UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                               ------------------
                                    FORM 10-K
                                  ANNUAL REPORT
                     PURSUANT TO SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934

                   For the fiscal year ended December 31, 2002

                        Commission File Number 000-27843

                                     SOMERA
                              Communications, Inc.

             (Exact name of registrant as specified in its charter)


                 Delaware                                  77-0521878
     (State or other jurisdiction of                     (IRS Employer
      incorporation or organization)                   Identification No.)

                 5383 Hollister Avenue, Santa Barbara, CA 93111
              (Address of principal executive offices and zip code)

                                 (805) 681-3322
              (Registrant's telephone number, including area code)

        Securities registered pursuant to Section 12(b) of the Act: None

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

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


      Indicate by check mark  whether the  Registrant  (1) has filed all reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|

      Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation  S-K is not contained  herein,  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. Yes |_| No |X|

      Indicate by check mark whether the registrant is an accelerated  filer (as
defined in Exchange Act Rule 12b-2). Yes |X| No |_|

      The aggregate market value of the voting stock held by  non-affiliates  of
the Registrant  (based on the closing sale price of the Common Stock as reported
on  the  NASDAQ  National  Market  as  of  June  28,  2002)  was   approximately
$348,447,986.  The number of outstanding shares of the Registrant's Common Stock
as of the close of business on March 14, 2003 was 49,097,103.

                       DOCUMENTS INCORPORATED BY REFERENCE
      Portions  of the  Registrant's  definitive  Proxy  Statement  for the 2003
Annual Meeting of Stockholders are incorporated by reference in Part III of this
Form 10-K to the extent stated herein.


<PAGE>

                           SOMERA COMMUNICATIONS, INC.

<TABLE>
<CAPTION>
                                      INDEX

                                                                                                            Page
                                     PART I

<S>                                                                                                          <C>
Item 1.       Business....................................................................................     1
Item 2.       Properties..................................................................................     9
Item 3.       Legal Proceedings...........................................................................     9
Item 4.       Submission of Matters to a Vote of Security Holders.........................................     9


                                     PART II


Item 5.       Market for Registrant's Common Equity and Related Stockholder Matters.......................    10
Item 6.       Selected Financial Data.....................................................................    11
Item 7.       Management's Discussion and Analysis of Financial Condition and Results of Operations.......    12
Item 7A.      Qualitative and Quantitative Disclosures About Market Risk..................................    26
Item 8.       Financial Statements........................................................................    27
Item 9.       Changes in and Disagreements with Accountants on Accounting and Financial Disclosure........    51


                                    PART III


Item 10.      Directors and Executive Officers of the Registrant..........................................    51
Item 11.      Executive Compensation......................................................................    51
Item 12.      Security Ownership of Certain Beneficial Owners and Management..............................    51
Item 13.      Certain Relationships and Related Transactions..............................................    51
Item 14.      Controls and Procedures.....................................................................    51

                                     PART IV


Item 15.      Exhibits, Financial Statement Schedules and Reports on Form 8-K.............................    52
</TABLE>


<PAGE>

                                     PART I

      This Annual Report on Form 10-K contains  forward-looking  statements that
are subject to a number of risks and uncertainties, many of which are beyond our
control. These statements, other than statements of historical facts included in
this Annual  Report on Form 10-K,  regarding our  strategy,  future  operations,
financial position,  estimated revenues or losses,  projected costs,  prospects,
plans and objectives of management are forward-looking  statements. When used in
this Annual  Report on Form 10-K,  the words "may,"  "will,"  "should,"  "plan,"
"anticipate,"  "believe," "intend,"  "estimate," "expect," "project" and similar
expressions are intended to identify  forward-looking  statements,  although not
all   forward-looking   statements   contain   such   identifying   words.   All
forward-looking  statements  speak only as of the date of this Annual  Report on
Form  10-K.  You  should  not  place  undue  reliance  on these  forward-looking
statements.

      Although we believe that our plans,  intentions and expectations reflected
in or suggested by the forward-looking  statements we make in this Annual Report
on Form  10-K  are  reasonable,  we can  give no  assurance  that  these  plans,
intentions or expectations  will be achieved.  We disclose  important factors in
"Risks  Factors" and elsewhere in this Annual Report that could cause our actual
results to differ  materially from the  forward-looking  statements in this Form
10-K.  These  cautionary  statements  qualify  all  forward-looking   statements
attributable  to us or persons  acting on our behalf.  We  undertake  no duty to
update any of the  forward-looking  statements  after the date of this report to
conform these statements to actual results or to changes in our expectations.


ITEM 1.   BUSINESS


The Markets we Serve

      Wireless,  wireline and data services are provided by nearly 2,000 network
operators  around the world.  During the period of rapid growth from 1996 - 2001
these network operators purchased trillions of dollars of new equipment. Much of
that investment was never deployed or has never been fully utilized.  Since 2001
there has been very little  capital  available to network  operators to complete
the  projects  already  planned  or to upgrade  their  networks  to  accommodate
changing  customer  requirements.  Continually  increasing  downward pressure on
capital spending and operating budgets have encouraged network operators to rely
upon the  large  supply of  previously  purchased  equipment  to  satisfy  their
network's hardware  requirements.  Using previously  purchased  equipment avoids
additional  spending and improves key financial  metrics  (cash flow,  return on
assets,  etc.) But, there is often a mis-match between the excess equipment that
they already own and the specific  hardware that their network needs today. This
overhang of excess  equipment  has driven  further  reductions  in new equipment
purchased.  Manufacturers  have responded by slashing prices to dispose of their
excess  inventories  and  reducing  their work forces to lower their  break-even
points and return to  profitability.  As a result  there is a large  overhang of
recent  vintage  hardware,  a mis-match  within each network of  equipment  they
already  own vs.  equipment  they need today and a lack of  technical  personnel
available to put the right equipment in the right place in the right network.


The Somera Solution

      We provide telecommunications operators with equipment deployment services
to support  their need to optimize  their  networks  and  equipment  assets more
efficiently  and   cost-effectively.   Our  equipment  deployment  services  are
categorized  into three  primary  areas.  First,  working  with the  operator to
determine the  feasibility of redeploying  existing  equipment  within their own
network or valuing  that same  equipment  for possible  re-marketing  to another
operators network.  Second,  supplying operators with the optimum combination of
new and redeployed equipment based on their implementation strategy,  budget and
time-to-market   requirements.   Finally,   providing  value-added  services  to
supplement  or replace  resources  to execute  programs  and  projects  that our
customers traditionally managed themselves.

      Somera is uniquely  qualified to address this market need by understanding
the  complexities  of  equipment  deployment,  whether  that  be a  function  of
operators redeploying equipment assets within their own network ("intra-network"
deployment)  or disposing of assets  outside of their  network  ("inter-network"
deployment) for redeployment into another  operators'  network.  By working with
Somera,   operators  can  make  multi-vendor   equipment   purchase,   equipment
disposition, and service decisions, from a single cost-effective source.

      A key  differentiator  for Somera is the application of our  "intellectual
capital" in data, people, and operations,  which we believe enables  executional
excellence and provides a distinct competitive advantage. Our proprietary global
database of  customers  and  networks  enable us to value,  find,  redeploy  and
dispose  of  equipment  assets  at the


                                       1
<PAGE>

greatest  return to our  customers.  The  experience  and  skills of our  people
deliver unbiased solutions to our customers' problems.  Our equipment deployment
services  competencies  are supported by our world-class  operations,  certified
expertise, and program management skills.


Equipment Deployment Services

Equipment Placement & Valuation

      We help our customers determine the market value of idle and sub-optimized
equipment assets. The financial potential from these assets may provide a source
of capital to offset the expense of other equipment and services  purchases.  As
part of the  evaluation,  we assess the viability of redeploying  this equipment
within the operator's own network ("intra-network" deployment) or outside of the
operator's network ("inter-network"  deployment).  The metrics for valuation are
based on the data  that we  capture  in our  proprietary  global  database.  The
database  consists of product  information and its respective  market value, the
installed technology base within our customers' networks,  network build-out and
de-installation  plans,  and  demand and supply of  equipment  on the  secondary
market.  The data domiciled within our database and applied to the valuation and
marketability  process is  captured  primarily  through  our sales and  purchase
transactions  and  interactions  with customers.  The data is interpreted by our
internal sales, procurement, and supply organization.

      We help our  customers  place  equipment and maximize the value of idle or
sub-optimized  equipment while minimizing their expense and management attention
to the  process.  We offer four types of  equipment  placement  programs.  After
collaborative investigation with the customer, we execute one, or a combination,
based on the type of  equipment  the  customer  wants to dispose of, the current
market demand for the  equipment,  the viability and condition of the equipment,
and the  customer's  network  deployment  strategy.  Our four types of equipment
placement programs are as follows: Consignment,  Asset Exchange, Direct Purchase
and Equipment Disposal.

      Consignment.  Our consignment program is designed to reduce the customer's
excess inventory levels while maximizing  recovery return based on market value.
In the consignment  program,  we do not take title to the equipment,  but rather
the customer owns and typically  stores the excess  inventory in our  warehouse.
Our sales  force then  promotes  the sale of the  consigned  equipment  into our
network of customers and  prospects.  Net proceeds from the consigned  sales are
shared between the customer and us based on negotiated terms.

      Asset Exchange.  Our asset exchange  program is designed to help customers
maximize their capital budget by substituting, or exchanging, equipment from the
customer's existing inventory for equipment that the customer wants to purchase.
The equipment  desired by the customer is supplied from our own inventory,  from
virtual  inventory  identified  from the  proprietary  global  database  or from
inventory to which we  contractually  have access.  Exchange deals are typically
executed for high demand infrastructure equipment.

      Direct  Purchase.  Our  direct  purchase  program  involves  our  directly
purchasing  equipment from the operator  either through direct payment or credit
for future purchases. Direct purchase deals are typically executed for equipment
where we have an existing order of that equipment pending in the system.

      Equipment  Disposal.  Some equipment is no longer marketable and should be
disposed of or  scrapped.  We can  provide  support to  customers  to manage the
disposition  of this  equipment  in a manner that  complies  with  environmental
regulations.

Equipment Supply

      We are  focused on  accelerating  the return on  investment  of  equipment
purchased   by   our   customers.   We  are  a   vendor   neutral   source   for
telecommunications  carriers'  equipment needs. We offer our customers  multiple
categories  of  telecommunications  infrastructure  equipment  to address  their
specific and changing equipment  requirements  primarily for network maintenance
and incremental  build-outs.  We support analog,  T1, T2, SONET, TDMA, CDMA, and
GSM for voice and data  communications.  The  equipment we sell includes new and
redeployed items from a variety of manufacturers.  In 2002, we had a database of
over 25,000 different items, from over 350 different manufacturers. We offer the
original  manufacturer's warranty on all new equipment. On redeployed equipment,
we offer our own warranty which guarantees that the equipment will perform up to
the manufacturer's original specifications.

      The new  equipment  we  offer  consists  of  telecommunications  equipment
purchased primarily from the original equipment  manufacturers  ("OEM") directly
or  distributors.  The  redeployed  equipment  we offer  consists  primarily  of
equipment   removed   from   the   existing   telecommunications   networks   of
telecommunications operators, many of


                                       2
<PAGE>


whom are also our customers, and equipment purchased from resellers. Our sources
for redeployed equipment are typically the original owners of such equipment and
either the  operator,  another  third party,  or a Somera  trained  professional
removes the equipment from the network on behalf of the operator.

      Substantially  all of our equipment  sourcing  activities  are made on the
basis of purchase orders rather than long-term agreements.  Although we seek, as
part  of  our  asset  management   strategy  to  establish   strategic  contract
relationships with operators, we anticipate that operating results for any given
period will continue to be dependent, to a significant extent, on purchase order
based transactions.

      The equipment we sell is grouped into several general  product  categories
and includes core, edge, and ancillary infrastructure support.

      Switching. Switching equipment is used by operators to manage call traffic
and to deliver value-added services.  Switches and related equipment are located
in the central  office of a  telecommunications  operator and serve to determine
pathways and circuits for  establishing,  breaking or completing  voice and data
communications over the public switched telephone network ("PSTN"). We provide a
variety of switching  equipment,  including  switches,  circuit cards,  shelves,
racks  and  other   ancillary   items  in  support  of  carrier   upgrades   and
reconfigurations.  Manufacturers  of switching  equipment whose products we sell
include Alcatel USA, Lucent Technologies and Nortel Networks.

      Transmission.  Transmission  equipment  is  used  by  operators  to  carry
information to multiple points in their network.  Transmission  equipment serves
as the backbone of a  telecommunications  operator's network and transmits voice
and data traffic in the form of standard  electrical or optical signals. We sell
a  broad  range  of  transmission   products,   including   channel  banks,  M13
multiplexers,  digital cross-connect systems, digital loop carriers, SONET ADMs,
DSX panels and echo cancellers.  Manufacturers  of transmission  equipment whose
products we sell include ADC Telecommunications, Carrier Access, Fujitsu, Lucent
Technologies, NEC, Nortel Networks, Telco Systems and Tellabs.

      Wireless.  Cell sites and related ancillary  wireless products are used by
cellular, PCS and paging operators to provide wireless access. This equipment is
used  to  amplify,  transmit  and  receive  signals  between  mobile  users  and
transmission  sites,  including cell sites and  transmission  towers.  We sell a
broad  range of  wireless  equipment  including  radio  base  stations,  towers,
shelters,  combiners,  transceivers  and other related items.  Manufacturers  of
wireless and cell site equipment  whose  products we sell include  Telefon AB LM
Ericsson, Lucent Technologies,  Motorola, Nortel Networks,  Paragon Networks and
Siemens.

      Data. Data networking equipment is used to transmit, route and switch data
communications  traffic  within a wireless or wireline  operator's  network.  We
provide a wide variety of data networking  products including  routers,  digital
subscriber lines, ATM switches, LAN switches and bridges.  Manufacturers of data
networking  equipment  whose  products we sell  include  Cisco  Systems,  Lucent
Technologies, Motorola, Nortel Networks, Redback and Riverstone.

      Microwave. Microwave systems are used by operators to transmit and receive
voice,  data  and  video  traffic.   These  systems  enable  point-to-point  and
point-to-multipoint high speed wireless communications.  We provide a variety of
microwave systems,  including antennas,  dishes,  coaxial cables and connectors.
Manufacturers of microwave  systems whose products we sell include Alcatel,  DMC
Stratex Networks, Harris-Farinon, Nortel Networks and Proxim.

      Power. Power equipment is used by operators to provide direct current (DC)
and/or  alternate  current (AC) power to support  their  network  infrastructure
equipment.  We sell a broad  range of power  equipment,  including  power  bays,
rectifiers,  batteries,  breaker panels and converters.  Manufacturers  of power
equipment whose products we sell include Argus, Lucent Technologies, Marconi and
Nortel Networks.

      As part of the  equipment  supply  offering,  we will  support  customers'
access to critical maintenance spares to minimize network downtime and potential
revenue loss.  Under this  program,  we stock new and  redeployed  equipment and
co-locate  the inventory at the  customers'  facilities or in locations in close
geographic proximity to the customers' network operations for immediate access.

Services

      Resource  allocation has become a more critical concern among operators in
the execution of their network  deployment  strategy.  Resources once focused on
asset  management and network  (re)deployment  are now being  redirected to core
operator business strategies to generate revenue and implement new services.  In
response to this


                                       3
<PAGE>

market  trend,  we have  expanded and enhanced our services  strategy to include
planning,  deployment,  engineering,  and  logistics  and  materials  management
services.  Our ability to deliver a combined  equipment  and services  solution,
which  supplements  or  replaces  services  that  our  customers   traditionally
performed  themselves,  can enable  operators to reduce  operating  expenses and
focus on growth strategies.

      Services  revenue has not been material to date, but is becoming a growing
part of the  company's  business with revenues  generated  primarily  from North
American  operators.  In 2002, we advanced this  strategy and  strengthened  our
competencies  through the purchase of certain assets of Compass Telecom,  LLC, a
provider of  outsourced  services.  Additionally,  all work is  performed to ISO
9001:2000 certification standards.

We provide the following services in connection with our equipment supply:

     o    Planning  Services:  Our strategy is to support our customers' need to
          execute  their network plans in a manner that will maximize the impact
          to their business.  Our planning services are designed to support this
          objective,  which include business case analysis,  value  engineering,
          and  assessing/valuing  existing equipment and determining optimal use
          or disposition of identified excess assets.

     o    Network  Deployment  Services:  We provide  customers with  deployment
          services for network  build-outs and existing  network  modifications.
          Deployment support is defined as program management, site acquisition,
          site development, construction management, and installation.

          -    Program  Management:  We  provide  a  full  spectrum  of  program
               management  support.  Our qualified program managers oversee many
               of the assignments  that have  traditionally  been managed by the
               operator's own personnel.

          -    Site Acquisition,  Development,  and Construction Management:  We
               support  the  site  and  construction  requirements  for  new and
               existing  network  developments.  This  includes  strategic  site
               planning and mapping, leasing, documentation,  zoning, regulatory
               compliance, process engineering, and design and construction.

          -    Installation/De-Installation:        Installation/De-installation
               support has become increasingly  important to our customers.  The
               complexity  of today's  networks  makes it difficult  for any one
               manufacturer to support the multi-product, multi-platform network
               installation/de-installation  process. We work with our customers
               to  define  the  appropriate   level  of  certified   engineering
               resources required to complete a project. Trained technicians are
               dispatched  to the  location,  where  removal of the equipment is
               performed.  Our  broad-based  technical  expertise  in  over  350
               different  technologies and platforms  enables us to support this
               need.  Typically,  the  equipment  de-installed  from the site is
               shipped   to  our   distribution   and   operations   center  for
               refurbishment and reconfiguration.

     o    Engineering  Services: We provide our customers with turnkey solutions
          for  end-to-end  program  execution.  Our program  offering is defined
          based on existing or emergency opportunities. Our engineering services
          support fixed  network,  wireless  backhaul,  site design,  structural
          analysis, E911, and DAS strategies.

     o    Logistic & Materials  Management  Services:  We provide customers with
          repair & refurbishment  spares  management,  customization,  equipment
          disposal, testing, and kitting & staging services.

          -    Testing,  Repair &  Refurbishment:  To ensure the  reliability of
               redeployed  equipment we sell, many of our products are subjected
               to  a  rigorous  testing  and  evaluation  process.  The  process
               includes  loop-back  testing,   field  simulation  testing,   and
               self-diagnostics.   We   also   perform   repair   services   for
               customer-owned   equipment.   Refurbishment   is   completed   to
               manufacturer specifications and customer input.

          -    Spares Management: Availability of critical maintenance spares is
               essential to managing and minimizing  network  downtime.  We work
               with our customers to develop a spares program to ensure critical
               spares  availability  based on historical  utilization  rates and
               other data.  Material will either be co-located at our customers'
               facilities  or in close  geographic  proximity to the  deployment
               site.

          -    Customization:  We  offer  customized  assembly  of  multi-vendor
               equipment,  tailored to the network's specific configuration.  In
               support  of this  process,  Somera  may  provide  customers  with
               ancillary  equipment  and  components to complete the project and
               staged deployment based on the network implementation schedule.


                                       4
<PAGE>

          -    Equipment Disposal:  Somera works with customers to identify what
               equipment is no longer  marketable  or  deployable  and should be
               disposed or scrapped.  We then manage our customer's  disposition
               needs in a manner that  complies with  environmental  regulations
               and maximizes the customer's return on such equipment.

      We  execute  our  services  strategy  through a  combination  of  internal
expertise and  strategic  partnerships.  Services  performed by us either at the
customers' site or at one of our facilities in California,  Georgia,  New Jersey
or Texas.  We have  announced  plans to  consolidate  these  facilities to a new
central operation in Texas by the third quarter of 2003.  Services performed for
the  Europe,  Middle  East,  and  Africa  ("EMEA")  region  are  managed  out of
Amsterdam, The Netherlands.


Sales and Marketing

      Our sales and marketing strategy is to be in close geographic proximity to
our  customers.  The United  States  sales  organization  is located at both our
corporate  headquarters in Santa Barbara,  California and at strategic locations
in  California,  Illinois,  New Jersey,  Texas,  and Georgia.  The Latin America
region is supported primarily from Florida with operations in Mexico and Brazil.
Operations for the EMEA region are  headquartered in Amsterdam,  The Netherlands
with agent or sales  offices in countries  throughout  the region  including the
United Kingdom, Sweden and Russia.  Operations for Asia Pacific are conducted by
our offices located in Singapore and Hong Kong.

      As of  December  31,  2002,  we  employed  over 225  sales,  services  and
procurement  professionals.  We generate  sales leads  primarily  through direct
sales contact, telemarketing,  customer referrals and various marketing outreach
programs.

      In the U.S,  our sales force is  organized  by market  segment,  including
specialized  teams focused on the Regional Bell Operating  Companies  ("RBOCs"),
incumbent local exchange carriers  ("ILECs"),  long distance carriers  ("IXCs"),
competitive  local exchange  carriers  ("CLECs"),  national  wireless  carriers,
including cellular,  personal  communications  service companies  ("PCSs"),  and
rural wireless  carriers.  Within these segments,  our sales force operates on a
defined strategic account basis with sales operatives in geographic proximity to
our customers.  Within each segment,  we employ  dedicated  teams with extensive
market knowledge to meet the specific requirements of these customers.

      For our  customers  in other  countries,  we  approach  the  business on a
geographic  basis,  rather  than a  defined  account  basis,  due  to  language,
cultural, and country specific considerations.

      Another  key  feature  of  our  selling  effort  is the  relationships  we
establish at various  levels in our  customers'  organizations.  This  structure
allows us to  establish  multiple  contacts  with  each  customer  across  their
management, engineering and purchasing operations. An integral part of our asset
management strategy is establishing more senior level relationships.  We believe
this is important to the company's future as the industry  consolidates,  buying
decisions  become   centralized,   and  relationships   become   established  by
overarching or master  agreements.  We have account teams focused on each of the
large national  telecommunications  operators and dedicated  sales/support teams
for others.

      An account  team  comprises  equipment  sales,  procurement,  services and
logistic responsibilities.  This level of integration enables us to respond more
rapidly to customer  requirements and provides  consistent high quality customer
service,  which builds long-term  relationships with our customers.  Sales teams
are further  supported by product line managers  responsible for matching supply
with demand to assure  equipment  availability  and  monitoring  the category to
identify emerging trends that might impact our customers.


                                       5
<PAGE>

      Each team  member  has access to,  and is  supported  by, our  proprietary
global database.  This real time proprietary information system allows each team
to:

     o    respond to customer  requirements  by accessing our database of excess
          and  redeployed   equipment   located  at  operators,   manufacturers,
          distributors  and  other  third  parties  worldwide,  as  well  as  by
          accessing our select inventory;

     o    identify cross-selling opportunities for equipment and services;

     o    access relevant detailed purchase and sale information;

     o    access technical and system configuration information;

     o    trace and track all customer and vendor order activity; and

     o    project and anticipate  customer network  deployment  requirements and
          sales opportunities.

