and 2000, respectively.


(13) Income Taxes

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

                                                    1998      1999       2000
                                                    ----      ----       ----
     Current expense:
       Federal...................................  $1,506    $6,394     $13,218
       State.....................................      83       952       1,937
                                                   ------    ------     -------
                                                    1,589     7,346      15,155
                                                   ------    ------     -------
     Deferred expense (benefit):
       Federal...................................      16      (960)     (2,692)
       State.....................................     (17)      (95)       (491)
                                                   ------    ------     -------
                                                       (1)   (1,055)     (3,183)
                                                   ------    ------     -------
                                                   $1,588    $6,291     $11,972
                                                   ======    ======     =======


                                       51
<PAGE>

     Income tax expense differed from the amounts computed by applying the U.S.
federal income tax rate of 35% to pretax income as a result of the following (in
thousands):

                                                         1998    1999    2000
                                                         ----    ----    ----
     Computed "expected" tax.........................   $1,736  $6,032  $11,325
     State taxes, net of federal income tax benefit..       44     557      940
     Research credit.................................     (366)   (480)    (691)
     Foreign sales corporation benefit...............     (188)   (109)    (288)
     Nondeductible compensation......................       --      87      199
     Nondeductible goodwill amortization.............       --      44      143
     Tax-exempt interest.............................       --      --     (126)
     Other, net......................................      362     160      470
                                                        ------  ------  -------
                                                        $1,588  $6,291  $11,972
                                                        ======  ======  =======

   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,
                                                                ------------
                                                               1999       2000
                                                               ----       ----
     Deferred tax assets:
       Inventory reserves and additional costs capitalized..  $  156     $  480
       Accrued compensation and vacation....................     528      1,945
       Allowance for doubtful accounts......................     108        408
       Other accruals and reserves..........................     623      1,292
       Net operating losses and start-up costs..............     304          3
       Tax credits..........................................     240         --
       Intangible amortization..............................      --      1,011
       State income taxes...................................     332        678
                                                              ------     ------
     Total gross deferred tax assets........................   2,291      5,817
                                                              ------     ------

     Deferred tax liabilities:
       Property and equipment...............................    (313)      (512)
       Unrealized exchange gains............................     (30)       (20)
       Federal tax cost of net state deferred assets........     (69)      (241)
                                                              ------     ------
       Total deferred tax liabilities.......................    (412)      (773)
                                                              ------     ------
     Net deferred tax assets................................  $1,879     $5,044
                                                              ======     ======


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


(14) Segment Information

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

   The Company's chief operating decision-maker is considered to be the
Company's Chief Executive Officer ("CEO"). The CEO reviews financial information
presented on a consolidated basis accompanied by disaggregated information about
revenue by geographic region for purposes of making operating decisions and
assessing financial performance. The consolidated financial information reviewed
by the CEO is the same as the information presented in the accompanying
consolidated statements of net income. In addition, as the Company's assets are
primarily located in its corporate offices in the United States and not
allocated to any specific segment, the Company does not produce reports for or

                                       52
<PAGE>

measures the performance of its segments based on any asset-based metrics.
Therefore, the Company operates in a single operating segment the design,
manufacture, and sale of digital test equipment for telecommunications,
transmission, and signaling applications.

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

<TABLE>
<CAPTION>
                                                Years Ended December 31,
                                           ----------------------------------
                                             1998          1999        2000
                                           -------       -------     --------
<S>                                        <C>           <C>           <C>
Net sales:
 North America.........................    $17,028       $50,168     $ 88,469
 Europe................................      4,684         4,364       10,407
 Asia/Pacific..........................      5,668         5,742       10,144
 Latin America.........................      1,155         1,191        4,461
                                           -------       -------     --------
                                           $28,535       $61,465     $113,481
                                           =======       =======     ========
</TABLE>

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

<TABLE>
<CAPTION>
                                                Years Ended December 31,
                                           ----------------------------------
                                             1998          1999        2000
                                           -------       -------     --------
<S>                                        <C>           <C>         <C>
 Digital Subscriber Line.................. $28,535       $59,895     $ 90,317
 Fiber Optics.............................      --           236       14,236
 Cable TV.................................      --         1,334        4,273
 Signaling................................      --            --        4,655
                                           -------       -------     --------
                                           $28,535       $61,465     $113,481
                                           =======       =======     ========
</TABLE>

(15) Subsequent Events

       In January 2001, the Company acquired all of the outstanding stock of
Avantron Technologies, a Canadian company which specializes in the design and
manufacture of spectrum analyzers and performance monitoring systems.  The
purchase price was approximately Cdn. $17.6 million (approximately U.S. $11.7
million) in cash and short-term notes payable. The transaction will be accounted
for under the purchase method.