      Substantially  all of our sales are made on the basis of  purchase  orders
rather than long-term  agreements.  As a result,  we may commit resources to the
procurement  and testing of products  without having received  advance  purchase
commitments  from  customers.  Although our asset  management  strategy seeks to
establish strategic contractual relationships with operators, we anticipate that
operating  results for any given  period will  continue  to be  dependent,  to a
significant  extent,  on purchase  orders.  These  purchase  orders often can be
modified, delayed or canceled by our customers without penalty. Additionally, as
telecommunications  equipment  supplier  competition  increases,  we may need to
lower our selling prices or pay more for the equipment we procure. Consequently,
our gross margins may decrease over time. We recognize revenue, net of estimated
provision for sales returns and warranty obligations,  when we ship equipment to
our customers, provided that there are no significant post-delivery obligations.

      As we attempt to expand our sales,  marketing and procurement efforts into
international markets, we face a number of challenges, including:

     o    recruiting skilled sales and technical support personnel;

     o    creation of new supply and customer relationships;

     o    difficulties   and  costs  of  managing  and  staffing   international
          operations; and

     o    developing relationships with local suppliers.

      Any of these  factors  could  potentially  harm our  future  international
operations.

      Our  marketing  efforts are focused on defining the category and enhancing
our brand therein. Activities to support this strategy include public relations,
advertising  in  key  telecommunications  industry  publications,   e-marketing,
cooperative  marketing,  industry trade shows,  professional sales presentations
and  brochures,  and  customer  events.  We  believe  the size and  scope of our
operations in our highly  fragmented  industry gives us both a unique  advantage
and opportunity to further build and enhance our brand recognition.


Customers

      We sell to every major segment of the  telecommunications  sector. We sell
equipment to ILECs, RBOCs, IXCs,  wireless operators  including  cellular,  PCS,
paging and SMRs, and CLECs. We have a healthy account  diversity with over 1,400
customers  worldwide with the majority  located in the United  States.  In 2002,
Verizon  Communications  accounted  for 13.4% of our net revenue,  with no other
customers  accounting  for more than 10% of our net  revenue.  In 2001 and 2000,
Verizon Communications accounted for 16.1% and 11.3%,  respectively,  of our net
revenue. No other customers accounted for greater than 10% of our net revenue in
2001 and 2000.  Sales to customers  outside of the United  States  accounted for
14.9% of our net revenue in 2002,  9.7% of our net revenue in 2001,  and 7.8% of
our net revenue in 2000. Customers from whom we recognized at least $5.0 million
in net revenue in 2002 include leading operators such as Verizon Communications,
AT&T,  Bellsouth,  Cingular,  Lucent  Technologies,  Triton  and  United  States
Cellular.


Competition

      The  market  for  asset  management,  equipment  and  services,  is highly
competitive.    Constrained    capital   budgets,    the    over-abundance    of
telecommunications   infrastructure  equipment  on  the  market,  and  continued
pressures to improve  balance sheet metrics  among  operators and  manufacturers
will further intensify  competition in our industry


                                       6
<PAGE>

for  the  foreseeable  future.   Increased   competition  may  result  in  price
reductions, lower gross margins and loss of our market share in the future.

      As we expand  our  services  strategy,  we are likely to face a new set of
competitors.   Many  of  these  competitors  have  longer  operating  histories,
significantly  greater  resources  and name  recognition,  and a larger  base of
customers.  These  factors are likely to give these  competitors  a  substantial
competitive advantage.

      Increased  competition in the secondary equipment market from distributors
and other secondary market dealers for redeployed  telecommunications  equipment
could also heighten demand for the limited supply of redeployed equipment, which
would  lead to  increased  prices  for,  and reduce the  availability  of,  this
equipment.  Any increase in these prices could significantly  impact our ability
to  maintain  our gross  margins.  Any  reduction  in the  availability  of this
equipment could cause us to be able to meet customer demand.

      Also on the equipment front, we currently face  competition  directly from
OEMs  who may  aggressively  discount  or  extend  terms to gain  share,  reduce
inventories,   and  meet  quarterly  financial   expectations.   Many  of  these
competitors have longer operating histories, significantly greater resources and
name  recognition,  and a larger base of customers.  These  competitors are also
likely  to enjoy  substantial  competitive  advantages  over us,  including  the
following:

     o    ability to devote greater resources to the development,  promotion and
          sale of their equipment and related services;

     o    ability to adopt more aggressive pricing policies than we can;

     o    ability to expand existing customer relationships and more effectively
          develop new customer  relationships  than we can,  including  securing
          long term purchase agreements;

     o    ability  to  leverage  their  customer  relationships  through  volume
          purchasing contracts, and other means intended to discourage customers
          from purchasing products from us;

     o    ability  to  more  rapidly  adopt  new or  emerging  technologies  and
          increase the array of products offered to better respond to changes in
          customer requirements;

     o    greater  focus and  expertise  on  specific  manufacturers  or product
          lines; and

     o    ability to form new  alliances  or  business  combinations  to rapidly
          acquire significant market share.

      There can be no  assurance  that we will  have the  resources  to  compete
successfully  in the  future  or that  competitive  pressures  will not harm our
business.


Employees

      As of December 31, 2002, we had 354 full-time  employees.  We consider our
relations  with our  employees  to be  satisfactory.  We have  never  had a work
stoppage,  and none of our employees is represented  by a collective  bargaining
agreement. We believe that our future success will depend in part on our ability
to attract,  integrate, retain and motivate highly qualified personnel, and upon
the continued service of our senior  management and key sales personnel.  Demand
for qualified  personnel in the  telecommunications  equipment  industry and our
primary  geographic  locations  is  competitive.  We may  not be  successful  in
attracting,  integrating,  retaining  and  motivating  a  sufficient  number  of
qualified employees to conduct our business in the future.


Where You Can Find More Information

      Our  principal  executive  offices are located at 5383  Hollister  Avenue,
Santa Barbara,  California  93111,  and our telephone  number at this address is
(805)  681-3322.  You may  request a copy of our  annual  reports  on Form 10-K,
quarterly reports on Form 10-Q,  current reports on Form 8-K, and all amendments
to these  reports  filed  pursuant to Section  13(a) or 15(d) of the  Securities
Exchange Act of 1934,  at no cost, by writing or  telephoning  us at our address
above (Attention: Investor Relations). Our SEC filings are also available to the
public from the SEC's web site at  http://www.sec.gov.  Our Internet  address is
http://www.somera.com.  The  information on our web site is not  incorporated by
reference into this report.


                                       7
<PAGE>

                      EXECUTIVE OFFICERS OF THE REGISTRANT

      The following table sets forth certain information regarding the Company's
current executive officers as of February 28, 2003.
<TABLE>
<CAPTION>
Name                                     Age                        Position
<S>                                       <C>    <C>
Rick Darnaby........................      51     President, Chief Executive Officer and Director

Dan Firestone.......................      41     Chairman of the Board of Directors

C. Stephen Cordial..................      52     Chief Financial Officer

Warren B. Grayson...................      52     Vice President, General Counsel & Secretary

Brandt A. Handley...................      44     Vice President, Chief Marketing Officer
</TABLE>

     Rick Darnaby has served as our President and Chief Executive  Officer since
joining Somera  Communications  in September 2001. Prior to joining Somera,  Mr.
Darnaby was employed in a number of positions at Motorola,  Inc.  From  December
1999 to April  2001,  Mr.  Darnaby  served as  Regional  President,  Senior Vice
President & General  Manager - EMEA for the  personal  communications  business,
from February 1998 to December 1999, Mr. Darnaby served as Senior Vice President
& General Manager,  Consumer  Solutions Group, and from November 1996 to January
1998, Mr.  Darnaby  served as Corporate Vice President & Director,  Global Brand
Management for Motorola. From 1994 to 1996, Mr. Darnaby served as President, and
from 1991 to 1994 served as executive in various  capacities  for The Nutrasweet
Group a division of Monsanto  Company.  From 1989 to 1991, Mr. Darnaby served as
President & Chief Executive Officer of Monsanto, Canada, Inc. Prior to 1989, Mr.
Darnaby  served in various  positions of management  for Monsanto  Company.  Mr.
Darnaby  holds a B.S.  degree in  business  administration  and an  M.B.A.  from
Oklahoma State University.  Mr. Darnaby also holds an Advanced Management Degree
in   International   Business   from   I.N.S.E.A.D.   (Institute   of   European
Administration) Fountainbleau, France.

      Dan  Firestone  co-founded  Somera  Communications  in July 1995,  and has
served  as our  Executive  Chairman  of the  Board  since  September  2001.  Mr.
Firestone  served as our Chief  Executive  Officer from 1996 to September  2001,
served as our  President  from  December  1998 to September  2001,  and has also
served as our  Chairman  of the  Board  since  our  inception.  From 1994 to the
present,  Mr.  Firestone  has also operated SDC Business  Consulting,  a private
business-consulting  firm. In 1984, Mr.  Firestone  co-founded  Century Computer
Marketing,  a distributor of computer service spare parts and related  products,
and served as its Chief  Executive  Officer until May 1994.  Mr.  Firestone also
serves as President of Somera Ventures, LLC.

      C. Stephen Cordial has served as our Chief Financial Officer since joining
Somera  Communications in August 2002. Prior to joining Somera, Mr. Cordial held
executive  positions  with  industry  leading  companies in the  technology  and
telecom sectors,  including Texas Instruments,  PMC-Sierra, and Xylan (which was
acquired by Alcatel).  Mr. Cordial also served as Chief Financial Officer for En
Pointe Technologies in 1999, iReady Corp in 2000, and Nexsi Systems Corp in 2001
and 2002. Mr. Cordial holds a bachelors degree from Stanford  University,  and a
MBA from the University of Santa Clara.

      Warren B. Grayson has served as our Vice President,  General Counsel since
joining Somera  Communications  in June 2002 and was appointed  Secretary of the
Corporation   in  August  2002.  Mr.  Grayson  came  to  Somera  from  McWhorter
Technologies,  Inc.  where he  served as Vice  President,  General  Counsel  and
Secretary  from June 1999 to December 31, 2001.  From September 1989 through May
1999, Mr. Grayson held a variety of in-house legal positions with The NutraSweet
Company,  then a subsidiary of Monsanto  Company,  ultimately  serving as Deputy
General Counsel from June 1995 to May 1999. Prior to joining Monsanto, from 1980
to 1989, Mr. Grayson was Division  General Counsel and Assistant  Secretary with
Carson  Pirie Scott & Company,  a publicly  held  retail  company.  Mr.  Grayson
received his undergraduate  degree from the University of Illinois,  Chicago and
his law degree from The John Marshall Law School.

      Brandt A.  Handley  has  served  as our Vice  President,  Chief  Marketing
Officer  since  December  2002.  Previously  Mr.  Handley  served  as  our  Vice
President, International from January 2001 to December 2002. From September 1999
to December  2000, Mr. Handley  founded and operated  Seedvest,  Inc., an equity
investment and consultancy firm. From 1991 to September 1999, Mr. Handley served
as a vice  president  at The Walt  Disney


                                       8
<PAGE>

Company,  establishing  two start-up  companies in Asia.  From 1982 to 1991, Mr.
Handley served in various management  capacities in the marketing  department of
The Procter & Gamble  Company,  including  assignments  in the U.S.,  the Middle
East,  Europe and Asia. Mr. Handley holds a B.A. in international  business from
the  University of Oregon and is a graduate of the Advanced  Management  Program
from the Wharton School at the University of Pennsylvania.


ITEM 2.   PROPERTIES

      Our principal  executive and corporate offices,  located in Santa Barbara,
California,   occupy  approximately  43,000  square  feet  under  several  lease
agreements  that expire from March 2003 to March 2004.  Additionally,  we occupy
nine  office  sites  in the  United  States  under  lease  agreements,  totaling
approximately 75,000 square feet.

      At December 31, 2002,  we operated  three  distribution  facilities in the
United States,  occupying approximately 150,000 square feet, under several lease
agreements that expire from May 2004 to December 2005. Our primary  distribution
center is located in Oxnard,  California,  and  occupies  approximately  100,000
square feet under a lease agreement that expires in May 2004. We have another US
distribution center in Norcross,  Georgia and a repair center in Euless,  Texas.
In December 2002, we announced we were  consolidating  our smaller  distribution
and repair facilities into a larger facility in Dallas, Texas. We entered into a
facility lease agreement for space in Dallas,  Texas,  occupying  210,000 square
feet, which begins in March 2003 and expires in March 2010. We expect the Dallas
distribution  and repair facility to be fully  operational by July 2003. At that
time, the Oxnard and Norcross facilities will be vacated.

      We lease additional  properties outside the U.S. Our European headquarters
and  distribution  center,  located  in  Amsterdam,  The  Netherlands,  occupies
approximately 14,000 square feet under a lease agreement that expires in October
2005. We have two other sales  offices in Singapore and Brazil.  We believe that
our facilities are adequate for our current operations and that additional space
can be obtained as needed.


ITEM 3.   LEGAL PROCEEDINGS

      From time to time, we may be involved in legal  proceedings and litigation
arising in the ordinary course of business.  As of the date hereof, we are not a
party  to or aware  of any  litigation  or other  legal  proceeding  that  could
materially harm our business.


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

      No matters were  submitted to a vote of holders of Common Stock during the
quarter ended December 31, 2002.


                                       9
<PAGE>

                                     PART II


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

      Our common stock has been traded on the Nasdaq  National  Market under the
symbol  "SMRA"  since our initial  public  offering on November  12,  1999.  The
following table sets forth, for the periods indicated,  the high and low closing
sale prices for our common stock as reported by the Nasdaq National Market:

                                                          High        Low
                                                         -------    -------
          Year Ended December 31, 2002
          First quarter.............................      $8.70      $7.00
          Second quarter............................      $8.56      $5.58
          Third quarter.............................      $7.29      $2.01
          Fourth quarter............................      $3.26      $1.74

          Year Ended December 31, 2001
          First quarter.............................     $11.69      $4.50
          Second quarter............................      $7.23      $4.00
          Third quarter.............................      $7.05      $3.95
          Fourth quarter............................      $8.15      $4.14

      On March 14, 2003,  the last  reported  sale price for our common stock on
the Nasdaq National Market was $1.07 per share. As of March 14, 2003, there were
approximately  164  holders of record.  Because  many of such shares are held in
street name by brokers and other institutions on behalf of stockholders,  we are
unable to estimate the total number of stockholders  represented by these record
holders.

      While we do not plan to pay  dividends,  any future  determination  to pay
dividends  will be at the  discretion  of the board of directors and will depend
upon our financial condition,  operating results, capital requirements and other
factors the board of directors deems relevant.  We currently plan to retain cash
from  earnings  for use in the  operation  of our  business  and to fund  future
growth.


                                       10
<PAGE>

ITEM 6.   SELECTED FINANCIAL DATA

      You should read the following  selected  financial  data together with our
financial statements and related notes and "Management's Discussion and Analysis
of Financial  Condition and Results of Operations"  appearing  elsewhere in this
Annual Report on Form 10-K. Historical results are not necessarily indicative of
the results to be expected in the future.
<TABLE>
<CAPTION>
                                                             Year Ended December 31,
                                                      -------------------------------------
                                                  2002       2001      2000      1999      1998
                                                  ----       ----      ----      ----      ----
                                                     (in thousands except per share/unit data)
<S>                                            <C>        <C>       <C>       <C>        <C>
Statements of Operations:
Net revenue (1) .............................  $199,200   $221,256  $211,192  $126,861   $73,180
Cost of net revenue (1) .....................   145,590    148,478   134,618    82,761    44,126
                                               --------   --------  --------  --------   -------
Gross profit ................................    53,610     72,778    76,574    44,100    29,054
                                               --------   --------  --------  --------   -------
Operating expenses:
     Sales and marketing ....................    32,334     24,902    20,312    10,320     5,747
     General and administrative .............    25,934     22,049    16,108     8,756     3,939
     Amortization of intangible assets (3) ..       689      1,484       302      --        --
     Asset impairment .......................     1,593       --        --        --        --
     Restructuring charges ..................     2,759        352      --        --        --
                                               --------   --------  --------  --------   -------
          Total operating expenses ..........    63,309     48,787    36,722    19,076     9,686
                                               --------   --------  --------  --------   -------
Income (loss) from operations ...............    (9,699)    23,991    39,852    25,024    19,368
Interest income (expense), net ..............     1,037      1,724     2,376    (2,193)     (187)
                                               --------   --------  --------  --------   -------
Income (loss) before income taxes ...........    (8,662)    25,715    42,228    22,831    19,181
Income tax provision (benefit) ..............    (3,508)    10,929    17,737   (17,403)     --
                                               --------   --------  --------  --------   -------
     Net income (loss) ......................  $ (5,154)  $ 14,786  $ 24,491  $ 40,234   $19,181
                                               ========   ========  ========  ========   =======
Net income (loss) per share/unit--basic (2) .  $  (0.11)  $   0.31  $   0.51  $   1.02   $  0.50
                                               ========   ========  ========  ========   =======
Weighted average shares/units--basic ........    48,645     48,260    47,928    39,408    38,063
                                               ========   ========  ========  ========   =======
Net income (loss) per share/unit--diluted (2)  $  (0.11)  $   0.30  $   0.51  $   1.02   $  0.50
                                               ========   ========  ========  ========   =======
Weighted average shares/units--diluted ......    48,645     48,625    48,329    39,484    38,063
                                               ========   ========  ========  ========   =======
</TABLE>

<TABLE>
<CAPTION>
                                                                   December 31,
                                                         ---------------------------------
                                                    2002      2001      2000     1999      1998
                                                    ----      ----      ----     ----      ----
                                                                  (in thousands)
<S>                                              <C>       <C>       <C>       <C>      <C>
Balance Sheet Data:
Working capital ...............................  $ 77,332  $ 90,476  $ 78,513  $67,888  $  9,482
Total assets ..................................   165,090   143,572   178,076   115,751   17,009
Notes payable--net of current portion .........      --        --        --       --       3,457
Mandatorily redeemable Class B units ..........      --        --        --       --      51,750
Stockholders' equity/members' capital (deficit)   128,100   132,016   114,497   86,786   (45,136)
</TABLE>

(1)  During 2000,  we adopted new guidance for the  accounting  for shipping and
     handling revenues and expenses, and accordingly have reclassified the prior
     period  balances  to conform  with our  current  policy for the years ended
     December  31,  2000,  1999,  and  1998.  See  also  Note 2 of  Notes to the
     Consolidated Financial Statements.

(2)  See  Note  2 of  Notes  to the  Consolidated  Financial  Statements  for an
     explanation of the  calculation of net income (loss) per  share/unit--basic
     and diluted.

(3)  The  acquisition  of MSI  Communications,  Inc. in October 2000 and Asurent
     Technologies  in October 2001 includes  amortization  totaling  $302,000 in
     2000 and $1.4 million in 2001  related to goodwill and acquired  workforce.
     Pursuant to SFAS 142 guidelines, for years subsequent to December 31, 2001,
     the carrying  values will be assessed for  impairment  and no  amortization
     will be recorded. See Note 5 of notes to consolidated financial statements.


                                       11
<PAGE>

      Our fiscal years are on a 52 and 53 week basis. For presentation  purposes
we are using a calendar  quarter and calendar  year end  convention.  Our fiscal
years 2002, 2001,  2000, 1999 and 1998 ended on December 29, 2002,  December 30,
2001, December 31, 2000, January 2, 1999 and January 3, 1998, respectively.


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

      The following  discussion of financial condition and results of operations
should be read in conjunction  with the  consolidated  financial  statements and
related notes appearing elsewhere in this Annual Report on Form 10-K. Our actual
results  could  differ  materially  from  the  results   contemplated  by  these
forward-looking  statements as a result of factors,  including  those  discussed
previously, under "Risk Factors" or in other parts of this Annual Report on Form
10-K.


Corporate History

      Somera Communications,  Inc. was formed in August 1999 and is incorporated
under  the  laws  of  the  State  of  Delaware.  In  November  1999,  we  raised
approximately  $107 million in net proceeds  from our initial  public  offering.
Since that time, our common stock has traded on the Nasdaq National market under
the symbol SMRA.


   Business Combinations.

      In October  2000,  we  acquired  MSI  Communications  Inc.  ("MSI").  This
acquisition has enabled us to strengthen our product offering in data networking
equipment  and  services,  increase  our  national  presence,  and  provide  key
personnel.  This  transaction  was  accounted  for as a purchase.  We paid $10.6
million in cash,  including  acquisition  costs and issued 693,391 shares of our
common stock. As of December 31, 2002, all shares have been earned and no shares
are in escrow.

      In October  2001,  we completed the  acquisition  of the equipment  repair
business of Asurent Technologies,  Inc. ("Asurent") for $6.3 million in cash and
acquisition  costs.  The  acquisition  of  Asurent  provides  us  with  enhanced
equipment  repair  capabilities,  key  personnel,  and  additional  customer and
supplier  relationships.  The financial results of these  acquisitions have been
included in our consolidated financial statements from the dates of acquisition.

      In  October  2002,  we  acquired  Compass  Telecom,  LLC  ("Compass"),  to
strengthen  our services  offerings,  provided key  personnel,  and  contributed
additional  customer  relationships.  We paid $9.5  million  in cash,  including
acquisition costs, and accrued $2.9 million as a result of earn out obligations.
In  addition,  under  the  terms of the  acquisition  agreement,  we may also be
obligated  to pay up to $7.1  million  in cash  over the next  three  years as a
result of a contingent  earn out that is based on achieving  future  performance
targets.

      For further details about these  acquisitions,  see Note 3 of Notes to the
Consolidated Financial Statements.


Results of Operations


   2002 Compared to 2001

      Net Revenue. Substantially all of our net revenue consists of sales of new
and  redeployed  telecommunications  and data  networking  equipment,  including
switching,  transmission, access, wireless, microwave and power products, net of
estimated provision for returns.  Net revenue decreased 10% to $199.2 million in
2002 from $221.3  million in 2001.  The  decrease  in net revenue was  primarily
driven by a 30% decrease in new equipment sales,  partly offset by a 4% increase
in redeployed  equipment sales. Net revenues from customers in the United States
decreased 15% to $169.5  million from $199.8  million,  primarily due to reduced
new equipment  sales.  Net revenues from customers  outside of the United States
increased  39% to $29.7  million in 2002 from  $21.4  million in 2001 due to the
expansion of our international  operations,  primarily in Europe, Asia and Latin
America and our increased focus on international sales. Net revenue attributable
to new equipment  sales decreased to $63.7 million in 2002 from $90.9 million in
2001. The decrease in net revenue  attributable  to new equipment  sales was due
primarily to the financial distress of the  telecommunications  industry,  which
has reduced customers' demand for new equipment. In addition, telecommunications
operators'  capital spending budgets continue to be reduced and we see increased
pricing  pressure  caused by OEMs'  reduction  of their  equipment  prices.  Net
revenue  attributable to redeployed  equipment sales increased to $135.5 million
in 2002 from $130.4 million in 2001. The increase in net revenue attributable to
redeployed  equipment  sales was due to greater  demand  among our  customers in
connection with the


                                       12
<PAGE>

build-out and  servicing of their  existing  networks.  We also see an increased
preference   expressed  by  our   customers  for   redeployed   equipment  as  a
cost-effective alternative to new equipment. We believe net revenue attributable
to new and redeployed equipment will continue to vary from quarter to quarter as
customers'  demand for such  equipment  fluctuates.  We believe net revenue from
customers  in the  United  States  will  decrease  but  that net  revenues  from
customers  outside of the United States will  increase in both absolute  dollars
and as a  percentage  of  overall  net  income  as we  continue  to  expand  our
international  operations.  Service  revenue  was not  material  at 9% of  total
revenues  in 2002 and given  that such  services  are sold in  conjunction  with
equipment sales, we have included it with equipment.

      Cost of Net Revenue. Substantially all of our cost of net revenue consists
of the costs of the equipment we purchase from third party sources.  Cost of net
revenue  decreased 2% to $145.6 million in 2002 from $148.5 million in 2001. The
decrease in cost of net revenue during this period is primarily  attributable to
decreases in our net revenues of new equipment sales, offset by an $11.9 million
increase to our inventory  reserve in the fourth  quarter 2002.  The increase in
inventory  reserve  resulted from continued  weakness in the  telecommunications
industry and changes in our business strategy.  Cost of net revenue attributable
to new equipment  sales decreased to $57.0 million in 2002 from $73.2 million in
2001,  primarily  due to lower  volumes  of new  equipment  sales,  offset by an
increase in the  inventory  reserve  during the fourth  quarter of $2.4  million
relating to obsolete,  but new equipment.  Cost of net revenue  attributable  to
redeployed equipment sales increased to $88.6 million in 2002 from $75.3 million
in  2001.  The  increase  in  cost of net  revenue  attributable  to  redeployed
equipment was due primarily to a $9.5 million  increase in inventory  reserve in
the  fourth  quarter  related  to  redeployed  equipment,  increased  volume  of
redeployed  equipment  sales and an increase  in the cost to acquire  redeployed
equipment.  We believe that the cost of net revenue  attributable  to redeployed
equipment  will continue to fluctuate in absolute  dollar terms as our volume of
redeployed equipment sales fluctuates in response to customer demand.

      Gross profit as a percentage of net revenue, or gross margin, decreased to
26.9% in 2002 from 32.9% in 2001. The decrease in gross margin was primarily due
to an $11.9 million increase to our inventory  reserve we made in fourth quarter
2002. We anticipate  increased pricing pressure on new and redeployed  equipment
due to OEMs' reduction of their equipment  prices during the fourth quarter as a
result  of the  slow-down  of  the  economy  in  2001  and  2002.  Gross  margin
attributable  to new  equipment  sales  decreased to 10.5% in 2002 from 19.4% in
2001.  The  decrease in gross margin  attributable  to new  equipment  sales was
primarily due to an increase in the inventory reserve of $2.4 million during the
fourth quarter,  which related to new equipment and increased pricing pressures.
Gross margin  attributable  to redeployed  equipment sales decreased to 34.6% in
2002 from 42.3% in 2001. The decrease in gross margin attributable to redeployed
equipment  sales was due  primarily to an increase in the  inventory  reserve of
$9.5 million  during the fourth  quarter  related to  redeployed  equipment  and
increased price pressure on redeployed equipment.  We believe that gross margins
attributable to redeployed  equipment sales may continue to fluctuate  depending
upon the mix of redeployed  equipment we sell, our ability to procure  inventory
at favorable prices,  and the pace of recovery of the economy in general and the
telecommunications industry in particular.

      Sales and Marketing.  Sales and marketing  expenses  consist  primarily of
salaries,   commissions  and  benefits  for  sales,  marketing  and  procurement
employees  as well as costs  associated  with  advertising,  promotions  and our
e-commerce  initiative.  Our e-commerce  initiative  was  terminated  during the
fourth  quarter of 2002.  A majority  of our sales and  marketing  expenses  are
incurred in connection with establishing and maintaining long-term relationships
with a variety of  operators.  Sales and marketing  expenses  increased to $32.3
million,  or 16.2% of net revenue,  in 2002 from $24.9 million,  or 11.3% of net
revenue, in 2001. This increase was primarily due to an increase of $5.1 million
in  salaries  and  wages  associated  with the  hiring of  additional  sales and
procurement  personnel,  an increase  of $1.2  million in travel  related  costs
associated  with our intensified  sales efforts,  and an increase of $804,000 in
marketing   primarily   associated   with  a  market  study  on  the  redeployed
telecommunications  space,  partially  offset by a decrease of $948,000 in lower
absolute  commissions  corresponding to lower gross profit on which  commissions
are based.  The absolute  dollar  increase in salaries and wages and decrease in
commissions  were also due to a change in compensation  structure for our senior
sales personnel,  wherein base salaries were increased and commission rates were
reduced as well as severance  packages paid to employees who were  terminated as
part of a reduction in workforce we completed in the third  quarter of 2002.  We
expect that our sales and  marketing  expenses will decrease in 2003 as a result
of our restructuring in the fourth quarter of 2002.

      General and  Administrative.  General and administrative  expenses consist
principally  of salary  and  benefit  costs  for  executive  and  administrative
personnel,  professional  fees and facility  costs.  General and  administrative
expenses increased to $25.9 million, or 13.0% of net revenue, in 2002 from $22.0
million, or 10.0% of net revenue, in 2001. This increase was due primarily to an
increase of $742,000 in  relocation  costs,  an increase of $253,000


                                       13
<PAGE>

associated   with   facilities   costs  and  an  increase  of  $1.2  million  in
depreciation.  We expect that general and administrative  expenses will decrease
due to our cost saving measures.

      Restructuring and Asset Impairment Charges. In the fourth quarter of 2002,
the Company announced and began implementation of its operational  restructuring
plan to reduce  operating  costs and streamline its operating  facilities.  This
initiative  involved the reduction of employee staff by 29 positions  throughout
the Company in  managerial,  professional,  clerical and  operational  roles and
consolidation  of the  Oxnard,  Norcross  and  Euless  distribution  and  repair
facilities to one centralized location in Dallas.

      For the year ended  December 31,  2002,  the charges  associated  with the
restructuring were as follows (in thousands):

                                                                 Total Charge
                                                                 ------------
Restructuring Charge
     Continuing lease obligations...........................     $     995
     Termination benefits...................................         1,764
                                                                     -----
Total Restructuring Charge..................................         2,759
     Asset Impairments......................................         1,593
                                                                     -----
Total Charge................................................     $   4,352

      Continuing  lease  obligations  primarily relate to closure of the Oxnard,
Norcross,  and  Euless  facilities.  Amounts  expensed  represent  estimates  of
undiscounted future cash outflows,  offset by anticipated  third-party sub-lease
rentals.  At December  31,  2002,  the  Company  remains  obligated  under lease
obligations  of $1.5  million  associated  with its  December  2002  operational
restructuring,  offset by estimates of future sub-lease rentals of $575,000. The
lease obligations expire in 2006. The Company expects cash savings of $500,000 a
quarter beginning in the third quarter of 2003 and thereafter.

      Termination benefits are comprised of  severance-related  payments for all
employees to be  terminated in connection  with the  operational  restructuring.
Termination benefits do not include any amounts for employment-related  services
prior to  termination.  Other  restructuring  costs include broker  commissions,
professional fees and other miscellaneous  expenses directly attributable to the
restructuring.

      At  December  31,  2002,  the  accrued   liability   associated  with  the
restructuring  charge  was $2.6  million  and  consisted  of the  following  (in
thousands):

<TABLE>
<CAPTION>
                                                      Restructuring                        Balance at
                                                          Charge         Payments       December 31, 2002
                                                          ------         --------       -----------------
<S>                                                       <C>              <C>               <C>
Lease obligations, net of estimated
      Sublease income .............................       $  995           $  --             $  995
Termination benefits ..............................        1,764            (155)             1,609
                                                          ------           -----             ------
Total .............................................       $2,759           $(155)            $2,604
                                                          ======           =====             ======
</TABLE>

      As of December 31,  2002,  20 employees  had been  terminated,  and actual
termination benefits paid were $155,000.

      Asset  impairments  primarily  relate to  e-commerce  software the Company
invested  in, in  anticipation  of  on-line  sales.  The  online  market did not
materialize  and in the  fourth  quarter of 2002,  the  Company  eliminated  the
department  and  wrote-off  the assets.  The  Company  expects  $1.5  million in
amortization savings in 2003 and none thereafter.

      Restructuring  charges  in 2001  relate to a  reorganization  in which the
domestic  workforce was reduced by 28 people,  or approximately  10% of the then
existing  workforce.  The total charges associated with the reorganization  were
$352,000  and  represented  accrued  salaries  and  wages,  severance,   accrued
vacation, payroll taxes and other directly related costs, all which were paid in
2001.

      Amortization of Intangible  Assets.  Intangible assets consist of customer
contracts, non-compete covenants and goodwill related to our acquisitions during
2000,  2001 and 2002 which were  amortized on a  straight-line  basis over their
estimated  economic  lives.  Amortization  of  intangible  assets  decreased  to
$689,000  in 2002 from $1.5  million in 2001.  The  decline in  amortization  of
intangible   assets   relates  to  our  adoption  of  SFAS  No.  141   "Business
Combinations"  and 142 "Goodwill  and other  Intangibles",  which  requires that
workforce  intangibles  be subsumed into goodwill and that goodwill no longer be
amortized.  This resulted in a $1.4 million  decrease in  amortization  in


                                       14
<PAGE>

2002. This is partially offset by additional  intangible  asset  amortization of
$182,000 resulting from the Compass acquisition  completed in October,  2002. We
expect  amortization  to  increase  slightly  during 2003 to reflect a full year
amortization of intangible assets relating to the Compass acquisition.

      Interest Income (Expense), Net. Interest income (expense), net consists of
investment earnings on cash and cash equivalent  balances.  Interest income, net
decreased  to $1.0  million in 2002 from $1.7  million in 2001.  The decrease in
interest  income was primarily due to lower interest rates in effect during 2002
and a declining  cash  balance from  January  2002 to December  2002.  We had no
long-term debt outstanding as of December 31, 2002.

      Income Tax Provision / (Benefit).  In 2002 we had an income tax benefit of
$3.5  million,  with an  effective  tax rate of  40.5%.  In  2001,  we had a tax
provision of $10.9  million with an  effective  tax rate of 42.5%.  Our tax rate
decrease is due  primarily to Goodwill no longer being  amortized as a result of
SFAS 141 and 142 and tax  efficiencies  gained  as an  indirect  consequence  of
internally restructuring domestic business operations.


   2001 Compared to 2000

      Net Revenue.  Net revenue  increased to $221.3 million in 2001 from $211.2
million in 2000.  The increase in net revenue was  primarily  attributable  to a
general increase in our equipment and services offerings rather than significant
increases in the price of the products we sold,  expansion of our  international
operations,  and growth in  significant  customer  accounts.  Net revenues  from
customers  outside of the United States  increased to $21.4 million in 2001 from
$16.5 million in 2000 due to the expansion of our international operations.  Our
acquisitions of MSI in October 2000 and the equipment repair business of Asurent
in October 2001  contributed  to the general  increase in equipment  and service
offerings.  These increases were partially  offset by the effects of the general
slow-down  in  the   telecommunications   operators'  capital  spending  levels,
including increased price pressure on our redeployed equipment prices, caused by
OEMs'  reduction of their  equipment  prices.  Net revenue  attributable  to new
equipment sales  increased  slightly to $90.9 million in 2001 from $90.7 million
in 2000. Net revenue  attributable  to redeployed  equipment  sales increased to
$130.4  million in 2001 from $120.5 million in 2000. The increase in net revenue
attributable  to redeployed  equipment sales was due to greater demand among our
customers in  connection  with the  build-out  and  servicing of their  existing
networks.  We believe net revenue  attributable to new and redeployed  equipment
will increase as our customers continue to build their existing networks.

      Cost of Net Revenue.  Cost of net revenue  increased to $148.5  million in
2001 from $134.6  million in 2000.  The  increase in cost of net revenue  during
this period is primarily  attributable  to increases in our volume of redeployed
equipment  sales.  Cost  of net  revenue  attributable  to new  equipment  sales
decreased  slightly to $73.2 million in 2001 from $73.8 million in 2000. Cost of
net revenue  attributable  to  redeployed  equipment  sales  increased  to $75.3
million in 2001 from $60.8 million in 2000.  The increase in cost of net revenue
attributable  to redeployed  equipment was due primarily to increased  volume of
redeployed equipment sales.

      Gross profit as a percentage of net revenue, or gross margin, decreased to
32.9% in 2001 from 36.3% in 2000. The decrease in gross margin was primarily due
to increased  price pressure on redeployed  equipment due to OEMs'  reduction of
their  equipment  prices,  as a result of the  slow-down of the economy in 2001.
Gross margin attributable to new equipment sales increased to 19.4% in 2001 from
18.6% in 2000. The increase in gross margin  attributable to new equipment sales
was primarily a function of equipment mix. We believe gross margin  attributable
to new equipment sales will continue to fluctuate  depending upon the mix of the
new equipment we sell. Gross margin  attributable to redeployed  equipment sales
decreased  to 42.3% in 2001 from 49.5% in 2000.  The  decrease  in gross  margin
attributable to redeployed  equipment sales was due primarily to increased price
pressure on redeployed equipment.

      Sales and  Marketing.  Sales and  marketing  expenses  increased  to $24.9
million,  or 11.3% of net revenue,  in 2001 from $20.3  million,  or 9.6% of net
revenue, in 2000. This increase was primarily due to an increase of $4.2 million
in  salaries  and  wages  associated  with the  hiring of  additional  sales and
procurement  personnel,  and an increase of  $800,000  in travel  related  costs
associated with our intensified sales efforts, partially offset by a decrease of
$2.4 million in lower absolute  commissions  corresponding to lower gross profit
on which  commissions are based. The absolute increase in salaries and wages and
decrease in commissions were also due to a change in compensation  structure for
our senior sales personnel,  wherein base salaries were increased and commission
rates were reduced.

      General and Administrative.  General and administrative expenses increased
to $22.0 million,  or 10.0% of net revenue,  in 2001 from $16.1 million, or 7.6%
of net revenue,  in 2000. This increase was due primarily to an increase of $3.6
million in  compensation  costs and  benefits  associated  with the  increase in
employees  relating  to the


                                       15
<PAGE>

expansion  of our  operations,  an  increase  of $1.2  million  associated  with
facilities costs and an increase of $1.7 million in depreciation.

      Stock  Based  Compensation.  Stock-based  compensation  was  $148,000  and
$367,000  for 2001 and 2000,  respectively.  Stock based  compensation  includes
stock-based  charges  resulting  from variable  accounting  treatment of certain
stock  options  issued to key  directors.  The number of shares of common  stock
subject  to   outstanding   vested  and  unvested   employee  stock  awards  was
approximately  $10.1 million and $6.8 million, or 21% and 14% of our outstanding
common stock, at December 31, 2002 and 2001, respectively.

      Amortization of Intangible  Assets.  Intangible assets consist of acquired
workforce,  customer  contract and goodwill related to our  acquisitions  during
2000 and 2001 which were amortized on a straight-line basis over their estimated
economic lives.  Amortization of intangible  assets increased to $1.5 million in
2001 from  $302,000  in 2000.  This  increase  in 2001  reflected a full year of
amortization  of the goodwill  and  purchased  intangibles  arising from the MSI
acquisition compared with three months of amortization in 2000.

      Restructuring  Charges.  On  March  8,  2001,  in  light  of the  economic
environment  and the state of the  telecommunications  industry,  we undertook a
reorganization  in which the  domestic  workforce  was reduced by 28 people,  or
approximately  10% of the then existing  workforce.  The  terminations  were not
concentrated  in any  particular  aspect  of the  business.  We  recorded  total
associated  charges  of  $352,000   representing  accrued  salaries  and  wages,
severance, accrued vacation, payroll taxes and other directly related costs, all
of which were paid during 2001.

      Interest Income (Expense), Net. Interest income (expense), net consists of
investment earnings on cash and cash equivalent  balances.  Interest income, net
decreased to $1.7  million in 2001 from $2.4  million in 2000.  The decrease was
primarily due to lower interest rates in effect during 2001. We had no long-term
debt outstanding as of December 31, 2001.

      Income Tax Provision.  Income tax provision  decreased to $10.9 million in
2001, an effective  tax rate of 42.5%,  from $17.7 million in 2000, an effective
tax rate of 42.0%.


                                       16
<PAGE>

Quarterly Results of Operations

      The following tables set forth unaudited  statement of operations data for
each of the eight quarters in the period ended December 31, 2002, as well as the
percentage of our net revenue  represented  by each item.  In our opinion,  this
unaudited  information  has  been  prepared  on the  same  basis  as the  annual
financial statements. This information includes all adjustments (consisting only
of normal recurring  adjustments)  necessary for fair  presentation when read in
conjunction with the financial  statements and related notes included  elsewhere
in this Annual Report on Form 10-K.  The  operating  results for any quarter are
not necessarily indicative of results for any future period.
<TABLE>
<CAPTION>
                                                                   Quarter Ended
                                     March 31, June 30, Sept. 30,  Dec. 31,  March 31, June 30,  Sept. 30,  Dec. 31,
                                     --------- -------- ---------  --------  --------- --------  ---------  --------
                                        2001     2001      2001      2001       2002      2002      2002     2002
                                        ----     ----      ----      ----       ----      ----      ----     ----
                                                                    (unaudited)
                                                                  (in thousands)
<S>                                   <C>       <C>       <C>       <C>       <C>       <C>       <C>       <C>
Statements of Operations Data:
Net revenue ........................  $47,809   $60,103   $54,973   $58,371   $55,001   $49,217   $50,495   $ 44,487
Cost of net revenue ................   32,475    41,747    36,035    38,221    36,210    32,961    34,560     41,859
                                      -------   -------   -------   -------   -------   -------   -------   --------
Gross profit .......................   15,334    18,356    18,938    20,150    18,791    16,256    15,935      2,628

Operating expenses:
     Sales and marketing ...........    5,567     5,914     6,464     6,957     7,293     8,338     9,309      7,394
     General and administrative ....    5,281     5,024     5,575     6,169     5,473     6,625     6,358      7,478
     Amortization of intangible
       assets ......................      350       350       350       434       127       127       127        308
     Asset impairment ..............       --        --        --        --        --        --        --      1,593
     Restructuring charges .........      352        --        --        --        --        --        --      2,759
                                      -------   -------   -------   -------   -------   -------   -------   --------
         Total operating
           expenses ................   11,550    11,287    12,389    13,561    12,893    15,090    15,794     19,532
                                      -------   -------   -------   -------   -------   -------   -------   --------
Income (loss) from operations ......    3,784     7,069     6,549     6,589     5,898     1,166       141    (16,904)
Interest income (expense), net .....      507       470       461       286       218       490       181        148
                                      -------   -------   -------   -------   -------   -------   -------   --------
Income (loss)  before
   income taxes ....................    4,291     7,539     7,010     6,875     6,116     1,656       322    (16,756)
Income tax provision (benefit) .....    1,818     3,210     2,979     2,922     2,477       671       130     (6,786)
                                      -------   -------   -------   -------   -------   -------   -------   --------
Net income (loss) ..................  $ 2,473   $ 4,329   $ 4,031   $ 3,953   $ 3,639   $   985   $   192   $ (9,970)
                                      =======   =======   =======   =======   =======   =======   =======   ========
As a Percentage of Net Revenue:
Net revenue ........................    100.0%    100.0%    100.0%    100.0%    100.0%    100.0%    100.0%     100.0%
Cost of net revenue ................     67.9      69.5      65.6      65.5      65.8      67.0      68.4       94.1
                                      -------   -------   -------   -------   -------   -------   -------   --------
Gross profit .......................     32.1      30.5      34.4      34.5      34.2      33.0      31.6        5.9
Operating expenses:
     Sales and marketing ...........     10.6       9.3      11.0      11.5      13.3      16.9      18.4       16.6
     General and administrative ....     12.1       8.9      10.9      11.0      10.0      13.4      12.6       16.8
     Amortization of intangible
       assets ......................      0.7       0.6       0.6       0.7       0.2       0.3       0.3        0.7
     Asset impairment ..............       --        --        --        --        --        --        --        3.6
     Restructuring charges .........      0.7        --        --        --        --        --        --        6.2
                                      -------   -------   -------   -------   -------   -------   -------   --------
         Total operating
           expenses ................     24.1      18.8      22.5      23.2      23.5      30.6      31.3       43.9
                                      -------   -------   -------   -------   -------   -------   -------   --------
Income (loss) from operations ......      8.0      11.7      11.9      11.3      10.7       2.4       0.3      (38.0)
Interest income (expense), net .....      1.0       0.8       0.8       0.5       0.4       1.0       0.3        0.3
                                      -------   -------   -------   -------   -------   -------   -------   --------
Income (loss) before
   income taxes ....................      9.0      12.5      12.7      11.8      11.1       3.4       0.6      (37.7)
Income (loss) tax
   provision (benefit) .............      3.8       5.3       5.4       5.0       4.5       1.4       0.2      (15.3)
                                      -------   -------   -------   -------   -------   -------   -------   --------
Net income (loss) ..................      5.2%      7.2%      7.3%      6.8%      6.6%      2.0%      0.4%     (22.4)%
                                      =======   =======   =======   =======   =======   =======   =======   ========
</TABLE>

     Goodwill  and  acquired   workforce  related  to  the  acquisition  of  MSI
Communications,  Inc. in October 2000 and Asurent technologies,  Inc. in October
2001 includes $302,000  amortization in 2000 and $1.4 million of amortization in
2001.  Pursuant to SFAS 142  guidelines,  for years  subsequent  to December 31,
2001, the carrying  values will be assessed for  impairment and no  amortization
will be recorded.


                                       17
<PAGE>

Liquidity and Capital Resources

      Our principal  source of liquidity is our cash and cash  equivalents.  Our
cash and cash  equivalents  balance was $50.4 and $54.5  million at December 31,
2002 and 2001, respectively.

      We finance our operations  primarily  through cash flows from  operations.
Net cash  generated  by  operating  activities  in 2002 was $10.4  million.  The
primary increase in net cash provided by operating  activities was a decrease in
accounts  receivable of $19.5 million. We saw over a $6.0 million dollar decline
in net revenues in the fourth quarter.  Decreasing  revenues and continued focus
on cash collection caused the balance to decrease  significantly  over the prior
year. The inventory  provision  increased by $13.7  million,  primarily due to a
$11.9  million  increase in the inventory  reserve  taken in the fourth  quarter
2002.  In the fourth  quarter we  experienced  a  significant  decline in market
demand  over  the  previous  quarter  and  continued  to see  increased  pricing
pressures.  Historically, the value of inventory increased as it aged and became
scarce in the market.  In addition,  when the  decision was made to  consolidate
operations in Dallas,  we recognized the cost of transporting  some of the items
exceeded the market price.  At the time we made the decision to consolidate  our
distribution  facilities in Dallas,  we reviewed  inventory for  impairment  and
concluded  that a write-down  of $11.9 million was  necessary.  Increases in our
operating  activities  were  offset  by a $10.6  million  decrease  in  Accounts
Payable,  $9.1 million  increase in inventories  and a $4.5 million  decrease in
income taxes payable.