(16) Quarterly Financial Data (unaudited)

<TABLE>
<CAPTION>
                                                                 Quarter Ended
                                                                 -------------
                                Mar. 31,  June 30,  Sept. 30,  Dec. 31,  Mar. 31,  June 30,  Sept. 30,  Dec. 31,
                                  1999      1999       1999      1999      2000      2000       2000      2000
                                  ----      ----       ----      ----      -----     ----       ----      ----
                                                     (in thousands, except per share data)
<S>                             <C>       <C>       <C>        <C>       <C>       <C>       <C>        <C>
Net sales.....................   $ 8,090   $16,410    $14,511   $22,454   $19,791   $27,485    $35,085   $31,120
Gross profit..................     5,809    12,409     11,048    17,463    14,203     7,982     10,034    21,730
Income from operations........     1,451     4,399      3,510     7,548     4,334     7,332     10,992     7,791
Net income....................     1,046     3,034      2,460     4,404     2,773     4,575      7,325     5,712
Earnings per share:
 Basic........................   $  0.02   $  0.07    $  0.05   $  0.10   $  0.06   $  0.10    $  0.15   $  0.11
 Diluted......................   $  0.02   $  0.07    $  0.05   $  0.10   $  0.06   $  0.10    $  0.14   $  0.11
Shares used in per share
computation:
 Basic........................    44,540    44,551     44,728    44,844    45,060    45,451     49,178    49,761
 Diluted......................    45,517    45,606     45,963    46,207    47,032    47,638     51,855    51,874
</TABLE>

                                       53
<PAGE>

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

          None.

                                   PART III.

Item 10.  Directors and Executive Officers of the Registrant.

     The information required by this Item with respect to our executive
officers is incorporated herein by reference from the information under Item 1
of Part I of this Report.  Reference is made to the information responsive to
Items 401 and 405 of Regulation S-K contained in our definitive Proxy Statement
relating to our 2001 Annual Meeting of Shareholders which will be filed with the
U.S. Securities and Exchange Commission within 120 days after the close of the
Company's fiscal year ended December 31, 2000, pursuant to Rule 14a-6(b) under
the Securities and Exchange Act of 1934, as amended; said information is
incorporated herein by reference.

Item 11.  Executive Compensation.

     Reference is made to the information responsive to Item 402 of Regulation
S-K contained in our definitive Proxy Statement relating to our 2001 Annual
Meeting of Shareholders which will be filed with the U.S. Securities and
Exchange Commission within 120 days after the close of our fiscal year ended
December 31, 2000, pursuant to Rule 14a-6(b) under the Securities Exchange Act
of 1934, as amended; said information is incorporated herein by reference.

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

     Reference is made to the information responsive to Item 403 of Regulation
S-K contained in our definitive Proxy Statement relating to our 2001 Annual
Meeting of Shareholders which will be filed with the U.S. Securities and
Exchange Commission within 120 days after the close of our fiscal year ended
December 31, 2000, pursuant to Rule 14a-6(b) under the Securities Exchange Act
of 1934, as amended; said information is incorporated herein by reference.

Item 13.  Certain Relationships and Related Transactions.

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

                                       54
<PAGE>

                                   PART IV.

Item 14.  Exhibits, Financial Statement Schedules, and Reports on Form 8-K.

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

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

               Independent Auditors' Report

               Consolidated Balance Sheets

               Consolidated Statements of Net Income

               Consolidated Statements of Shareholders' Equity and Comprehensive
               Income

               Consolidated Statements of Cash Flows

               Notes to Consolidated Financial Statements

       (2) Supplementary Consolidated Financial Statement Schedule as of and for
  the years ended December  31, 2000, 1999 and 1998:

               None.

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

       (3) Exhibits:

               See attached Exhibit Index.


  (b)  Reports on Form 8-K

       There were no reports on Form 8-K filed during the last quarter of the
       year ended December 31, 2000.

                                       55
<PAGE>

                                   SIGNATURES

     Pursuant to the requirements of the Securities Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized, in the city of San Jose, State of California on March
15, 2001.