      Net cash provided by operating  activities in 2001 was $32.3 million.  The
primary  increases  in  operating  activities  comprised  of net income of $14.8
million,  depreciation and amortization of $5.0 million, a $3.0 million increase
in inventory reserve, an increase in accounts payable of $4.6 million,  increase
in deferred revenue of $4.6 million and increase in income taxes payable of $5.2
million.  The  increases  in  operating  activities  were  partially  offset  by
decreases  in  accounts  receivable  of $4.7  million  and  inventories  of $2.4
million.  Net cash used in operating  activities in 2000 was $3.2  million.  The
primary  increase in operating  activities was net income of $24.5 million.  Net
income was offset by  increases  in  accounts  receivable  of $18.8  million and
inventories of $13.1 million.

      Net cash used in investing  activities  in 2002  comprised  primarily  our
acquisition  of Compass for $9.5 million in cash  including  acquisition  costs,
acquisition  of property and  equipment of $4.3 million and a loan to an officer
for $2.0  million.  Net cash  used in  investing  activities  in 2001  comprised
primarily  our  acquisition  of  Asurent  for $6.3  million  in cash,  including
acquisition  costs,  and  acquisition of property and equipment of $4.7 million.
Net  cash  used in  investing  activities  in 2000  comprised  primarily  of our
acquisition of MSI for $10.6 million in cash,  including  acquisition  costs and
acquisition of property and equipment of $6.1 million.

      Cash flows from financing activities for the years ended December 31, 2002
and 2001,  included  proceeds  from  employee  stock  purchases  of $586,000 and
$580,000,  respectively. Cash flow used in financing activity for the year ended
December 31, 2000 was $1.5 million,  which primarily relates to a repayment of a
line of credit for $1.0 million and a repayment of capital leases of $830,000.

      At December 31, 2002, we had $50.4  million in cash and cash  equivalents.
We do not currently plan to pay dividends, but rather to retain earnings for use
in the operation of our business and to fund future growth.  We had no long-term
debt outstanding as of December 31, 2002.

      The  following  summarizes  our  contractual   obligations  under  various
operating  leases for both office and  warehouse  space as at December 31, 2002,
and the effect such  obligations  are expected to have on our liquidity and cash
flow in future  periods.  The remaining  lease terms range in length from one to
four years with future  minimum  lease  payments,  net of  sublease  proceeds of
$108,000 in 2003, as follows (in thousands):
<TABLE>
<CAPTION>
                                             2003    2004     2005   2006   2007 Thereafter
                                             ----    ----     ----   ----   ---- ----------
<S>                                         <C>     <C>     <C>     <C>     <C>   <C>
Restructuring related leases (see note 11)  $  561  $  592  $  304  $   22  $  0  $    0
Operating Leases .........................   2,247   2,256   1,913   1,108   912  1, 989
                                            ------  ------  ------  ------  ----  ------

      Total commitments ..................  $2,808  $2,848  $2,217  $1,130  $912  $1,989
                                            ======  ======  ======  ======  ====  ======
</TABLE>
      We have not included  contingent earn out payments in the table above. The
potential  earn out  payments to the former  owners of Compass is $3.85  million
during 2003 and $3.25 million in 2004 if the earnings  before  interest,  taxes,
depreciation  and  amortization  exceed $3.5 million in 2003 and $4.6 million in
2004.


                                       18
<PAGE>

      We are  also  exposed  to  credit  risk in the  event  of  default  of the
sub-lessee  of  certain  facilities,  because  we are  still  liable to meet our
obligations under the terms of the original lease agreement.

      We anticipate fluctuations in working capital in the future primarily as a
result of  fluctuations  in sales of equipment and relative levels of inventory.
We will also continue to expend  significant  amounts of capital on property and
equipment   related  to  the   restructuring  of  our  corporate   headquarters,
consolidation of our distribution centers, equipment testing infrastructure, and
additional  facilities to support our growth,  as well as expending  significant
resources in support of our information technology projects.

      We believe that cash and cash  equivalents and anticipated  cash flow from
operations   will  be  sufficient  to  fund  our  working  capital  and  capital
expenditure requirements for at least the next 12 months.


Critical Accounting Policies

      We consider certain  accounting  policies related to revenue  recognition,
valuation  allowances,  valuation of goodwill and intangible  assets, and income
taxes to be critical policies.

      Revenue Recognition.  Substantially all of our revenue is derived from the
sale of new and redeployed  telecommunications  equipment. With the exception of
exchange  transactions,  revenue is  recognized  upon our  delivery of equipment
provided  that,  at the time of  delivery,  there is evidence  of a  contractual
arrangement with the customer,  the fee is fixed or determinable,  collection of
the  resulting  receivable is  reasonably  assured and there are no  significant
remaining  obligations.  Delivery occurs when title and risk of loss transfer to
the customer, generally at the time the product is shipped to the customer.

      We also generate  services  revenue in connection  with  equipment  sales.
Revenue for transactions  that include  multiple  elements such as equipment and
services is allocated to each  element  based on its relative  fair value (or in
the absence of fair value,  the residual method) and recognized when the revenue
recognition  criteria have been met for each element.  We recognize  revenue for
delivered  elements  only  when  the  following  criteria  are  satisfied:   (1)
undelivered  elements  are  not  essential  to the  functionality  of  delivered
elements, (2) uncertainties  regarding customer acceptance are resolved, and (3)
the fair value for all  undelivered  elements is known.  For 2002  revenue  from
services represented  approximately 9% of net revenue. Services represented less
than 5% of net revenues prior to 2002.

      Revenue  is  deferred   when  customer   acceptance  is  uncertain,   when
significant  obligations  remain, or when undelivered  elements are essential to
the  functionality  of the delivered  products.  A reserve for sales returns and
warranty  obligations  is recorded  at the time of shipment  and is based on our
historical experience.  Actual results could differ from those estimates,  which
could affect our operating results.  At December 31, 2002, the reserve for sales
returns and warranty obligations was $990,000.

      We supply  equipment to companies in exchange for redeployed  equipment or
to companies  from which  redeployed  equipment  was  purchased  under  separate
arrangements executed within a short period of time ("reciprocal arrangements").
For reciprocal  arrangements,  the Company considers Accounting Principles Board
("APB") No. 29,  "Accounting for Nonmonetary  Transactions," and Emerging Issues
Task Force ("EITF")  Issue No. 86-29,  "Nonmonetary  Transactions:  Magnitude of
Boot and  Exceptions  to the Use of Fair  Value,  Interpretation  of APB No. 29,
Accounting  for  Nonmonetary  Transactions."  Revenue  is  recognized  when  the
equipment received in accordance with the reciprocal arrangement is sold through
to a third party.  Revenues  recognized under reciprocal  arrangements were $1.3
million and $1.4 million for the fiscal years ended  December 31, 2002 and 2001,
respectively.  There were no revenues  recognized under reciprocal  arrangements
during 2000.

      Valuation   Allowances.   The  preparation  of  financial   statements  in
conformity with generally  accepted  accounting  principles  requires us to make
estimates  and  assumptions  that  affect  the  reported  amounts  of assets and
liabilities  and disclosure of contingent  assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses during
the reporting period.  Specifically,  we make estimates of doubtful accounts and
slow-moving  and  obsolete  inventory.  These  estimates  are  made  based  on a
consideration of various factors, including historical experience,  knowledge of
customers and the  telecommunications  equipment  market,  and current  economic
trends. Actual results could differ from those estimates, which could affect our
operating results.

      At December 31, 2002, the estimate for slow-moving and obsolete  inventory
was $14.5  million.  During the year ended December 31, 2002 we recorded a $13.7
million increase to the inventory reserve,  resulting from continued weakness in
the telecommunications industry and changes in our business strategy.

      At December 31, 2002, the estimate for doubtful accounts was $692,000.


                                       19
<PAGE>

      Valuation  of  Goodwill  and  Intangible  Assets.  The  cost  of  acquired
companies is allocated to the assets acquired and  liabilities  assumed based on
estimated  fair  values  at  the  date  of   acquisition.   Costs  allocated  to
identifiable  intangible assets are generally amortized on a straight-line basis
over the  remaining  estimated  useful  lives of the assets,  as  determined  by
underlying contract terms or appraisals. Such lives range from fifteen months to
three years.

      We conduct  our  annual  goodwill  impairment  tests  during  June or more
frequently based on an ongoing assessment of events and circumstances that would
more than likely reduce the fair value of the Company below its carrying  value.
Events or  circumstances  that might  require the need for more  frequent  tests
include,  but are not limited to: the loss of a number of  significant  clients,
the identification of other impaired assets within the Company,  the disposition
of a  significant  portion of the Company,  or a significant  adverse  change in
business climate or regulations.  Accordingly,  as a result of the restructuring
activities and inventory write-downs,  the Company conducted a second impairment
test at December 31, 2002. The estimated fair value of the Company  exceeded the
carrying  value in both  tests  conducted  in 2002,  indicating  the  underlying
goodwill was not impaired at the respective testing dates. The goodwill balances
at  December  31,  2002  and  2001  were  $26.5   million  and  $16.3   million,
respectively.

      Deferred Taxes.  The carrying value of our net deferred tax assets assumes
that we will be able to generate sufficient future taxable income in certain tax
jurisdictions,  based on  estimates  and  assumptions.  If these  estimates  and
related assumptions change in the future, we may be required to record valuation
allowances  against our deferred tax assets  resulting in additional  income tax
expense.  We evaluate the realizability of the deferred tax assets quarterly and
assess the need for additional  valuation allowances related to our net deferred
tax assets.  As of December 31, 2002,  we had no valuation  allowances  recorded
against our deferred tax assets.


Recent Accounting Pronouncements

      In June  2002,  the  FASB  issued  SFAS No.  146,  "Accounting  for  Costs
Associated with Exit or Disposal  Activities." This standard requires that costs
associated with exit or disposal activities be recognized when they are incurred
rather than at the date of a commitment to an exit or disposal plan. SFAS No.146
will apply to exit or disposal activities  initiated after fiscal year 2002. The
provisions  of EITF  No.  94-3  shall  continue  to apply  for an exit  activity
initiated under an exit plan that met the criteria of EITF No. 94-3 prior to the
adoption of SFAS No. 146.  The effect on adoption of SFAS No. 146 will change on
a prospective basis the timing of when  restructuring  charges are recorded from
commitment date approach to when the liability is incurred.

      In  December  2002,  the  FASB  issued  SFAS  No.  148,   "Accounting  for
Stock-Based  Compensation -- Transition and  Disclosure."  This Statement amends
SFAS No. 123,  "Stock-Based  Compensation,"  to provide  alternative  methods of
transition  for a voluntary  change to the fair value based method of accounting
for stock-based employee  compensation.  In addition,  this Statement amends the
disclosure requirements of SFAS No. 123 to require prominent disclosures in both
annual and  interim  financial  statements  about the method of  accounting  for
stock-based employee  compensation and the effect of the method used on reported
results.  The  disclosure  provisions of this Statement are effective for fiscal
years  ending  after  December  15, 2002 and have been  incorporated  into these
financial statements and accompanying footnotes.

      In March 2003, the EITF reached a consensus on Issue 00-21, addressing how
to account for arrangements that involve the delivery or performance of multiple
products,  services,  and/or  rights to use assets.  Revenue  arrangements  with
multiple  deliverables  are divided into  separate  units of  accounting  if the
deliverables in the arrangement meet the following  criteria:  (1) the delivered
item has value to the customer on a standalone basis; (2) there is objective and
reliable  evidence of the fair value of undelivered  items;  and (3) delivery of
any undelivered item is probable.  Arrangement consideration should be allocated
among the separate units of accounting based on their relative fair values, with
the amount  allocated to the delivered  item being limited to the amount that is
not  contingent on the delivery of additional  items or meeting other  specified
performance conditions.  The final consensus is applicable to agreements entered
into in  fiscal  periods  beginning  after  June 15,  2003 with  early  adoption
permitted.  We  are  currently  assessing  the  impact  of  EITF  00-21  on  our
consolidated financial statements.

      In  November  2002,  the FASB  issued  Interpretation  No. 45 ("FIN  45"),
"Guarantor's  Accounting and Disclosure  Requirements for Guarantees,  Including
Indirect Guarantees of Indebtedness of Others." FIN 45 requires that a liability
be recorded in the  guarantor's  balance sheet upon issuance of a guarantee.  In
addition,  FIN 45 requires  disclosures  about the guarantees that an entity has
issued,  including a reconciliation  of changes in the entity's product warranty
liabilities.  The initial recognition and initial measurement  provisions of FIN
45 are


                                       20
<PAGE>

applicable  on a  prospective  basis to  guarantees  issued  or  modified  after
December 31, 2002.  The  disclosure  requirements  of FIN 45 are  effective  for
financial  statements  of interim or annual  periods  ending after  December 15,
2002.  We have not  assessed  the  impact  of the  recognition  and  measurement
provisions of FIN 45 on our consolidated financial statements.

      In  January  2003,  the FASB  issued  Interpretation  No.  46 ("FIN  46"),
"Consolidation of Variable Interest Entities,  an Interpretation of ARB No. 51."
FIN 46 requires  certain  variable  interest  entities to be consolidated by the
primary  beneficiary of the entity if the equity  investors in the entity do not
have the  characteristics  of a  controlling  financial  interest or do not have
sufficient  equity at risk for the  entity to  finance  its  activities  without
additional  subordinated  financial  support  from  other  parties.  FIN  46  is
effective immediately for all new variable interest entities created or acquired
after January 31, 2003. For variable interest entities created or acquired prior
to  February  1, 2003,  the  provisions  of FIN 46 must be applied for the first
interim  or annual  period  beginning  after  June 15,  2003.  We are  currently
assessing the impact of FIN 46 on our consolidated financial statements.


Risk Factors

      You should  carefully  consider the risks  described  below. If any of the
following  risks  actually  occur,  our business could be harmed and the trading
price  of our  common  stock  could  decline.  You  should  also  refer to other
information  contained  in this  Annual  Report  on  Form  10-K,  including  our
financial statements and related notes.


Our  operating  results are likely to fluctuate in future  periods,  which might
lead to reduced prices for our stock.

      Our annual or quarterly operating results are difficult to predict and are
likely to fluctuate significantly in the future as a result of numerous factors,
many of which are outside of our control.  If our annual or quarterly  operating
results do not meet the expectations of securities  analysts and investors,  the
trading  price of our stock  could  significantly  decline.  Factors  that could
impact our operating results include:

     o    the rate,  timing  and  volume of  orders  for the  telecommunications
          infrastructure equipment we sell;

     o    the  rate  at  which  telecommunications  operators  de-install  their
          equipment;

     o    decreases in our selling  prices due to  competition  in the secondary
          market or price pressure from OEMs;

     o    our   ability   to  obtain   products   cost-effectively   from  OEMs,
          distributors,    operators    and   other    secondary    sources   of
          telecommunications equipment;

     o    our ability to provide  equipment  and service  offerings  on a timely
          basis to satisfy customer demand;

     o    variations in customer capital  spending  patterns due to seasonality,
          economic  conditions  for   telecommunications   operators  and  other
          factors;

     o    write-offs due to inventory defects or obsolescence;

     o    the  sales  cycle  for  equipment  we sell,  which  can be  relatively
          lengthy;

     o    delays in the  commencement  of our operations in new market  segments
          and geographic regions; and

     o    costs  relating  to  possible  acquisitions  and  integration  of  new
          businesses.

Our business depends upon our ability to match third party redeployed  equipment
supply with carrier  demand for this equipment and failure to do so could reduce
our net revenue.

      Our success depends on our continued  ability to match the equipment needs
of  telecommunications   operators  with  the  supply  of  redeployed  equipment
available  in  the  secondary  market.  We  depend  upon  maintaining   business
relationships  with third parties who can provide us with  redeployed  equipment
and information on available redeployed equipment. Failure to effectively manage
these  relationships  and match the needs of our customers with available supply
of redeployed equipment could damage our ability to generate net revenue. In the
event operators  decrease the rate at which they de-install  their networks,  or
choose not to de-install  their  networks at all, it would be more difficult for
us to locate this equipment, which could negatively impact our net revenue.


                                       21
<PAGE>

A continued  downturn in the  telecommunications  industry or an industry  trend
toward reducing or delaying  additional  equipment purchases due to cost-cutting
pressures could reduce demand for our products.

      We   rely    significantly    upon   customers    concentrated    in   the
telecommunications  industry as a source of net revenue and redeployed equipment
inventory.  In 2002, we  experienced a general  downturn in the level of capital
spending by our telecommunications customers. This slow-down in capital spending
could  result in  postponement  of network  upgrades  and  reduced  sales to our
customers.  There can be no assurance that the level of capital  spending in the
telecommunications  industry or by our customers  specifically  will increase or
remain at current levels.


The  market  for  supplying   equipment  to   telecommunications   operators  is
competitive,  and if we cannot  compete  effectively,  our net revenue and gross
margins might decline.

      Competition  among  companies who supply  equipment to  telecommunications
operators  is  intense.  We  currently  face  competition  primarily  from three
sources:  OEMs,  distributors  and  secondary  market  dealers  who sell new and
redeployed  telecommunications  infrastructure  equipment.  If we are  unable to
compete effectively  against our current or future  competitors,  we may have to
lower our selling  prices and may  experience  reduced gross margins and loss of
market share, either of which could harm our business.

      Competition is likely to increase as new companies  enter this market,  as
current  competitors  expand their  products and services or as our  competitors
consolidate.    Increased    competition    in   the   secondary    market   for
telecommunications  equipment  could also heighten demand for the limited supply
of redeployed equipment which would lead to increased prices for, and reduce the
availability   of,  this   equipment.   Any   increase  in  these  prices  could
significantly impact our ability to maintain our gross margins.


We do not have many formal  relationships  with suppliers of  telecommunications
equipment and may not have access to adequate product supply.

      In fiscal year 2002, 68% of our net revenue was generated from the sale of
redeployed  telecommunications  equipment.  Typically,  we do  not  have  supply
contracts to obtain this equipment and are dependent on the  de-installation  of
equipment  by operators  to provide us with much of the  equipment we sell.  Our
ability  to  buy  redeployed  equipment  from  operators  is  dependent  on  our
relationships  with them.  If we fail to develop  and  maintain  these  business
relationships with operators or they are unwilling to sell redeployed  equipment
to us, our ability to sell redeployed equipment will suffer.


Our  customer  base  is  concentrated  and  the  loss  of one or more of our key
customers would have a negative impact on our net revenue.

      Historically,  a significant  portion of our sales have been to relatively
few customers. Sales to our ten largest customers accounted for 49.4% of our net
revenue in 2002,  39.7% of our net revenue in 2001,  and 39.5% in 2000.  Verizon
Communications  accounted for 13.4%, 16.1% and 11.3% of our net revenue in 2002,
2001 and 2000,  respectively.  In addition,  substantially  all of our sales are
made on a purchase  order  basis,  and no customer  has entered into a long-term
purchasing agreement with us. As a result, we cannot be certain that our current
customers  will  continue to purchase  from us. The loss of, or any reduction in
orders  from, a  significant  customer  would have a negative  impact on our net
revenue.


We may be forced to reduce the sales prices for the equipment we sell, which may
impair our ability to maintain our gross margins.

      In the future we expect to reduce prices in response to competition and to
generate increased sales volume. In 2002 some manufacturers reduced their prices
of new telecommunications  equipment.  If manufacturers reduce the prices of new
telecommunications  equipment, we may be required to further reduce the price of
the new and redeployed  equipment we sell. If we are forced to reduce our prices
or are unable to shift the sales mix towards higher margin  equipment  sales, we
will not be able to maintain current gross margins.


The market for redeployed  telecommunications equipment is relatively new and it
is unclear  whether our  equipment  and service  offerings and our business will
achieve long-term market acceptance.

      The market for redeployed  telecommunications  equipment is relatively new
and evolving, and we are not certain that our potential customers will adopt and
deploy redeployed  telecommunications  equipment in their


                                       22
<PAGE>

networks.  For example,  with respect to  redeployed  equipment  that includes a
significant  software  component,  potential customers may be unable to obtain a
license or  sublicense  for the  software.  Even if they do purchase  redeployed
equipment,  our  potential  customers  may not  choose  to  purchase  redeployed
equipment  from us for a variety of reasons.  Our customers  may also  re-deploy
their displaced  equipment within their own networks which would eliminate their
need for our equipment and service  offerings.  These internal  solutions  would
also limit the supply of  redeployed  equipment  available  for us to  purchase,
which would limit the development of this market.


We may fail to continue to attract,  develop and retain key management and sales
personnel, which could negatively impact our operating results.

      We depend  on the  performance  of our  executive  officers  and other key
employees.  The loss of key  members  of our  senior  management  or  other  key
employees  could  negatively  impact our  operating  results  and our ability to
execute our business strategy. In addition, we depend on our sales professionals
to serve customers in each of our markets.  The loss of key sales  professionals
could significantly disrupt our relationships with our customers. We do not have
"key person" life insurance policies on any of our employees.

      Our future  success  also  depends on our ability to  attract,  retain and
motivate   highly   skilled   employees.   Competition   for  employees  in  the
telecommunications equipment industry is intense. Additionally, we depend on our
ability to train and develop  skilled  sales  people and an  inability  to do so
would significantly harm our growth prospects and operating performance.


Our business may suffer if we are not  successful in our efforts to keep up with
a rapidly changing market.

      The market for the  equipment  and  services we sell is  characterized  by
technological changes, evolving industry standards,  changing customer needs and
frequent  new  equipment  and  service  introductions.  Our  future  success  in
addressing  the needs of our customers  will depend,  in part, on our ability to
timely and cost-effectively:

     o    respond  to  emerging  industry  standards  and  other   technological
          changes;

     o    develop our internal technical capabilities and expertise;

     o    broaden our equipment and service offerings; and

     o    adapt our services to new technologies as they emerge.

      Our failure in any of these areas could harm our business.  Moreover,  any
increased emphasis on software solutions as opposed to equipment solutions could
limit the availability of redeployed equipment, decrease customer demand for the
equipment we sell, or cause the equipment we sell to become obsolete.


The  lifecycles  of  telecommunications   infrastructure  equipment  may  become
shorter,  which would decrease the supply of, and carrier demand for, redeployed
equipment.

      Our sales of redeployed equipment depend upon telecommunications  operator
utilization of existing  telecommunications network technology. If the lifecycle
of equipment  comprising  operator  networks is significantly  shortened for any
reason, including technology advancements,  the installed base of any particular
model would be limited.  This limited installed base would reduce the supply of,
and demand for, redeployed equipment which could decrease our net revenue.


Many of our  customers  are  telecommunications  operators  that may at any time
reduce or discontinue their purchases of the equipment we sell to them.

      If our  customers  choose  to  defer or  curtail  their  capital  spending
programs,   it  could   have  a   negative   impact   on  our   sales  to  those
telecommunications  operators,  which  would harm our  business.  A  significant
portion of our customers are emerging  telecommunications  operators who compete
against  existing  telecommunications  companies.  These new  participants  only
recently  began to enter these  markets,  and many of these  operators are still
building their networks and rolling out their services. They require substantial
capital for the  development,  construction  and expansion of their networks and
the  introduction of their services.  If emerging  operators fail to acquire and
retain  customers or are  unsuccessful  in raising needed funds or responding to
any other  trends,  such as price  reductions  for their  services or diminished
demand for telecommunications  services in general, then they could be forced to
reduce their capital spending programs.


                                       23
<PAGE>

If we fail to implement  our strategy of purchasing  equipment  from and selling
equipment to regional bell operating companies, our growth will suffer.

      One of our  strategies  is to develop  and expand our  relationships  with
regional bell operating companies,  or RBOCs. We believe the RBOCs could provide
us with a significant source of additional net revenue. In addition,  we believe
the RBOCs  could  provide us with a large  supply of  redeployed  equipment.  We
cannot assure you that the  implementation  of this strategy will be successful.
RBOCs may not  choose  to sell  redeployed  equipment  to us or may not elect to
purchase this  equipment from us. RBOCs may instead  develop those  capabilities
internally  or elect to compete with us and resell  redeployed  equipment to our
customers  or  prospective  customers.  If we fail to  successfully  develop our
relationships  with RBOCs or if RBOCs elect to compete with us, our growth could
suffer.


If we do not continue to expand our  international  operations  our growth could
suffer.

      We intend to continue  expanding  our business in  international  markets.
This  expansion  will require  significant  management  attention  and financial
resources  to develop a  successful  international  business,  including  sales,
procurement  and  support  channels.  Following  this  strategy,  we opened  our
European  headquarters  in the fourth quarter of 2000,  and in 2002  established
sales offices in Singapore,  Brazil,  Sweden and Russia.  However, we may not be
able to maintain or increase  international  market  demand for the equipment we
sell, and therefore we might not be able to expand our international operations.
Our experience in providing  equipment  outside the United States is increasing,
but still developing.  Sales to customers outside of the United States accounted
for 14.9% of our net revenue in 2002,  9.7% of our net revenue in 2001, and 7.8%
of our net revenue in 2000.


If  we do  engage  in  selective  acquisitions,  we  may  experience  difficulty
assimilating the operations or personnel of the acquired companies,  which could
threaten our future growth.

      If  we  make   acquisitions  in  the  future,  we  could  have  difficulty
assimilating or retaining the acquired companies' personnel or integrating their
operations,  equipment or services  into our  organization.  These  difficulties
could disrupt our ongoing  business,  distract our  management and employees and
increase  our  expenses.  Moreover,  our  profitability  may  suffer  because of
acquisition-related  costs,  impairment of goodwill, or amortization of acquired
other intangible assets.  Furthermore, we may have to incur debt or issue equity
securities in any future  acquisitions.  The issuance of equity securities would
be dilutive to our existing stockholders.


Defects in the  equipment we sell may  seriously  harm our  credibility  and our
business.

      Telecommunications  operators  require  a  strict  level  of  quality  and
reliability  from  telecommunications  equipment  suppliers.  Telecommunications
equipment is inherently complex and can contain undetected  software or hardware
errors.  If we deliver  telecommunications  equipment with  undetected  material
defects, our reputation, credibility and equipment sales could suffer. Moreover,
because the equipment we sell is integrated into our customers' networks, it can
be  difficult  to  identify  the  source  of a problem  should  one  occur.  The
occurrence  of such defects,  errors or failures  could also result in delays in
installation,  product returns,  product liability and warranty claims and other
losses  to us or our  customers.  In some of our  contracts,  we have  agreed to
indemnify  our  customers  against  liabilities  arising  from  defects  in  the
equipment we sell to them.  Furthermore,  we supply most of our  customers  with
warranties  that  cover the  equipment  we offer.  While we may carry  insurance
policies  covering  these possible  liabilities,  these policies may not provide
sufficient  protection should a claim be asserted.  A material product liability
claim,  whether  successful or not,  could be costly,  damage our reputation and
distract key personnel, any of which could harm our business.


Our  strategy  to  outsource  services  could  impair our ability to deliver our
equipment on a timely basis.

      While we have expanded our services capability,  we still currently depend
on,  to a  large  degree,  third  parties  for a  variety  of  equipment-related
services, including engineering,  repair, transportation,  testing, installation
and  de-installation.  This outsourcing strategy involves risks to our business,
including  reduced  control over delivery  schedules,  quality and costs and the
potential  absence  of  adequate  capacity.  In the event  that any  significant
subcontractor  was to become  unable or unwilling  to continue to perform  their
required   services,   we  would  have  to  identify   and  qualify   acceptable
replacements.  This  process  could  be  lengthy,  and we  cannot  be sure  that
additional  sources of third party services would be available to us on a timely
basis, or at all.


                                       24
<PAGE>

Our quarterly net revenue and the price of our stock may be negatively  impacted
by the seasonal purchasing patterns of our customers.

      Our  quarterly  net  revenue  may be  subject to the  seasonal  purchasing
patterns of our customers,  which may occur as a result of our customers' annual
budgetary,  procurement and sales cycles.  If our quarterly net revenue fails to
meet the  expectations  of  analysts  due to those  seasonal  fluctuations,  the
trading price of our common stock could be negatively affected.


Our ability to meet  customer  demand and the growth of our net revenue could be
harmed if we are unable to manage our inventory needs accurately.

      To meet  customer  demand in the  future,  we believe it is  necessary  to
maintain or  increase  some levels of  inventory.  Failure to maintain  adequate
inventory  levels in these  products could hurt our ability to make sales to our
customers. In the past, we have experienced inventory shortfalls on certain high
demand  equipment,  and we cannot be certain  that we will not  experience  such
shortfalls  again in the future,  which could harm our ability to meet  customer
demand.  Further,  rapid  technology  advancement  could  make  portions  of our
existing  inventory  obsolete and cause us to incur losses. In addition,  if our
forecasts lead to an accumulation  of inventories  that are not sold in a timely
manner, our business could suffer.


The corruption or  interruption  of key software  systems we use could cause our
business to suffer if it delays or restricts our ability to meet our  customers'
needs.

      We rely on the integrity of key software and systems. Specifically we rely
on our relationship management database which tracks information on currently or
potentially available redeployed equipment.  This software and these systems may
be  vulnerable  to harmful  applications,  computer  viruses  and other forms of
corruption and interruption. In the event any form of corruption or interruption
affects our software or systems,  it could delay or restrict our ability to meet
our customers' needs, which could harm our reputation or business.


If we are unable to meet our additional  capital needs in the future, we may not
be able to execute our business growth strategy.

      We  currently  anticipate  that  our  available  cash  resources  will  be
sufficient  to meet our  anticipated  working  capital and  capital  expenditure
requirements for at least the next 12 months.  However, our resources may not be
sufficient to satisfy these requirements.  We may need to raise additional funds
through public or private debt or equity financings to:

     o    take  advantage  of  business  opportunities,   including  more  rapid
          international expansion or acquisitions of complementary businesses;

     o    develop and maintain higher inventory levels;

     o    gain access to new product lines;

     o    develop new services; or

     o    respond to competitive pressures.

      Any  additional  financing  we may need  might not be  available  on terms
favorable  to us, or at all.  If  adequate  funds are not  available  or are not
available on  acceptable  terms,  our business  could suffer if the inability to
raise  this  funding  threatens  our  ability  to execute  our  business  growth
strategy.  Moreover,  if  additional  funds are raised  through the  issuance of
equity securities,  the percentage of ownership of our current stockholders will
be reduced.  Newly issued equity  securities  may have rights,  preferences  and
privileges  senior to those of investors in our common stock.  In addition,  the
terms of any debt could impose restrictions on our operations.


We face the risk of future non-recurring charges in the event of impairment.

      We adopted  SFAS 142  beginning  in January  2002 and, as a result,  we no
longer amortize goodwill. However, we will continue to have amortization related
to other  purchased  intangibles,  and we must evaluate our  intangible  assets,
including goodwill, at least annually for impairment. For 2002, our amortization
charge for other intangibles was $689,000.  If we determine that these items are
impaired,  we will  be  required  to  take a  related  non-recurring  charge  to
earnings.


                                       25
<PAGE>

Our facilities  could be vulnerable to damage from earthquakes and other natural
disasters.

      Our main  facilities are located on or near known  earthquake  fault zones
and are  vulnerable  to damage  from  fire,  floods,  earthquakes,  power  loss,
telecommunications  failures  and  similar  events.  If a disaster  occurs,  our
ability  to test and ship  the  equipment  we sell  would be  seriously,  if not
completely,  impaired,  and our inventory  could be damaged or destroyed,  which
would  seriously  harm our  business.  We cannot be sure that the  insurance  we
maintain against fires, floods,  earthquakes and general business  interruptions
will be adequate to cover our losses in any particular case.


Our officers and directors  exert  substantial  influence  over us, and may make
future business decisions with which some of our stockholders might disagree.

      Our  executive  officers,  directors  and  entities  affiliated  with them
beneficially  own an aggregate of  approximately  55% of our outstanding  common
stock as of December 31, 2002. As a result,  these  stockholders will be able to
exercise  substantial  influence  over all  matters  requiring  approval  by our
stockholders,  including the election of directors  and approval of  significant
corporate transactions. This concentration of ownership may also have the effect
of delaying or preventing a change in our control.


ITEM 7A.   QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK

      We have  reviewed the  provisions  of Financial  Reporting  Release No. 48
"Disclosure of Accounting  Policies for  Derivative  Commodity  Instruments  and
Disclosure  of  Quantitative  and  Qualitative  Information  about  Market Risks
Inherent in Derivative Financial  Instruments,  Other Financial  Instruments and
Derivative Commodity Instruments." We had no holdings of derivative financial or
commodity instruments at December 31, 2002.

      Substantially  all of our  revenue,  purchases  and  capital  spending  is
denominated in U.S.  dollars.  A strengthening of the U.S. Dollar could make our
products  less  competitive  in foreign  markets.  This risk could  become  more
significant as we expand business outside the U.S.

      We invest  our excess  cash in short  term,  interest-bearing,  investment
grade  marketable  securities.  Due  to  the  short  time  the  investments  are
outstanding  and their general  liquidity,  these  instruments are classified as
cash  equivalents  and do not  represent a material  interest  rate risk.  As of
December 31, 2002, we had no long-term debt outstanding.


                                       26
<PAGE>

ITEM 8.   FINANCIAL STATEMENTS


                          INDEX TO FINANCIAL STATEMENTS



                                                                            Page

Report of Independent Accountants......................................      28


Consolidated Balance Sheets............................................      29


Consolidated Statements of Operations..................................      30


Consolidated Statement of Stockholders' Equity.........................      31


Consolidated Statements of Cash Flows..................................      32


Notes to Consolidated Financial Statements.............................      33


                                       27
<PAGE>

                        REPORT OF INDEPENDENT ACCOUNTANTS



To the Board of Directors and Stockholders of
Somera Communications, Inc.

      In our  opinion,  the  consolidated  financial  statements  listed  in the
accompanying  index  present  fairly,  in all material  respects,  the financial
position of Somera  Communications,  Inc. and its  subsidiaries  at December 31,
2002 and 2001 and the results of their  operations and their cash flows for each
of the three years in the period  ended  December  31, 2002 in  conformity  with
accounting principles generally accepted in the United States of America.  These
financial  statements are the  responsibility of the Company's  management;  our
responsibility  is to express an opinion on these financial  statements based on
our audits.  We conducted  our audits of these  statements  in  accordance  with
auditing  standards  generally  accepted in the United States of America,  which
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,  assessing the  accounting  principles
used and  significant  estimates made by management,  and evaluating the overall
financial  statement  presentation.   We  believe  that  our  audits  provide  a
reasonable basis for our opinion.

As  discussed  in Note 5 to the  Consolidated  Financial  Statements,  effective
January 1, 2002,  the Company  changed its method of accounting  for goodwill in
accordance with Statement of Financial  Accounting  Standards No. 142, "Goodwill
and Other Intangible Assets".


/s/ PRICEWATERHOUSECOOPERS LLP

PricewaterhouseCoopers LLP

San Jose, California
January 28, 2003


                                       28
<PAGE>

                           SOMERA COMMUNICATIONS, INC.


                           CONSOLIDATED BALANCE SHEETS
                      (in thousands, except per share data)
<TABLE>
<CAPTION>
                                                                                             December 31,
                                                                                             -----------
                                                                                         2002             2001
                                                                                       --------         --------
<S>                                                                                    <C>              <C>
                                     ASSETS
Current assets:
     Cash and cash equivalents ....................................................    $ 50,431         $ 54,522
     Accounts receivable, (net of allowance for doubtful accounts of
       $692 and $1,701 at December 31, 2002 and 2001 respectively) ................      25,065           44,269
     Inventories, net .............................................................      25,480           30,009
     Deferred tax asset, current portion ..........................................       7,422            4,857
     Income tax receivable ........................................................       2,680               --
     Other current assets .........................................................       3,244            2,879
                                                                                       --------         --------
          Total current assets ....................................................     114,322          136,536
Property and equipment, net .......................................................       7,064            8,687
Deferred tax asset, net of current portion ........................................      13,891           14,300
Other assets ......................................................................       1,838            1,060
Goodwill ..........................................................................      26,585           16,323
Intangible assets, net ............................................................       1,390            1,170
                                                                                       --------         --------
          Total assets ............................................................    $165,090         $178,076
                                                                                       ========         ========


                         LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
     Accounts payable .............................................................    $ 19,910         $ 29,694
     Accrued compensation .........................................................       3,105            2,401
     Other accrued liabilities ....................................................       8,292            4,196
     Deferred revenue .............................................................       5,683            4,550
     Income taxes payable .........................................................          --            5,219
                                                                                       --------         --------
          Total current liabilities ...............................................      36,990           46,060

Commitments (Note 6)

Stockholders' equity:
     Common stock: $0.001 par value
     Shares authorized: 200,000
     Shares issued and outstanding: 48,904 and 48,535 at December 31, 2002 and
        2001 respectively .........................................................          49               49
     Additional paid-in capital ...................................................      73,145           71,929
     Unearned stock-based compensation ............................................          (8)             (71)
     Accumulated other comprehensive loss .........................................        (114)             (73)
     Retained earnings ............................................................      55,028           60,182
                                                                                       --------         --------
          Total stockholders' equity ..............................................     128,100          132,016
                                                                                       --------         --------
          Total liabilities and stockholders' equity ..............................    $165,090         $178,076
                                                                                       ========         ========
</TABLE>
The  accompanying  notes are an integral  part of these  consolidated  financial
statements.


                                       29
<PAGE>

                           SOMERA COMMUNICATIONS, INC.


                      CONSOLIDATED STATEMENTS OF OPERATIONS
                      (in thousands, except per share data)

<TABLE>
<CAPTION>
                                                                            Year Ended December 31,
                                                                            -----------------------
                                                                          2002        2001       2000
                                                                       ---------    --------    --------
<S>                                                                    <C>          <C>         <C>
Net revenue .......................................................    $199,200     $221,256    $211,192
Cost of net revenue ...............................................     145,590      148,478     134,618
                                                                       --------     --------    --------
          Gross profit ............................................      53,610       72,778      76,574
Operating expenses:
     Sales and marketing ..........................................      32,334       24,902      20,312
     General and administrative ...................................      25,934       22,049      16,108
     Amortization of intangible assets ............................         689        1,484         302
     Asset impairment .............................................       1,593           --          --
     Restructuring charges, net ...................................       2,759          352          --
                                                                       --------     --------    --------
          Total operating expenses ................................      63,309       48,787      36,722
                                                                       --------     --------    --------
Income (loss)  from operations ....................................      (9,699)      23,991      39,852
Interest income (expense), net ....................................       1,037        1,724       2,376
                                                                       --------     --------    --------
Income (loss)  before income taxes ................................      (8,662)      25,715      42,228
Tax provision (benefit) ...........................................      (3,508)      10,929      17,737
                                                                       --------     --------    --------
          Net income (loss) .......................................    $ (5,154)    $ 14,786    $ 24,491
                                                                       ========     ========    ========
Net income (loss) per share--basic ................................    $  (0.11)    $   0.31    $   0.51
                                                                       ========     ========    ========
Weighted average shares--basic ....................................      48,645       48,260      47,928
                                                                       ========     ========    ========
Net income (loss)  per share--diluted .............................    $  (0.11)    $   0.30    $   0.51
                                                                       ========     ========    ========
Weighted average shares--diluted ..................................      48,645       48,625      48,329
                                                                       ========     ========    ========
</TABLE>

The  accompanying  notes are an integral  part of these  consolidated  financial
statements.


                                       30
<PAGE>

                           SOMERA COMMUNICATIONS, INC.


                 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
                                 (in thousands)
<TABLE>
<CAPTION>
                                                                                             Accumulated
                                                                  Additional    Unearned        Other
                                                 Common Stock      Paid-in    Stock-Based   Comprehensive   Retained
                                               Number     Value    Capital    Compensation   Income (loss)  Earnings      Total
                                               ------     -----    -------    ------------   ------------   --------      -----
<S>                                             <C>        <C>     <C>            <C>          <C>         <C>           <C>
Balances, January 1, 2000 .................     47,838     $48     $66,419        $(586)       $  --       $ 20,905      $  86,786
Issuance of common
  stock through employee
  stock purchase plan .....................         37      --         353           --           --             --            353
Issuance of common
  stock through exercise of warrants ......         27      --          --           --           --             --             --
Issuance of common
  stock on acquisition of MSI
  Communications,  Inc. ...................        289      --       2,500           --           --             --          2,500
Amortization of
  unearned stock-based compensation .......         --      --          --          367           --             --            367
Net income ................................         --      --          --           --           --         24,491         24,491
                                                ------     ---     -------        -----        -----      ---------      ---------
  Balance, December 31, 2000 ..............     48,191     $48     $69,272        $(219)       $  --      $  45,396      $ 114,497

Issuance of common
  stock through employee
  stock purchase plan .....................        118      --         580           --           --             --            580
Issuance of contingent
  common stock on acquisition of MSI
  Communications,  Inc. ...................        226       1       1,841           --           --             --          1,842
Warrants issued in exchange
   for services ...........................         --      --         236           --           --             --            236
Amortization of
  unearned stock-based compensation .......         --      --          --          148           --             --            148
Foreign currency translation adjustment             --      --          --           --          (73)            --            (73)
Net income ................................         --      --          --           --           --         14,786         14,786
                                                ------     ---     -------        -----        -----      ---------      ---------
 Balances, December 31, 2001 ..............     48,535     $49     $71,929        $ (71)       $ (73)     $  60,182      $ 132,016
                                                ======     ===     =======        =====        =====      =========      =========
Issuance of common
  stock through employee
  stock purchase plan .....................        168      --         586           --           --             --            586
Issuance of contingent
  common stock on acquisition of MSI
  Communications,  Inc. ...................        179      --         505           --           --             --            505
Issuance of common stock through stock
   option exercises .......................         22      --         125           --           --             --            125
Amortization of
  unearned stock-based compensation .......         --      --          --           63           --             --             63
Gain/(Loss) on investments                          --      --          --           --            3             --              3
Foreign currency translation
   adjustment .............................         --      --          --           --          (44)            --            (44)
Net loss ..................................         --      --          --           --           --         (5,154)        (5,154)
                                                ------     ---     -------        -----        -----      ---------      ---------
       Balances, December 31, 2002 ........     48,904     $49     $73,145        $  (8)       $(114)     $  55,028      $ 128,100
                                                ======     ===     =======        =====        =====      =========      =========
</TABLE>

The  accompanying  notes are an integral  part of these  consolidated  financial
statements.


                                       31
<PAGE>



                           SOMERA COMMUNICATIONS, INC.

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (in thousands)
<TABLE>
<CAPTION>
                                                                                                   Year ended December 31,
                                                                                                   -----------------------
                                                                                             2002            2001            2000
                                                                                           --------        --------        --------
<S>                                                                                        <C>             <C>             <C>
Cash flows from operating activities:
     Net income (loss) .............................................................       $ (5,154)       $ 14,786        $ 24,491
     Adjustments to reconcile net income (loss) to
        net cash provided by (used in) operating activities:
          Depreciation and amortization ............................................          5,363           5,038           1,015
          Provision for doubtful accounts ..........................................          1,876             592           1,778
          Provision for excess and obsolete inventories ............................         13,667           2,974           3,062
          Deferred tax provision (benefit) .........................................         (2,721)            521             (54)
          Warrants issued in exchange for services .................................             --             236              --
          Non-cash restructuring charge ............................................          1,593              --              --
          Amortization of stock-based compensation .................................             63             148             367
          Forgiveness of loans to officers .........................................            203              89              75
          Gain on disposal of assets ...............................................            (93)             --              --
          Changes in operating assets and liabilities:
               Accounts receivable .................................................         19,477          (4,652)        (18,811)
               Inventories .........................................................         (9,138)         (2,375)        (13,077)
               Other current assets ................................................         (2,181)           (340)           (518)
               Other assets ........................................................           (129)             45               8
               Accounts payable ....................................................        (10,582)          4,587            (513)
               Accrued compensation ................................................            335            (122)            816
               Deferred revenue ....................................................          1,133           4,550              --
               Other accrued liabilities ...........................................          1,203             975          (1,282)
               Income taxes payable ................................................         (4,486)          5,219            (508)
                                                                                           --------        --------        --------
                    Net cash provided by (used in) operating activities ............         10,429          32,271          (3,151)
                                                                                           --------        --------        --------
Cash flows from investing activities:
     Acquisition of property and equipment .........................................         (4,333)         (4,706)         (6,129)
     Acquisition of business, net of cash acquired .................................         (9,529)         (6,336)        (10,568)
     Purchase of short-term investments ............................................         (4,984)             --              --
     Sale of short-term investments ................................................          4,984              --              --
     Loans to officers .............................................................         (2,000)           (300)           (300)
     Repayment of loan to officer ..................................................            675              --             425
                                                                                           --------        --------        --------
                    Net cash used in investing activities ..........................        (15,187)        (11,342)        (16,572)
                                                                                           --------        --------        --------
Cash flows from financing activities:
     Repayment of line of credit ...................................................             --              --          (1,026)
     Payment of capital lease ......................................................             --            (180)           (830)
     Proceeds from employee stock purchase plan ....................................            586             580             353
     Proceeds from stock option exercises ..........................................            125              --              --
                                                                                           --------        --------        --------
                    Net cash provided by (used in) financing activities ............            711             400          (1,503)
                                                                                           --------        --------        --------

Net increase (decrease) in cash and cash equivalents ...............................         (4,047)         21,329         (21,226)
Effect of exchange rate changes on cash and cash equivalents .......................            (44)            (73)             --
Cash and cash equivalents, beginning of year .......................................         54,522          33,266          54,492
                                                                                           --------        --------        --------
Cash and cash equivalents, end of year .............................................       $ 50,431        $ 54,522        $ 33,266
                                                                                           ========        ========        ========
Supplemental disclosures of cash flow information:
     Cash paid during the period for interest ......................................       $     67        $     64        $    136
                                                                                           ========        ========        ========
     Income taxes paid .............................................................       $  5,111        $  4,815        $ 18,974
                                                                                           ========        ========        ========
     Fixed assets acquired under capital lease .....................................       $     --        $     --        $    258
                                                                                           ========        ========        ========
     Issuance of common stock in acquisition of business ...........................       $    505        $  1,842        $  2,500
                                                                                           ========        ========        ========
</TABLE>

The  accompanying  notes are an integral  part of these  consolidated  financial
statements.