                                   SUNRISE TELECOM INCORPORATED




                                   By:  /s/ Paul Ker-Chin Chang
                                      -------------------------------
                                   Paul Ker-Chin Chang
                                   President and Chief Executive Officer


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


<TABLE>
<CAPTION>
                 Signature                                        Title                                  Date
                 ---------                                        -----                                  ----
<S>                                                 <C>                                            <C>

          /s/ Paul Ker-Chin Chang                   President and Chief Executive                    March 15, 2001
-------------------------------------------         Officer (Principal Executive
            Paul Ker-Chin Chang                     Officer)

           /s/ Peter L. Eidelman                    Chief Financial Officer (Principal               March 15, 2001
-------------------------------------------         Accounting Officer)
              Peter Eidelman

           /s/ Paul A. Marshall                     Director                                         March 15, 2001
-------------------------------------------
             Paul A. Marshall

          /s/ Robert C. Pfeiffer                    Director                                         March 15, 2001
-------------------------------------------
            Robert C. Pfeiffer

         /s/ Patrick Peng-Koon Ang                  Director                                         March 15, 2001
-------------------------------------------
           Patrick Peng-Koon Ang

             /s/ Henry P. Huff                      Director                                         March 15, 2001
-------------------------------------------
               Henry P. Huff

           /s/ Jennifer J. Walt                     Director                                         March 15, 2001
-------------------------------------------
             Jennifer J. Walt
</TABLE>

                                       56
<PAGE>

                                 EXHIBIT INDEX

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

<TABLE>
<CAPTION>

  Exhibit
  Number     Description
  -------    -----------

<C>          <S>
    2.1      Share Purchase Agreement dated January 8, 2001 among each of the shareholders of
             Avantron Technologies Inc. and Sunrise Telecom Avantron Division Corp., a Nova Scotia
             unlimited liability company and wholly-owned subsidiary of Sunrise (Incorporated by
             reference from Exhibit 2.1 to Sunrise's Report on Form 8-K dated February 1, 2001).
    3.1      Amended and Restated Certificate of Incorporation.
    3.2      Amended and Restated Bylaws.
    4.1      Specimen Stock Certificate (Incorporated by reference from Exhibit 4.1 to Registration
             Statement No. 333-32070).
   10.1      Lease Agreement dated June 22, 1999 between Sunrise and Great Oaks Properties
             (Incorporated by reference from Exhibit 10.1 to Registration Statement No. 333-32070).
   10.2      Purchase and Sale Agreement and Escrow Instructions dated November 5, 1999 between
             Sunrise and Enzo Drive, LLC (Incorporated by reference from Exhibit 10.2 to Registration
             Statement No. 333-32070).
   10.3      Loan Agreement dated April 21, 2000 between Sunrise and Bank of America (Incorporated by
             reference from Exhibit 10.3 to Registration Statement No. 333-32070).
   10.4      Stock Purchase Agreement dated July 30, 1999 between Sunrise, Hukk Engineering, Inc.,
             Clifford D. Brown, Robert L. Richards and James A. Barker (Incorporated by reference
             from Exhibit 10.4 to Registration Statement No. 333-32070).
   10.5      Master Agreement dated February 22, 2000 between Sunrise and Franco Messori, Franco
             Corradini, Angelo Baccarani and Lucia Barbara Silvani and Master Agreement dated
             February 22, 2000 between Sunrise and Giuliano Sala, Gian Piero Brandolini, Pietro
             Zucchini, Aldo Baccarani and Franco Montanari (Incorporated by reference from Exhibit
             10.5 to Registration Statement No. 333-32070).
   10.6      Form of Indemnification Agreement between Sunrise and each of its Officers and Directors
             (Incorporated by reference from Exhibit 10.6 to Registration Statement No. 333-32070). +
   10.7      2000 Stock Option Plan (Incorporated by reference from Exhibit 10.7 to Registration
             Statement No. 333-32070). +
   10.8      2000 Employee Stock Purchase Plan (Incorporated by reference from Exhibit 10.8 to
             Registration Statement No. 333-32070). +
   10.9      2001 Executive Officer Bonus Plan.* +
   21.1      List of Subsidiaries.
   23.1      Consent of KPMG LLP
</TABLE>
_________________
*Material has been omitted pursuant to a request for confidential treatment.
+Indicates management contract or compensatory plan, contract or arrangement.

                                       57