                                       32
<PAGE>

                           SOMERA COMMUNICATIONS, INC.


                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Note 1--Formation and Business of the Company:

      Somera Communications,  Inc. ("The Company") was formed in August 1999 and
is incorporated  under the laws of the State of Delaware.  In November 1999, the
Company  raised  approximately  $107  million in net  proceeds  from the initial
public  offering.  Since that time, the Company's common stock has traded on the
Nasdaq National market under the symbol SMRA.


Note 2 - Summary of Significant Accounting Policies:


   Basis of Presentation

      The Company's  fiscal years reported are the 52- or 53-week periods ending
on the Sunday nearest to December 31. Fiscal years 2002, 2001 and 2000 comprised
the 52-week  periods ended on December 29, 2002,  December 30, 2001 and December
31, 2000, respectively.


   Principles of Consolidation

     The Company  acquired MSI  Communications,  Inc., in October  2000,  formed
Somera Communications B.V.,  incorporated in The Netherlands,  in November 2000,
formed Somera  Communications  Pte Ltd.,  incorporated  in Singapore,  in August
2001, and formed Somera  Communications Ltda,  incorporated in Brazil, in April,
2002. The consolidated  financial statements include the accounts of the Company
and its wholly-owned  subsidiaries.  All intercompany  balances and transactions
have been eliminated.


   Use of Estimates

      The  preparation  of financial  statements  in conformity  with  generally
accepted  accounting  principles  requires  management  to  make  estimates  and
assumptions  that  affect the  reported  amounts of assets and  liabilities  and
disclosure of  contingent  assets and  liabilities  at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Specifically,  estimates are used for, but not limited to the accounting
for doubtful  accounts  receivable,  slow-moving and obsolete  inventory,  sales
returns reserves, valuation of goodwill and purchased intangibles, restructuring
accruals and deferred taxes. Actual results could differ from those estimates.


   Revenue Recognition

      Substantially all of the Company's revenue is derived from the sale of new
and  redeployed  telecommunication  equipment.  With the exception of reciprocal
arrangements,  revenue is  recognized  upon  delivery  of the  equipment  by the
Company  provided  that,  at the  time  of  delivery,  there  is  evidence  of a
contractual  arrangement  with the customer,  the fee is fixed or  determinable,
collection  of the resulting  receivable is reasonably  assured and there are no
significant remaining  obligations.  Delivery occurs when title and risk of loss
transfer to the  customer,  generally  at the time the product is shipped to the
customer.

      The Company also generates  services  revenue in connection with equipment
sales. Revenue for transactions that include multiple elements such as equipment
and services is allocated to each element  based on its relative  fair value (or
in the absence of fair value,  the  residual  method)  and  recognized  when the
revenue  recognition  criteria  have  been met for  each  element.  The  Company
recognizes  revenue for delivered  elements only when the following criteria are
satisfied:  (1) undelivered  elements are not essential to the  functionality of
delivered  elements,   (2)  uncertainties   regarding  customer  acceptance  are
resolved,  and (3) the fair value for all undelivered elements is known. Revenue
from services  represented  approximately 9% of total revenue for the year ended
December 31, 2002 and less than 5% of revenue for each of the fiscal years ended
December 31, 2001 and 2000.

      Revenue  is  deferred   when  customer   acceptance  is  uncertain,   when
significant  obligations  remain, or when undelivered  elements are essential to
the  functionality  of the delivered  products.  A reserve for sales returns and
warranty  obligations  is recorded  at the time of shipment  and is based on the
Company's historical experience.


                                       33
<PAGE>

                           SOMERA COMMUNICATIONS, INC.


            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


      The Company  supplies  equipment to  companies in exchange for  redeployed
equipment or to companies from which  redeployed  equipment was purchased  under
separate  arrangements  executed  within  a short  period  of time  ("reciprocal
arrangements").  For reciprocal  arrangements,  the Company considers Accounting
Principles Board ("APB") No. 29, "Accounting for Nonmonetary  Transactions," and
Emerging Issues Task Force ("EITF") Issue No. 86-29, "Nonmonetary  Transactions:
Magnitude of Boot and Exceptions to the Use of Fair Value, Interpretation of APB
No. 29, Accounting for Nonmonetary Transactions." Revenue is recognized when the
equipment received in accordance with the reciprocal arrangement is sold through
to a third party.  Revenues  recognized under reciprocal  arrangements were $1.3
million and $1.4 million for the fiscal years ended  December 31, 2002 and 2001,
respectively.  There were no revenues  recognized under reciprocal  arrangements
during 2000.


   Income Taxes

      The Company  accounts for income taxes in accordance  with FASB  Statement
No. 109,  "Accounting for Income Taxes," which requires the use of the liability
method in accounting  for income  taxes.  Deferred  income taxes are  determined
based on the difference between the financial  reporting and tax bases of assets
and  liabilities  using  enacted  rates in effect  during  the year in which the
differences are expected to reverse.  Valuation  allowances are established when
necessary to reduce deferred tax assets to the amount expected to be realized.


   Concentration of Credit Risk and Other Risks and Uncertainties

      Financial   instruments,   which  potentially  expose  the  Company  to  a
concentration of credit risk,  consist  principally of cash and cash equivalents
and accounts  receivable.  The Company places its temporary cash with three high
credit quality financial institutions in the United States. The Company performs
ongoing credit evaluations of its customers'  financial  condition and generally
requires no collateral.

      For the year ended December 31, 2002, one customer  accounted for 13.4% of
net revenue and one  customer  accounted  for 23.7% of  accounts  receivable  at
December  31,  2002.  In  addition,  the  Company  purchased  1.4% of its  total
inventory  purchases  from a single  customer.  For the year ended  December 31,
2001,  one customer  accounted for 16.1% of net revenue and two  customers  each
accounted for 14.0% of accounts  receivable  at December 31, 2001.  For the year
ended December 31, 2000, one customer  accounted for 11.3% of net revenue and no
customer accounted for more than 10% of accounts receivable.

      One supplier accounted for 14.7% of equipment  purchases in the year ended
December 31, 2002.  One supplier  accounted for 11.3% of equipment  purchases in
the year ended December 31, 2001. Two suppliers accounted for 15.9% and 11.8% of
equipment purchases in the year ended December 31, 2000.


   Foreign Currency Translation

      The Company considers the local currency to be the functional currency for
its international  subsidiaries.  Assets and liabilities  denominated in foreign
currencies  are  translated  using the exchange  rate on the balance sheet date.
Revenues and expenses are translated at average exchange rates prevailing during
the year.  Translation  adjustments  resulting  from this process are charged or
credited to accumulated  other  comprehensive  income (loss).  Foreign  currency
transaction gains and losses, which to date have not been material, are included
in the statement of operations.


   Fair Value of Financial Instruments

      The carrying  amounts of certain of the Company's  financial  instruments,
including cash and cash  equivalents,  accounts  receivable and accounts payable
approximate fair value due to their short-term maturities.


   Cash and Cash Equivalents

      The  Company  considers  all  highly  liquid  instruments  purchased  with
remaining  maturity  of three  months or less at the date of purchase to be cash
equivalents.


                                       34
<PAGE>

                           SOMERA COMMUNICATIONS, INC.


            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


   Inventories

      Inventories,  which are  comprised  of  finished  goods  held for  resale,
including redeployed  equipment,  are stated at the lower of cost (determined on
an average cost basis) or net realizable value. Costs may include  refurbishment
costs associated with repairing and reconfiguring  redeployed equipment held for
resale.  Inventories  are stated net of reserves  for  obsolete  and slow moving
items.


   Property and Equipment

      Property  and  equipment  are  recorded  at  cost  and are  stated  net of
accumulated  depreciation.  Depreciation  is  recorded  using the  straight-line
method over the  estimated  useful  lives of the assets,  ranging  from three to
seven  years.  Leasehold  improvements  are  amortized  over the  shorter of the
estimated  useful life of the asset or remaining  lease term on a  straight-line
basis.  Purchased  software  utilized in  designing,  installing  and  operating
business information and communications  systems is capitalized and amortized on
a straight-line basis, generally over three years.  Expenditures for maintenance
and repairs are charged to expense as incurred.  Additions,  major  renewals and
replacements that increase the property's useful life are capitalized. Gains and
losses on dispositions of property and equipment are included in net income.


   Goodwill and Intangible Assets

      The cost of acquired  companies is  allocated  to the assets  acquired and
liabilities  assumed based on estimated fair values at the date of  acquisition.
Costs allocated to identifiable  intangible assets are generally  amortized on a
straight-line  basis over the remaining estimated useful lives of the assets, as
determined by underlying  contract  terms or  appraisals.  Such lives range from
fifteen months to three years.

      The excess of the cost of acquired companies over the net amounts assigned
to assets acquired and liabilities assumed is recorded as goodwill.  Goodwill is
not amortized but instead tested for impairment at least  annually.  The Company
currently   operates  as  one  reporting  unit  that  shares  similar   economic
characteristics.  Accordingly,  the impairment  test is a comparison of the fair
value of the Company to its carrying value.  The excess of the fair value of the
Company over the amounts allocated to the identifiable assets and liabilities of
the Company is the implied  fair value of the  Company's  goodwill.  The Company
conducts annual  impairment  tests in June and whenever events or  circumstances
may  occur  that  might  require  the  need  for  more  frequent  tests.   These
circumstances  include,  but  are not  limited  to:  the  loss  of a  number  of
significant  clients,  the  identification  of other impaired  assets within the
Company,  the  disposition  of  a  significant  portion  of  the  Company,  or a
significant adverse change in business climate or regulations.


   Stock-based Compensation

      The Company uses the intrinsic value method of Accounting Principles Board
Opinion No. 25 ("APB 25"),  "Accounting  for Stock Issued to Employees," and its
interpretations  in  accounting  for its  employee  stock  options.  The Company
amortizes   stock  based   compensation   arising  from  certain   employee  and
non-employee  stock  option  grants  over the  vesting  periods  of the  related
options,  generally four years using the method set out in Financial  Accounting
Standards Board  Interpretation No. 28 ("FIN 28"). Under the FIN 28 method, each
vested  tranche of options is accounted  for as a separate  option grant awarded
for past services.  Accordingly, the compensation expense is recognized over the
period  during which the services  have been  provided.  This method  results in
higher  compensation  expense in the  earlier  vesting  periods  of the  related
options.


                                       35
<PAGE>

                           SOMERA COMMUNICATIONS, INC.


            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


      Pro forma information  regarding net loss and net loss per share as if the
Company  recorded  compensation  expense based on the fair value of  stock-based
awards have been presented in accordance with Statement of Financial  Accounting
Standards No. 148,  "Accounting  for  Stock-Based  Compensation - Transition and
Disclosure"  and are as follows for the years ended December 31, 2002,  2001 and
2000 (in thousands, except per share data):

                                                    Year Ended December 31,
                                                    -----------------------
                                                    2002       2001    2000
                                                  --------   -------  -------
Net (loss) income--as reported .................  $ (5,154)  $14,786  $24,491
Add:  Stock-based employee compensation
    expensed in the financial statements .......        63       148      367
Deduct: Stock-based employee compensation
    expense determined under fair value
    based method for all award .................    12,504    12,764    5,770
                                                  --------   -------  -------
Net (loss) income--as adjusted .................  $(17,595)  $ 2,170  $19,088
                                                  ========   =======  =======

Net  (loss) income per share--basic as reported   $  (0.11)  $   0.3  $  0.51
Net (loss) income per share--basic as adjusted .  $  (0.36)  $   0.0  $  0.40
Net (loss) income per share--diluted as reported  $  (0.11)  $   0.3  $  0.51
Net (loss) income per share--diluted as adjusted  $  (0.36)  $   0.0  $  0.39

      The Company  calculated the fair value of each option grant on the date of
grant using the  Black-Scholes  option  pricing  model as prescribed by SFAS 123
"stock-based compensation" using the following assumptions:
<TABLE>
<CAPTION>
                                          Employee Stock Option Plan        Employee Stock Purchase Plan
                                      ---------------------------------   ----------------------------------
                                        2002        2001        2000          2002        2001        2000
                                        ----        ----        ----          ----        ----        ----
<S>                                   <C>         <C>         <C>             <C>         <C>        <C>
     Risk-free interest rate........  2.62%       4.15%       5.88%           2.30%       4.22%      6.13%
     Expected life (in years).......     5           5           5            0.50        0.50       0.50
     Dividend yield.................     0%          0%          0%              0%          0%         0%
     Expected volatility............    95%         92%         40%             79%         79%        40%
</TABLE>

   Net Income (loss) Per Share

      Basic net income  (loss) per share is computed by dividing  the net income
(loss)  for the  period by the  weighted  average  number of shares  outstanding
during the period.  Diluted net income  (loss) per share is computed by dividing
the net income  (loss) for the period by the weighted  average  number of shares
and equivalent shares outstanding during the period. Equivalent shares, composed
of shares  issuable upon the exercise of options and  warrants,  are included in
the diluted net income  (loss) per share  computation  to the extent such shares
are dilutive.  A  reconciliation  of the numerator and  denominator  used in the
calculation  of basic and  diluted net income per share  follows (in  thousands,
except per share data):

                                                   Year Ended December 31,
                                                   -----------------------
                                                   2002      2001     2000
                                                 --------   -------  -------
Numerator
     Net income (loss) ........................  $ (5,154)  $14,786  $24,491
                                                 --------   -------  -------
Denominator
     Weighted average shares--basic ...........    48,645    48,260   47,928
     Dilutive effect of options and warrants to
     purchase shares and escrow shares ........      --         365      401
                                                 --------   -------  -------
Weighted average shares--diluted ..............    48,645    48,625   48,329
                                                 --------   -------  -------
Net income (loss) per share--basic ............  $  (0.11)  $  0.31  $  0.51
                                                 ========   =======  =======
Net income (loss) per share--diluted ..........  $  (0.11)  $  0.30  $  0.51
                                                 ========   =======  =======

      For the year ended December 31, 2001, 404,478 and 127,581 shares of common
stock were excluded from the basic and fully diluted calculations of net income,
respectively.  For the year ended December 31, 2000,  404,478 and 288,913 shares
of common stock were excluded from the basic and fully diluted  calculations  of
net income,  respectively.  These shares are considered  contingent as they were
issued in connection  with the MSI  acquisition


                                       36
<PAGE>

                           SOMERA COMMUNICATIONS, INC.


            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


and held in escrow until certain  contingencies are resolved.  In addition,  for
the years ended December 31, 2002, 2001 and 2000, options to purchase 4,302,196,
5,001,518  and  182,750  shares of common  stock  were  excluded  from the fully
diluted calculation as their effect would be anti-dilutive.


   Comprehensive Income (loss)

      The  Company  has  adopted  the   provisions  of  Statement  of  Financial
Accounting  Standards No. 130 ("SFAS 130"),  "Reporting  Comprehensive  Income."
SFAS 130  establishes  standards  for  reporting  comprehensive  income  and its
components in financial statements.  Comprehensive income, as defined,  includes
all changes in equity during a period from non-owner  sources.  Foreign currency
translation  losses of $44,000 and $73,000 and a gain on  investments  of $3,000
and $0  resulted  in total  comprehensive  (loss)  income  of  ($5,195,000)  and
$14,713,000 for the year ended December 31, 2002 and 2001,  respectively.  There
was no difference  between the Company's net income of $24,491,000 and its total
comprehensive income for the year ended December 31, 2000.


   Reclassifications

      Certain financial statement items have been reclassified to conform to the
current year's presentation. These reclassifications had no impact on previously
reported net earnings.


     Recent Accounting Pronouncements

      In June  2002,  the  FASB  issued  SFAS No.  146,  "Accounting  for  Costs
Associated with Exit or Disposal  Activities." This standard requires that costs
associated with exit or disposal activities be recognized when they are incurred
rather than at the date of a commitment to an exit or disposal plan. SFAS No.146
will apply to exit or disposal activities  initiated after fiscal year 2002. The
provisions  of EITF  No.  94-3  shall  continue  to apply  for an exit  activity
initiated under an exit plan that met the criteria of EITF No. 94-3 prior to the
adoption of SFAS No. 146.  The effect on adoption of SFAS No. 146 will change on
a prospective basis the timing of when  restructuring  charges are recorded from
commitment date approach to when the liability is incurred.

      In  December  2002,  the  FASB  issued  SFAS  No.  148,   "Accounting  for
Stock-Based  Compensation -- Transition and  Disclosure."  This Statement amends
SFAS No. 123,  "Stock-Based  Compensation,"  to provide  alternative  methods of
transition  for a voluntary  change to the fair value based method of accounting
for stock-based employee  compensation.  In addition,  this Statement amends the
disclosure requirements of SFAS No. 123 to require prominent disclosures in both
annual and  interim  financial  statements  about the method of  accounting  for
stock-based employee  compensation and the effect of the method used on reported
results.  The  disclosure  provisions of this Statement are effective for fiscal
years  ending  after  December  15, 2002 and have been  incorporated  into these
financial statements and accompanying footnotes.

      In March 2003, the EITF reached a consensus on Issue 00-21, addressing how
to account for arrangements that involve the delivery or performance of multiple
products,  services,  and/or  rights to use assets.  Revenue  arrangements  with
multiple  deliverables  are divided into  separate  units of  accounting  if the
deliverables in the arrangement meet the following  criteria:  (1) the delivered
item has value to the customer on a standalone basis; (2) there is objective and
reliable  evidence of the fair value of undelivered  items;  and (3) delivery of
any undelivered item is probable.  Arrangement consideration should be allocated
among the separate units of accounting based on their relative fair values, with
the amount  allocated to the delivered  item being limited to the amount that is
not  contingent on the delivery of additional  items or meeting other  specified
performance conditions.  The final consensus is applicable to agreements entered
into in  fiscal  periods  beginning  after  June 15,  2003 with  early  adoption
permitted.  We  are  currently  assessing  the  impact  of  EITF  00-21  on  our
consolidated financial statements.

      In  November  2002,  the FASB  issued  Interpretation  No. 45 ("FIN  45"),
"Guarantor's  Accounting and Disclosure  Requirements for Guarantees,  Including
Indirect Guarantees of Indebtedness of Others." FIN 45 requires that a liability
be recorded in the  guarantor's  balance sheet upon issuance of a guarantee.  In
addition,  FIN 45 requires  disclosures  about the guarantees that an entity has
issued,  including a reconciliation  of changes in the entity's product warranty
liabilities.  The initial recognition and initial measurement  provisions of FIN
45 are


                                       37
<PAGE>

                           SOMERA COMMUNICATIONS, INC.


            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


applicable  on a  prospective  basis to  guarantees  issued  or  modified  after
December 31, 2002.  The  disclosure  requirements  of FIN 45 are  effective  for
financial  statements  of interim or annual  periods  ending after  December 15,
2002.  We have not  assessed  the  impact  of the  recognition  and  measurement
provisions of FIN 45 on our consolidated financial statements.

      In  January  2003,  the FASB  issued  Interpretation  No.  46 ("FIN  46"),
"Consolidation of Variable Interest Entities,  an Interpretation of ARB No. 51."
FIN 46 requires  certain  variable  interest  entities to be consolidated by the
primary  beneficiary of the entity if the equity  investors in the entity do not
have the  characteristics  of a  controlling  financial  interest or do not have
sufficient  equity at risk for the  entity to  finance  its  activities  without
additional  subordinated  financial  support  from  other  parties.  FIN  46  is
effective immediately for all new variable interest entities created or acquired
after January 31, 2003. For variable interest entities created or acquired prior
to  February  1, 2003,  the  provisions  of FIN 46 must be applied for the first
interim  or annual  period  beginning  after  June 15,  2003.  We are  currently
assessing the impact of FIN 46 on our consolidated financial statements.


Note 3 - Acquisitions


MSI Communications, Inc.

      On October 17, 2000, the Company acquired all of the outstanding shares of
MSI Communications, Inc. ("MSI"), a data networking equipment sales and services
company,  for $10.6 million in cash  including  acquisition  costs,  and 693,391
shares of common stock issued to MSI shareholders and held in an escrow account.
The  acquisition has been accounted for as a purchase  business  combination and
the  results  of  operations  of MSI  have  been  included  in the  consolidated
financial  statements  since the date of acquisition.  The shares to be released
from escrow may be reduced based on resolution of certain  contingencies.  As of
the acquisition date, 288,913 shares,  valued at $2.5 million,  were expected to
be earned and were  included in the  allocated  purchase  price.  The  remaining
404,478  shares,  valued at $3.5  million,  were to be earned  based on  certain
financial  performance and employee retention milestones as of December 31, 2001
and 2002,  resulting  in an  increase  to the  purchase  price  resulting  in an
increase in  goodwill.  The share  values were  calculated  based on the average
closing price of the last five business days prior to the  acquisition  date. As
of December  31, 2002 and 2001,  both the  financial  performance  and  employee
retention  milestones  were  achieved.  As a result,  178,613 and 225,865 shares
valued at $505,000 and $1.8  million,  respectively  using the year-end  closing
prices in 2002 and 2001,  were earned,  resulting in an increase in the purchase
price as detailed below.

      The purchase  price was  allocated  to the net  tangible and  identifiable
intangible assets acquired and liabilities assumed based on their estimated fair
values at the date of the acquisition as determined by management. The excess of
the  purchase  price  over the fair  value of the net  identifiable  assets  was
allocated to goodwill. The additional 178,613 shares released from escrow due to
the  resolution  of certain  contingencies,  valued using the  year-end  closing
price, increased the purchase price by approximately  $505,000,  resulting in an
increase in goodwill of the same amount. The total purchase price, including the
adjustment for achieving the year-end 2002 milestones,  was allocated as follows
(in thousands):


        Current assets..........................................       $ 3,317
        Property and equipment..................................           187
        Deferred tax assets.....................................           898
        Assumed liabilities.....................................        (3,453)
        Goodwill................................................        14,568
                                                                       -------
        Total purchase price....................................       $15,517
                                                                       =======


                                       38
<PAGE>

                           SOMERA COMMUNICATIONS, INC.


            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


Asurent Technologies, Inc.

      On October 10, 2001 the Company acquired the equipment repair business and
certain assets and  liabilities of Asurent  Technologies,  Inc.  ("Asurent"),  a
telecommunications equipment sales and repair business, for $6.3 million in cash
including  acquisition  costs.  The results of  operations  of Asurent have been
included in the consolidated financial statements since the date of acquisition.
The purchase price was allocated to the net tangible and identifiable intangible
assets acquired and liabilities  assumed based on their estimated fair values at
the date of acquisition as determined by management.  The excess of the purchase
price  over the fair  value of the net  identifiable  assets  was  allocated  to
goodwill. The purchase price was allocated as follows:


Current assets .................................................      $ 1,819
Property and equipment .........................................          428
Assumed liabilities                                                      (965)
Customer contract ..............................................          845
Goodwill                                                                4,209
                                                                      -------
  Total purchase price .........................................      $ 6,336
                                                                      =======

      The  amortization  of the  customer  contract is being  computed  over the
calculated  length of the contract of eighteen months on a straight-line  basis.
In  accordance  with SFAS No. 142  "Goodwill and other  intangible  asstes",  no
amortization has been recorded on the Asurent goodwill.


Compass Telecom, LLC.

      On  October  9,  2002,  the  Company  acquired  Compass  Telecom  Services
("Compass")  for $9.5  million  in cash  including  acquisition  costs.  Compass
provides  outsourced  services  to  support  telecom  operators'  need  to  more
efficiently  optimize their networks and equipment  assets.  The acquisition was
accounted for in  accordance  with SFAS No. 141 and the results of operations of
Compass have been included in the  consolidated  financial  statements since the
date of acquisition.

      The purchase  agreement  also provides for earn outs in years 2002 through
2004 for  certain  officers of Compass.  The earn outs are  contingent  upon the
financial  performance  of Compass during the fourth quarter of 2002, and fiscal
years 2003 and 2004. The fourth quarter 2002 earn out was achieved, resulting in
a $2.9 million increase in the purchase price and associated goodwill.  The earn
out was accrued in other accrued  liabilities  as of December 31, 2002.  For the
following  two  years,  additional  amounts  are to be earned  based on  certain
financial  performance and employee retention  milestones.  For the years ending
December 31, 2003 and 2004,  the maximum  earn outs are $3.85  million and $3.25
million, respectively.

      The purchase  price was  allocated  to the net  tangible and  identifiable
intangible assets acquired and liabilities assumed based on their estimated fair
values at the date of  acquisition  as  determined by an  independent  valuation
firm.  The  excess  of the  purchase  price  over  the  fair  value  of the  net
identifiable  assets was  allocated to  goodwill.  Compass  provides  outsourced
services to support telecom  operators' need to more efficiently  optimize their
networks and equipment assets. The purchase price was allocated as follows:

Current assets .................................................     $  2,708
Property and equipment .........................................          315
Other long-term assets .........................................           32
Assumed liabilities ............................................       (1,486)
Customer contract ..............................................          654
Non-compete agreements .........................................          665
Goodwill .......................................................        9,509
                                                                     --------
  Total purchase price .........................................     $ 12,397
                                                                     ========


                                       39
<PAGE>

                           SOMERA COMMUNICATIONS, INC.


            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


      The  customer  contract  intangible  asset is being  amortized  ove of the
contract of fifteen months on a straight-line  basis. The non-compete  covenants
are being  amortized over the length of the covenants of thirty-six  months on a
straight-line  basis. In accordance with SFAS No. 142, no amortization  has been
recorded on the Compass goodwill.

      The  amortization  of acquired  workforce  and goodwill was computed  over
three and ten years, respectively,  on a straight-line basis for the years ended
December 31, 2001 and 2000.  Pursuant to SFAS No. 142  guidelines the net amount
allocated to workforce has been  subsumed  into goodwill in connection  with the
Company's adoption of SFAS No. 142.

      The  following  unaudited  pro forma  information  presents  a summary  of
consolidated  results  of  operations  of  the  Company  and  Compass  as if the
acquisition  had occurred  January 1, 2001 and of MSI  Communications  as if the
acquisition had occurred on January 1, 2000. Pro forma results of operations for
the  Asurent  acquisition  have not been  presented  because  the effects of the
acquisition were not material.

                                                Year Ended December 31,
                                                -----------------------
 (in thousands except for per share data)     2002       2001      2000
                                            ---------  --------  --------
Net revenue ............................    $208,552   $237,817  $221,403
Net income .............................    $ (3,332)  $ 13,467  $ 23,189
Net income per share - basic ...........    $  (0.07)  $   0.28  $   0.48
Net income per share - diluted..........    $  (0.07)  $   0.28  $   0.48

     These  unaudited  pro forma  results have been  prepared  for  comparative
purposes  only  and  include  certain  adjustments,  such as the  reversal  of a
one-time  acquisition related  compensation charge and amortization expense as a
result of  goodwill  and other  intangible  assets.  They do not  purport  to be
indicative of the results of operations  which  actually would have occurred had
the  combinations  been in effect on  January  1,  2000,  and  January  1, 2001,
respectively or of future results of operations of the consolidated entities.


Note 4--Balance Sheet Accounts (in thousands):

Property and Equipment, Net                              December 31,
                                                         -----------
                                                       2002       2001
                                                    --------   --------
Computer and telephone equipment ...............    $  9,708   $ 10,366
Office equipment and furniture .................       1,068      1,204
Warehouse equipment ............................       1,135        486
Leasehold improvements .........................       2,131      1,972
                                                    --------   --------
                                                      14,042     14,028
Less accumulated depreciation and amortization..      (6,978)    (5,341)
                                                    --------   --------
                                                    $  7,064   $  8,687
                                                    ========   ========

      Depreciation  and  amortization  expense for the years ended  December 31,
2002,  2001 and 2000,  amounted to $4.7  million,  $3.6  million  and  $713,000,
respectively.

Inventory, Net                                          December 31,
                                                        ------------
                                                      2002       2001
                                                    --------   --------
Finished goods .................................    $ 39,979   $ 33,250
Less reserve for excess and obsolete inventory..     (14,499)    (3,241)
                                                    --------   --------
                                                    $ 25,480   $ 30,009
                                                    ========   ========


                                       40
<PAGE>

                           SOMERA COMMUNICATIONS, INC.


            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


      The Company  recorded  provisions  for excess and obsolete  inventories of
$13.7 million, $3.0 million and $3.0 million during the years ended December 31,
2002, 2001 and 2000,  respectively.  In the quarter ended December 31, 2002, the
Company  experienced  a  significant  decline in market demand over the previous
quarter;  increased pricing  pressures from declining new equipment prices,  net
revenues  declining by approximately $6 million over the quarter ended September
30, 2002. In addition,  when the decision was made to consolidate  operations in
Dallas,  the Company  recognized the additional cost of transporting and holding
some of the items  would  result in their  cost  exceeding  market  value.  As a
result,  in the fourth  quarter of 2002,  the Company  recorded a $10.1  million
inventory  write off and an  additional  writedown of $1.8 million to reduce the
carrying value of inventories to their market value. The $11.9 million inventory
charge was  included in the  inventory  reserve as of  December  31, 2002 and in
January 2003, $10.1 million of reserves subsequently was written off against the
reserve and $1.8 million was written down to market value.

   Other Accrued Liabilities                    December 31,
                                                ------------
                                                2002     2001
                                               ------  ------
   Restructuring accrual (see note 11)...      $2,604  $   --
   Compass earn out .....................       2,900      --
   Sales tax payable ....................         502     667
   Warranty reserve .....................         990     994
   Other ................................      $1,296  $2,535
                                               ------  ------
                                               $8,292  $4,196
                                               ======  ======

Note 5- Goodwill and Intangible assets

      In July 2001, the FASB issued SFAS No. 142,  Goodwill and Other Intangible
Assets.  SFAS  No.  142  requires  that  goodwill  and  intangible  assets  with
indefinite useful lives no longer be amortized but instead tested for impairment
at least  annually.  SFAS No. 142 also  requires  that  intangible  assets  with
definite useful lives be amortized over their respective  estimated useful lives
to their estimated  residual values. The Company fully adopted the provisions of
SFAS No. 142 effective January 1, 2002.

      Intangible assets consist of customer  contracts,  non-compete  agreements
and goodwill  related to the Company's  acquisitions  of Compass  Telecom LLC in
2002, Asurent Technologies,  Inc in 2001 and MSI Technologies,  Inc in 2000. The
customer  contracts are being amortized on a straight-line  basis over the terms
of the contracts,  15 to 18 months. The non-compete agreement is being amortized
on a straight line basis over the life of the agreement, 36 months.

      The Company  operates as one reporting  unit and  determined  during June,
2002,  that the carrying  amount of goodwill  exceeded its implied fair value at
that time.  As a result of the adverse  change in the  business  climate and the
restructuring  activities  announced during December 2002, the Company performed
an additional  impairment review and concluded that goodwill was not impaired at
that time because the  carrying  amount of goodwill  still  exceeded its implied
fair value.


                                       41
<PAGE>

                           SOMERA COMMUNICATIONS, INC.


            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


      The  following  is a summary of net income and  earnings per share for the
years ended  December 31, 2001 and 2000, as adjusted to remove the  amortization
of goodwill and intangible  assets with  indefinite  useful lives (in thousands,
except per share amounts):

                                                    Years Ended December 31,
                                                    ------------------------
                                                       2001           2000
                                                     -------        -------
Consolidated Statements of Operations Data:

Net income .......................................   $14,786        $24,491
Add: amortization expense (including workforce)...     1,399            302
                                                     -------        -------
Adjusted net income ..............................   $16,185        $24,793
                                                     =======        =======
Net income per common share--basic................   $  0.31        $  0.51
Add: amortization expense - basic.................   $  0.03        $  0.01
Adjusted net income per common share - basic......   $  0.34        $  0.52
Net income per common share - diluted.............   $  0.30        $  0.51
Add:  amortization expense - diluted..............   $  0.03        $  0.00
Adjusted net income per common share--diluted ....   $  0.33        $  0.51

      The  following is a summary of changes in the carrying  amount of goodwill
for the years ended December 31, 2002 and 2001 (in thousands):

                                                                    Goodwill
                                                                    --------
Balance at December 31, 2000 ..............................         $ 11,441
Additions - Asurent (see note 3) ..........................            4,209
Additions- MSI (see note 3) ...............................            1,842
Amortization ..............................................           (1,169)
                                                                    --------
Balance at December 31, 2001 ..............................           16,323
Additions - Compass (see note 3) ..........................            9,509
Adjustment - MSI earn out .................................              505
Workforce subsumed, net of tax ............................              248
                                                                    --------
Balance at December 31, 2002 ..............................         $ 26,585
                                                                    ========

      Intangible  assets with  definite  useful lives are  amortized  over their
respective estimated useful lives to their estimated residual values.  Effective
January  1,  2002,  intangible  assets  with  indefinite  useful  lives  are not
amortized but instead tested for impairment at least annually.  The following is
a summary of intangible assets with finite useful lives at December 31, 2002 and
2001 (in thousands):

                                                        2002

                                                    Accumulated
                                          Cost      amortization     Total
                                          ----      ------------     -----

Customer contracts ................     $1,499         $  643       $  856
                                                                       131
Non-compete agreement .............        665            534
                                        ----------------------------------
                                        $2,164         $  774       $1,390
                                        ==================================

                                                       2001

                                                    Accumulated
                                          Cost      amortization     Total
                                          ----      ------------     -----

Customer contracts ................     $  845         $   85       $  760
                                                                       280
Acquired workforce ................        690            410
                                        ----------------------------------
Other .............................     $1,535         $  365       $1,170
                                        ==================================


                                       42
<PAGE>

                           SOMERA COMMUNICATIONS, INC.


            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


      Amortization  expense related to intangible assets was $689,000,  $314,000
and $50,000 for the years ended December 31, 2002, 2001 and 2000,  respectively.
Estimated   amortization   expense  related  to  intangible  assets  subject  to
amortization at December 31, 2002 for each of the years ending December 31, 2003
and 2004, amortization will be $1.1 million and $194,000, respectively.


Note 6--Commitments:

      On February 9, 2001, the Company entered into a credit facility with Wells
Fargo  HSBC Trade  Bank,  which  provides  for  issuances  of letters of credit,
primarily for procurement of inventory.  On September 6, 2001, the agreement was
amended to increase the facility from $3.0 million to $4.0  million.  The credit
agreement  requires  facility fees,  which are not  significant,  as well as the
maintenance  of certain  minimum  net worth and other  financial  ratios.  As of
December  31,  2002,  the  Company had no letters of credit  outstanding.  As of
December  31, 2001,  the Company had $232,000 in letters of credit  outstanding.
The Company had no long-term debt as of December 31, 2002 and 2001.

      The Company is obligated  under various  operating  leases for both office
and warehouse  space. The remaining lease terms range in length from one to four
years.  Rent expense,  net of sublease  income,  for the years ended December 31
2002,  2001  and  2000,  was  $2.6  million,  $2.3  million  and  $1.1  million,
respectively.

      Future  minimum  lease  payments,  net of sublease  rentals of $108,000 in
2003, under non-cancelable  operating leases at December 31, 2002 are as follows
(in thousands):
<TABLE>
<CAPTION>
                                              2003    2004   2005   2006   2007 Thereafter
                                              ----    ----   ----   ----   ---- ----------
<S>                                         <C>     <C>    <C>     <C>     <C>   <C>
Gross restructuring related leases
        (see note 11)...................    $  561  $  592 $  304  $   22  $  0  $    0
Operating Leases........................     2,247   2,256  1,913   1,108   912   1,989
                                            ------  ------ ------  ------  ----  ------

    Total commitments...................    $2,808  $2,848 $2,217  $1,130  $912  $1,989
                                            ======  ====== ======  ======  ====  ======
</TABLE>

      Under the terms of the lease  agreements,  the Company is also responsible
for internal  maintenance,  utilities and a proportionate share (based on square
footage  occupied) of property taxes. The Company is also exposed to credit risk
in the event of default of the  sub-lessee,  because the Company is still liable
to meet its  obligations  under the terms of the original lease  agreement.  The
Company has not included  contingent  earn out payments in the table above.  The
potential  earn out  payments to the former  owners of Compass is $3.85  million
during 2003 and $3.25 million in 2004 if the earnings  before  interest,  taxes,
depreciation  and  amortization  exceed $3.5 million in 2003 and $4.6 million in
2004.


Note 7--Stockholders' Equity:


   Warrants

      In September 2001, the Company issued warrants to purchase  170,250 shares
of  common  stock in  exchange  for  recruitment  services.  The  warrants  were
immediately vested. The fair value of the warrants of approximately $236,000 has
been  recorded  as an expense  in 2001.  The fair  value of these  warrants  was
estimated  using  the  Black-Scholes  option  pricing  model  and the  following
assumptions: dividend yield of 0%; volatility of 40%; risk free interest rate of
3.30% and a term of three years.  The warrants are  outstanding  at December 31,
2002.


   1999 Stock Option Plans

      In May 1999 the  Company  adopted  the 1999 unit  option  plan (the  "Unit
Plan") under which  2,003,000  Class A units were reserved for issuance of stock
options to  employees,  directors,  or  consultants  under terms and  provisions
established by the Board of Managers.  On October 19, 1999 the Board of Managers
increased the number of units  issuable under the unit option plan to a total of
3,400,000 units.


                                       43
<PAGE>

                           SOMERA COMMUNICATIONS, INC.


            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


      In  September  1999 the Company  adopted  the 1999 Stock  Option Plan (the
"Plan")  under which  6,750,000  common shares were reserved for the issuance of
stock options to employees,  directors and  consultants.  The primary purpose of
the Plan is to attract and retain the best  available  personnel  and to provide
additional incentive to the grantees.  Upon the completion of the initial public
offering in November 1999, options granted under the Unit Plan were converted to
options to purchase an equivalent  number of common  shares.  Under the terms of
the Plan,  incentive  options  may be granted  to  employees,  and  nonstatutory
options may be granted to  employees,  directors and  consultants,  at prices no
less than 100% and 85%,  respectively,  of the fair  market  value of the common
shares at the date of grant.  Options  granted  under the Plan vest at a rate of
25% after one year with the remaining  vesting evenly over the next three years.
The options expire ten years from the date of grant.

      In July 1999,  the Company  issued  stock  options to two officers and one
outside  director  resulting in unearned  stock-based  compensation of $830,000,
which is being  amortized over the vesting  period of the underlying  options of
four  years.   Amortization   expense   associated  with  unearned   stock-based
compensation  totaled $63,000 $148,000 and $367,000 for the years ended December
31, 2002, 2001 and 2000, respectively.

     In July 2002, the Company  issued stock options to purchase  900,000 shares
of stock to an  executive  of the  Company.  The options  were  granted  with an
exercise price equal to the stock's fair market value on the date of grant.  The
options vest at a rate of 25% after one year with the remaining  vesting  evenly
over the following three years thereafter. The options expire ten years from the
date of grant.

     In July 2002, the Company  issued stock options to purchase  350,000 shares
of stock to an  executive  of the  Company.  The options  were  granted  with an
exercise price equal to the stock's fair market value on the date of grant.  The
options vest as  performance  milestones  are achieved and expire ten years from
the date of grant.


      In January 2002 and 2001, the Board approved the increase in the number of
options  available  for  grant  by  1,948,502  and  1,943,770  pursuant  to  the
provisions of the Plan. This represents the annual increase  calculated as 4% of
the total outstanding shares as of the beginning of the fiscal year.

      Activity under the Plan is set forth below:


                                                              Weighted
                                                              Average
                              Available      Outstanding      Exercise
                              For Grant        Options         Price
                              ---------        -------         -----

Balances, December 31, 1999   3,656,657        3,093,343      $ 9.60
                             ----------      -----------      ------
   Options granted ........  (2,683,500)       2,683,500      $10.90
   Options canceled .......     237,520         (237,520)      11.26
                             ----------      -----------      ------
Balances, December 31, 2000   1,210,677        5,539,323      $10.16
                             ----------      -----------      ------
   Annual increase ........   1,943,770               --          --
   Options granted ........  (1,750,725)       1,750,725      $ 5.48
   Options canceled .......     532,542         (532,542)      10.61
                             ----------      -----------      ------
Balances, December 31, 2001   1,936,264        6,757,506      $ 7.58
                             ----------      -----------      ------
    Annual increase .......   1,948,502               --          --
                             ----------      -----------      ------
    Options granted .......  (5,274,921)       5,274,921      $ 4.36
       Options exercised ..          --          (21,646)       7.02
                             ----------      -----------      ------
    Options canceled ......   1,963,205       (1,963,205)       8.41
                             ----------      -----------      ------
Balances, December 31, 2002     573,050       10,047,576      $ 6.18
                             ==========      ===========      ======

      At December 31, 2002, 4,692,957 options outstanding were exercisable.


                                       44
<PAGE>

                           SOMERA COMMUNICATIONS, INC.


            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


   1999 Director Option Plan

      In September  1999, the Company adopted the 1999 Director Option Plan (the
"Director Plan"), which provides for the grant of non-statutory stock options to
non-employee  directors.  The Director Plan has a term of ten years.  A total of
300,000 shares of the Company's  common stock,  plus an annual increase equal to
the number of shares needed to restore the number of shares of common stock that
are  available for grant under the Director  Plan to 300,000  shares,  have been
reserved  for  issuance  under the Director  Plan.  As of December 31, 2002,  no
options have been granted under the Director Plan.


   Executive Stock Option Agreements

      In September 2001, the Company issued stock options to purchase  1,923,000
and 500,000  shares of common stock in two separate  stock option  agreements to
two  officers of the Company.  The options  were granted with an exercise  price
equal to the stock's fair market value on the date of grant. The options vest at
a rate of 25%  after  one  year  with  the  remaining  vesting  evenly  over the
following three years thereafter.  The options expire ten years from the date of
grant.

      In September  2001, the Company  issued stock options to purchase  824,000
shares of stock to an officer of the  Company.  The options were granted with an
exercise price equal to the stock's fair market value on the date of grant.  The
options are time  accelerated  restricted stock awards which become fully vested
seven days prior to their  expiration  date,  September  2007.  The  options are
subject to accelerated vesting if certain performance criteria are met.

      The  aggregate  of  the  Company's   options   outstanding  and  currently
exercisable by exercise price at December 31, 2002 are as follows:

                  Options Outstanding                     Options Exercisable
--------------------------------------------------------- ----------------------
                                    Weighted
                                    Average      Weighted               Weighted
                                   Remaining      Average                Average
                                  Contractual    Exercise     Number    Exercise
  Exercise Price   Outstanding   Life in Years     Price   Exercisable    Price
  --------------   -----------   -------------     -----   -----------    -----

 $2.60 - $3.00     2,617,175           9.73       $ 2.79        6,604    $ 2.60
 $4.50 - $6.55     5,639,129           8.91         4.79    1,348,544      4.88
 $7.57 - $10.75    3,672,984           7.53         8.90    2,246,829      8.99
$11.00 - $13.50    1,365,288           6.94        11.06    1,090,980     11.05
                  ----------       --------       ------    ---------    ------
                  13,294,576           8.49       $ 6.18    4,692,957    $ 8.28
                  ==========       ========       ======    =========    ======

   Employee Stock Purchase Plan

      In September  1999,  the Company  adopted the 1999 Employee Stock Purchase
Plan (the "ESPP"),  which  provides  eligible  employees  with an opportunity to
purchase the Company's  common stock at a discount through  accumulated  payroll
deductions,  during each six-month offering period. The price at which the stock
is sold  under the ESPP is equal to 85% of the fair  market  value of the common
stock,  on the first or last day of the offering  period,  whichever is lower. A
total of 300,000  shares of common  stock have been  reserved  for the  issuance
under the  ESPP.  In  February  and  August  2002,  69,298  and  98,679  shares,
respectively,  were issued under the ESPP, generating contributions of $586,000.
In February and August 2001, 50,364 and 67,938 shares, respectively, were issued
under the ESPP,  generating  contributions  of $580,000.  The  weighted  average
estimated  fair values of the ESPP awards issued  during  fiscal 2002,  2001 and
2000 were $3.48, $2.19 and $3.01 per share, respectively. In August 2000, 36,718
shares were issued under the plan generating contributions of $353,000.


                                       45
<PAGE>

                           SOMERA COMMUNICATIONS, INC.


            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


Note 8 - Warranties and Financial Guarantees

      We provide for future  warranty  costs for  equipment  sales upon  product
delivery.  The specific terms and conditions of those  warranties vary depending
upon the  product  sold and country in which we do  business,  but in general we
offer  warranties  which match the OEM warranty for that specific  product.  Our
equipment  warranties  generally  carry  a 360 day  warranty  from  the  date of
shipment.  Our liability  under these  warranties is to repair or replace at our
cost any defective equipment.  Longer warranty periods are provided on a limited
basis in instances where the OEM warranty is longer.

      Because  our  products  are  manufactured,  in  many  cases,  to  customer
specifications and their acceptance is based on meeting those specifications, we
historically  have experienced  minimal warranty costs.  Factors that affect our
warranty  liability include  historical and anticipated rates of warranty claims
and cost per claim. We assess the adequacy of our recorded warranty  liabilities
every quarter and make adjustments to the liability if necessary.

      Changes in our  warranty  liability,  which is included as a component  of
"Other Accrued Liabilities" on the Condensed  Consolidated Balance Sheet, during
the period are as follows (in thousands):



Balance, as of December 31, 2001..........................        $     994
Provision for warranty liability..........................            3,371
Settlements...............................................           (3,375)
                                                                  ----------

Balance, as of December 31, 2002..........................        $     990
                                                                  ----------


   Financial Guarantees:

      We  occasionally   guarantee  contingent   commitments  through  borrowing
arrangements, such as letters of credit and other similar transactions. The term
of the  guarantee is equal to the remaining  term of the related debt,  which is
short term in nature.  The maximum  potential amount of future payments we could
be required to make under our guarantees at December 31, 2002 was $0.


Note 9--401(k) Savings Plan:

      In February 1998, the Company  adopted a 401(k) Savings Plan (the "Savings
Plan")  which  covers all  employees.  Under the  Savings  Plan,  employees  are
permitted to contribute up to 15% of their gross  compensation not to exceed the
annual IRS limitation for any plan year ($11,000 in 2002).  The Company  matches
25% of employee  contributions  on the first 5% of their  contributions  for all
employees who receive less than 50% of their total  compensation  in the form of
incentive  compensation.  The Company made  matching  contributions  of $48,050,
$144,000,  and $55,000,  for the years ended  December 31, 2002,  2001 and 2000,
respectively.


Note 10--Related Party Transactions and Loans to Officers:

      In December 2002, the Company subleased approximately 1,300 square feet of
space to the  Chairman of the Board for $2,300 per month.  The lease  expires on
March 31, 2003.

      On July 12, 1999 the Company entered into an  interest-free  mortgage loan
agreement under which it advanced  $600,000 to an officer of the Company.  Under
the terms of the  mortgage  loan the amount  advanced  was to be  forgiven as to
$50,000 on each of the first four anniversaries of the note and $100,000 on each
of the fifth through eighth anniversaries. In August 2002, the executive officer
repaid the  remaining  outstanding  balance of $450,000.  Under the terms of the
loan, $150,000 had been previously forgiven by the Company.

      On October 20, 1999 the Company  entered  into a mortgage  loan  agreement
under which it advanced  $1,351,000  to an officer of the Company.  The mortgage
loan  was  interest  free,  collateralized  by the  principal  residence  of the
officer,  and must be repaid when the  residence  is sold.  Notwithstanding  the
foregoing,  $300,000 of the amount advanced will be forgiven over eight years as
to $25,000 on each of the first four  anniversaries  of the note and  $50,000 on
each of the fifth through eighth anniversaries. In June 2000, the officer repaid
$425,000 of the principal  balance.  In September  2000,  the Company  re-loaned
$300,000


                                       46
<PAGE>

                           SOMERA COMMUNICATIONS, INC.


            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


to the officer on an interest  free basis.  In August 2002,  the officer  repaid
$225,000 of the principal balance. Under the terms of the loan, $75,000 has been
forgiven by the Company.  The officer repaid the remaining balance on January 1,
2003.

      On May 1, 2001, the Company  entered into a mortgage loan agreement  under
which it advanced $300,000 to an officer of the Company. The mortgage loan has a
term of eight years,  is interest  free and is  collateralized  by the principal
residence  of the  officer.  Under the  terms of the  mortgage  loan the  amount
advanced  will be forgiven as to $22,500 on the first  anniversary  of the note,
$25,000 on each of the second and third  anniversaries  of the note,  $50,000 on
each of the fourth through seventh  anniversaries and $27,500 the final year. If
the officer's  employment with the Company ceases for any reason,  the remaining
balance becomes repayable to the Company.  The term of repayment is dependent on
the reason for the officer's termination, and ranges from one to six months from
the date of termination of employment.  The remaining balance under this loan at
December 31, 2002 was $265,000.

      On May 3, 2002 the Company  entered into a mortgage loan  agreement  under
which it advanced  $2.0 million to an officer of the Company.  The mortgage loan
has a term of  eight  years,  is  interest  free  and is  collateralized  by the
principal  residence  of the officer.  Under the terms of the mortgage  loan the
amount advanced,  assuming the officer remains employed with the Company at such
time,  will be  forgiven  in the  amount  of  $200,000  on each of the first two
anniversaries  of the  note,  $250,000  on  each  of  the  third  through  sixth
anniversaries  of the  note  and  $300,000  on each of the  seventh  and  eighth
anniversaries.  The loan can be forgiven  in full in the event  that,  within 12
months of a change in control of the Company, the officer's employment is either
terminated  without  cause or is  constructively  terminated.  If the  officer's
employment with the Company ceases for any other reason,  the remaining  balance
becomes  repayable to the Company.  The term of repayment is dependent  upon the
reason for the officer's  employment  termination and ranges up to twelve months
from the date of  termination of  employment.  The remaining  balance under this
loan at December 31, 2002 was $1.9 million.

      As a result of the above,  the Company  recorded  compensation  charges of
$203,000,  $89,000 and $75,000,  equal to the total amounts forgiven under these
loans in 2002,  2001 and 2000.  The amounts  scheduled  to be repaid or forgiven
during the year ended  December 31, 2002 have been included in other current and
noncurrent assets.


Note 11 - Restructuring and Asset Impairment Charges

      In  the  fourth  quarter  of  2002,   the  Company   announced  and  began
implementation of its operational  restructuring  plan to reduce operating costs
and streamline its operating facilities.  This initiative involved the reduction
of  employee  staff  by 29  positions  throughout  the  Company  in  managerial,
professional,  clerical and operational  roles and  consolidation of the Oxnard,
Norcross  and Euless  distribution  and  repair  facilities  to one  centralized
location in Dallas.

      Continuing  lease  obligations  primarily relate to closure of the Oxnard,
Euless  and  Norcross  facilities.   Amounts  expensed  represent  estimates  of
undiscounted future cash outflows, offset by anticipated third-party sub-leases.
At December 31, 2002, the Company remains  obligated under lease  obligations of
$1.5 million associated with its December 2002 operational restructuring, offset
by estimates of future  sub-lease income of $575,000.  Expected  sublease income
has not been  reflected in the schedule of commitments in footnote 6 as sublease
agreements  have not been  signed.  The lease  obligations  expire in 2006.  The
Company  expects  cash  savings  of  $500,000 a quarter  beginning  in the third
quarter 2003 and thereafter.

      Termination benefits are comprised of  severance-related  payments for all
employees to be  terminated in connection  with the  operational  restructuring.
Termination benefits do not include any amounts for employment-related  services
prior to termination.


                                       47
<PAGE>

                           SOMERA COMMUNICATIONS, INC.


            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


      At  December  31,  2002,  the  accrued   liability   associated  with  the
restructuring  charge  was $2.6  million  and  consisted  of the  following  (in
thousands):
                                                                      Balance at
                                         Restructuring                 December
                                            Charge        Payments     31, 2002
                                            ------        --------     --------
Lease obligations, net of estimated
      sublease income .................     $  995         $  --          $  995
Termination benefits ..................      1,764          (155)          1,609
                                            ------         -----          ------
Total .................................     $2,759         $(155)         $2,604

      As of December 31,  2002,  20 employees  had been  terminated,  and actual
termination benefits paid were $155,000.

      Asset  impairments  primarily  relate to the write  down of the  remaining
carrying  value  of  the  e-commerce   software  the  Company  invested  in,  in
anticipation  of on-line  sales.  The online market did not  materialize  and in
December 2002, the Company terminated  on-line sales,  eliminated the department
and  wrote-off the assets.  The Company  expects $1.6 million in savings in 2003
and none thereafter.

      Restructuring  charges  in 2001  relate to a  reorganization  in which the
domestic  workforce was reduced by 28 people,  or approximately  10% of the then
existing  workforce.  The total charges associated with the reorganization  were
$352,000  and  represented  accrued  salaries  and  wages,  severance,   accrued
vacation, payroll taxes and other directly related costs, all which were paid in
2001.


Note 12--Income Taxes:

      The provision for (benefit from) income taxes for the years ended December
31, 2002, 2001 and 2000 consist of the following (in thousands):

                                              Year Ended December 31,
                                              -----------------------
                                        2002            2001             2000
                                        ----            ----             ----
Current:
     Federal ................        $ (1,361)        $  8,120         $ 13,969
     State ..................              40            2,264            3,822
     Foreign ................             (50)              23             --
                                     --------         --------         --------
                                       (1,371)          10,407           17,791

Deferred:
   Federal ..................          (1,602)             465              (59)
   State ....................            (535)              57                5
                                     --------         --------         --------
                                       (2,137)             520              (54)
                                     --------         --------         --------
                                     $ (3,508)        $ 10,929         $ 17,737
                                     ========         ========         ========

      The net deferred tax asset as of December 31, 2002 and 2001 was  comprised
of the following (in thousands):
<TABLE>
<CAPTION>
                                                                              December 31,
                                                                              ------------
                                                                             2002       2001
                                                                             ----       ---
<S>                                                                        <C>        <C>
Deferred tax asset (liability):
     Property and equipment .............................................  $   106    $  (379)
     Reserves and accruals ..............................................    6,038      3,606
     Difference in tax and book basis of net assets upon conversion, net    14,061     15,543
     Net operating loss carryforward ....................................      827        555
     Intangible assets ..................................................      281       (168)
                                                                           -------    -------
          Total deferred tax asset ......................................   21,313     19,157
     Valuation allowance ................................................     --         --
                                                                           -------    -------
          Net deferred tax asset ........................................  $21,313    $19,157
                                                                           =======    =======
</TABLE>


                                       48
<PAGE>

                           SOMERA COMMUNICATIONS, INC.


            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


      A  reconciliation  of the actual income tax rate to the federal  statutory
rate follows:
<TABLE>
<CAPTION>
                                                                  Year Ended December 31,
                                                                  -----------------------
                                                             2002           2001           2000
                                                             ----           ----           ----
<S>                                                        <C>             <C>            <C>
Tax at federal statutory rate.......................       (35.00)%        35.00 %        35.00%
State taxes (net of federal tax benefit)............        (5.88)%         5.95 %         6.11%
Non-deductible goodwill.............................        (0.21)%         1.59 %
Other...............................................          0.59%         (.04)%         0.89%
                                                           --------        -------        ------
Effective tax rate..................................       (40.50)%        42.50 %        42.00%
                                                           ========        =======        ======
</TABLE>

      The domestic and foreign components of earnings (losses) before taxes are:

                                               Year Ended December 31,
                                               -----------------------
                                       2002             2001            2000
                                       ----             ----            ----
U.S. ......................          $(8,523)          $25,650         $42,228
Non-U.S ...................             (139)               65              --
                                     -------           -------         -------
                                     $(8,662)          $25,715         $42,228
                                     =======           =======         =======

      At December 31, 2002 the Company has federal and state net operating  loss
carryforwards  of  approximately  $1.2 million and $6.0  million,  respectively,
available to offset future regular and alternative  minimum taxable income.  The
federal  carryforwards will begin to expire in 2019 and the state  carryforwards
will begin to expire in 2007 if not utilized.

      The Company has not provided for U.S.  Federal  income taxes on any of its
foreign  subsidiaries'  undistributed  earnings as of  December  31,  2002.  The
Company intends to invest these earnings  indefinitely in operations outside the
United States.

Note 13--Segment Information:

      The Company provides telecommunications  operators with equipment sourcing
for new and redeployed equipment and services.  In accordance with SFAS No. 131,
operating  segments are  identified as  components of an enterprise  about which
separate  discrete  financial  information is available that is evaluated by the
chief operating  decision maker or decision making group to make decisions about
how to allocate resources and assess performance.  The Company's chief operating
decision maker is the chief executive officer.  To date the Company has reviewed
its operations in principally two segments.  The chief operating  decision maker
assesses performance based on the gross profit generated by each segment.

      The  Company  does  not  report  operating   expenses,   depreciation  and
amortization,  interest expense, capital expenditures or identifiable net assets
by segment. All segment revenues are generated from external customers.  Segment
information is as follows (in thousands):

                                                 New    Redeployed     Total
                                              --------   ---------   ---------
Year ended December 31, 2000
     Revenue..............................    $ 90,713   $ 120,479   $ 211,192
                                              --------   ---------   ---------
     Gross profit.........................    $ 16,913   $  59,661   $  76,574
                                              --------   ---------   ---------
Year ended December 31, 2001
     Revenue..............................    $ 90,879   $ 130,377   $ 221,256
                                              --------   ---------   ---------
     Gross profit.........................    $ 17,658   $  55,120   $  72,778
                                              --------   ---------   ---------
Year ended December 31, 2002
     Revenue..............................    $ 63,691   $ 135,509   $ 199,200
                                              --------   ---------   ---------
               Gross profit...............    $  6,680   $  46,930   $  53,610
                                              --------   ---------   ---------


                                       49
<PAGE>

                           SOMERA COMMUNICATIONS, INC.


            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


      Net revenue information by geographic area is as follows (in thousands):

                                                              Net Revenue
                                                              -----------
          Year ended December 31, 2000:
               United States...............................    $ 194,663
               Canada......................................        6,415
               Latin America...............................        6,640
               Other.......................................        3,474
                                                               ---------
                    Total..................................    $ 211,192
                                                               =========
          Year ended December 31, 2001:
               United States...............................    $ 199,809
               Canada......................................        4,421
               Latin America...............................       11,368
               Europe......................................        1,803
               Asia........................................        3,060
               Other.......................................          795
                                                               ---------
                    Total..................................    $ 221,256
                                                               =========
                Year ended December 31, 2002:
                      United States........................    $ 169,512
                      Canada...............................        1,927
                      Latin America........................       12,955
                      Europe...............................        8,293
                      Asia.................................        4,998
                      Other................................        1,515
                                                               ---------
                            Total..........................    $ 199,200
                                                               =========

      Substantially all long-lived assets are maintained in the United States.


                                       50
<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 is incorporated herein by reference
to the  information  relating to the directors of the  Registrant and compliance
with Section 16(a) of the Exchange Act that is contained in the Proxy  Statement
relating to the Company's  2003 Annual Meeting of  Stockholders  scheduled to be
held on May 21,  2003,  which  will be filed with the SEC no later than 120 days
after the close of the fiscal year ended December 31, 2002.

      The information  required by this Item relating to the executive  officers
is contained in Item 1 of Part I hereof.


ITEM 11.   EXECUTIVE COMPENSATION

      The information  required by this Item is incorporated herein by reference
to the information  relating to executive  compensation that is contained in the
Proxy  Statement  relating to the Company's 2003 Annual Meeting of  Stockholders
scheduled to be held on May 21, 2003,  which will be filed with the SEC no later
than 120 days after the close of the fiscal year ended December 31, 2002.


ITEM 12.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

      The information  required by this Item is incorporated herein by reference
to the information  relating to security  ownership of certain beneficial owners
and  management  that  is  contained  in the  Proxy  Statement  relating  to the
Company's  2003 Annual Meeting of  Stockholders  scheduled to be held on May 21,
2003, which will be filed with the SEC no later than 120 days after the close of
the fiscal year ended December 31, 2002.


ITEM 13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

      The information  required by this Item is incorporated herein by reference
to the  information  relating  to certain  related  party  transactions  that is
contained in the Proxy  Statement  relating to the Company's 2003 Annual Meeting
of Stockholders  scheduled to be held on May 21, 2003,  which will be filed with
the SEC no later than 120 days after the close of the fiscal year ended December
31, 2002.


ITEM 14.   CONTROLS AND PROCEDURES

      Within  90 days  prior  to the  date of this  report,  we  carried  out an
evaluation,  under the supervision and with the  participation  of our principal
executive officer and principal  financial officer,  of the effectiveness of the
design and operation of our disclosure  controls and  procedures.  Based on this
evalution,  our  principal  executive  officer and principal  financial  officer
concluded  that our  disclosure  controls and procedures are effective in timely
alerting  them to material  information  required to be included in our periodic
SEC  reports.  It should be noted that the design of any system of  controls  is
based in part upon certain  assumptions,  and there can be no assurance that any
design will succeed in achieving stated goals.

      In addition,  we reviewed our  internal  controls,  and there have been no
significant  changes in our  internal  controls or in other  factors  that could
significantly  affect  those  controls  subsequent  to the  date of  their  last
evaluation.


                                       51
<PAGE>

                                     PART IV


ITEM 15.   EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K

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

     1. Financial Statements and Financial Statement Schedules.

     2. List of Financial Statement Schedules.

         II.      Valuation and Qualifying Accounts and Reserves

     3. Exhibits.  The following  exhibits are filed as part of, or incorporated
by reference into, this Report

 Exhibit
 Number                                Exhibit  Title
--------       -----------------------------------------------------------------
   3.1(a)      Title Amended and Restated Certificate of Incorporation of Somera
               Communications,  Inc.,  a Delaware  corporation,  as currently in
               effect.

   3.2(a)      Bylaws of Somera Communications, Inc., as currently in effect.

   4.1(a)      Specimen common stock certificate.

  10.1(a)      Form of Indemnification  Agreement between Somera Communications,
               Inc. and each of its directors and officers.

  10.2(a)      1999 Stock  Option  Plan and form of  agreements  thereunder  (as
               adopted September 3, 1999).

  10.3(a)      1999 Employee Stock Purchase Plan (as adopted September 3, 1999).

  10.4(a)      1999 Director  Option Plan and form of agreements  thereunder (as
               adopted September 3, 1999).

  10.5(a)      Loan  Agreement by and between  Somera  Communications  and Fleet
               National Bank, dated August 31, 1999.

  10.6(a)      Security Agreement by and between Somera Communications and Fleet
               National Bank, dated August 31, 1999.

  10.7(f)      Amended  Employment  Agreement between Somera  Communications and
               Jeffrey Miller, dated as of July 1, 2002.

  10.9(a)      Lease dated  January 20, 1998  between  Santa  Barbara  Corporate
               Center, LLC and Somera Communications.

 10.10(a)      First Amendment to Lease,  dated February 2, 1998,  between Santa
               Barbara Corporate Center, LLC and Somera Communications.

 10.11(a)      Second Amendment to Lease,  dated February 1, 1999, between Santa
               Barbara Corporate Center, LLC and Somera Communications.

 10.12(a)      Industrial/Commercial  Lease, dated May 12, 1999, between Sunbelt
               Properties and Somera Communications.

 10.27(f)      Employment  Agreement  between  Somera  Communications,  Inc. and
               Steve Cordial, dated August 15, 2002.

 10.28(h)      Asset Purchase  Agreement  dated as of September 19, 2002, by and
               among  Somera  Communications,  Inc.,  Compass  Telecom  and  the
               shareholders of Compass.

 10.13(c)      Second Amendment to Sublease, dated January 31, 2001, between GRC
               International, Inc. and Somera Communications.

 10.14(a)      Form of Registration  Agreement,  between Somera  Communications,
               Inc., and certain of its stockholders.

 10.15(c)      Employment  Agreement  between Somera  Communications  and Brandt
               Handley, dated January 8, 2001.

 10.16(c)      Sub-Sublease,  dated  August 2,  2000,  between  EDS  Information
               Services, L.L.C. and Somera Communications, Inc.

 10.17(c)      Sublease  Agreement,  dated May 19, 2000,  between Dames & Moore,
               Inc. and Somera Communications, Inc.

 10.18(b)      Stock  Purchase  Agreement,  dated  October 16, 2000  between the
               Somera Communications, Inc. and MSI Communications, Inc.

 10.19(c)      Lease,  dated November 1, 2000 through October 31, 2005,  between
               Somera Communications BV i.o. and Stena Realty BV


                                       52
<PAGE>

 Exhibit
 Number                                Exhibit  Title
--------       -----------------------------------------------------------------
 10.20(c)      Lease  Agreement,  dated  November 1, 2000,  between Jersey State
               Properties and Somera Communications, Inc.

 10.21(c)      First  Amendment  to Lease  Agreement,  dated  January  1,  2001,
               between Jersey State Properties and Somera Communications, Inc.

 10.22(c)      Employment  Agreement  between  Somera  Communications,  Inc. and
               Glenn Berger, dated October 8, 1999.

 10.23(d)      Credit Agreement by and between Somera  Communications,  Inc. and
               Wells Fargo HSBC Trade Bank, N.A. dated February 9, 2001.

 10.24(e)      Employment Agreement between Somera Communications,  Inc. and Dan
               Firestone, dated September17, 2001.

 10.25(e)      Employment Agreement between Somera Communications, Inc. and Rick
               Darnaby, dated September17, 2001.

 10.26(g)      Lease Agreement,  dated July 10, 2000,  between Endicott Company,
               LLC and Somera Communications, Inc.

     23.1      Consent of PricewaterhouseCoopers LLP, independent accountants.

Notes:

     (a)  Incorporated by reference to the Company's  Registration  Statement on
          Form S-1, filed September 10, 1999, as amended (File No. 333-86927).

     (b)  Incorporated  by reference to the Company's  Report on Form 8-K, filed
          on October 27, 2000.

     (c)  Incorporated by reference to the Company's  Report on Form 10-K, filed
          on March 29, 2001.

     (d)  Incorporated by reference to the Company's  Report on Form 10-Q, filed
          on May 14, 2001.

     (e)  Incorporated by reference to the Company's  Report on Form 10-Q, filed
          on November 14, 2001.

     (f)  Incorporated by reference to the Company's  Report on Form 10-Q, filed
          on November 14, 2002.

     (g)  Incorporated by reference to the Company's  Report on Form 10-K, filed
          on March 18, 2002.

     (h)  Incorporated by reference to the Company's Current Report on Form 8-K,
          filed on October 9, 2002.

(b) Reports on Form 8-K.

      The  Company  filed  a  Form  8-K  on  October  9,  2002  relating  to the
acquisition of the certain assets of Compass Telecom.


                                       53
<PAGE>

      CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
                                   PURSUANT TO
                             18 U.S.C. SECTION 1350
                             AS ADOPTED PURSUANT TO
                  SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

I, Rick Darnaby, certify that:

      1.  I  have   reviewed   this  annual   report  on  Form  10-K  of  Somera
Communications Inc.;

      2. Based on my  knowledge,  this annual report does not contain any untrue
statement of a material fact or omit to state a material fact  necessary to make
the statements made, in light of the  circumstances  under which such statements
were made,  not  misleading  with  respect to the period  covered by this annual
report;

      3. Based on my knowledge,  the financial  statements,  and other financial
information  included  in this annual  report,  fairly  present in all  material
respects the financial  condition,  results of operations  and cash flows of the
registrant as of, and for, the periods presented in this annual report;

      4. The registrant's  other  certifying  officers and I are responsible for
establishing and maintaining  disclosure  controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

           a) designed such  disclosure  controls and  procedures to ensure that
      material   information   relating  to  the   registrant,   including   its
      consolidated  subsidiaries,  is made  known to us by others  within  those
      entities,  particularly  during the period in which this annual  report is
      being prepared;

           b)  evaluated  the  effectiveness  of  the  registrant's   disclosure
      controls  and  procedures  as of a date within 90 days prior to the filing
      date of this annual report (the "Evaluation Date"); and

           c)  presented  in  this  annual  report  our  conclusions  about  the
      effectiveness  of the  disclosure  controls  and  procedures  based on our
      evaluation as of the Evaluation Date;

      5. The registrant's other certifying officers and I have disclosed,  based
on our most  recent  evaluation,  to the  registrant's  auditors  and the  audit
committee  of  registrant's  board  of  directors  (or  persons  performing  the
equivalent function):

           a)  all  significant  deficiencies  in the  design  or  operation  of
      internal controls which could adversely affect the registrant's ability to
      record,  process,  summarize and report financial data and have identified
      for  the  registrant's   auditors  any  material  weaknesses  in  internal
      controls; and

           b) any fraud,  whether or not material,  that involves  management or
      other employees who have a significant role in the  registrant's  internal
      controls; and

      6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.

Date:      March 28, 2002                   /S/    RICK DARNABY
           -----------------------------    ------------------------------------
                                            Rick Darnaby
                                            Chief Executive Officer


                                       54
<PAGE>

I, C. Stephen Coridal, certify that:

      1.  I  have   reviewed   this  annual   report  on  Form  10-K  of  Somera
Communications Inc.;

      2. Based on my  knowledge,  this annual report does not contain any untrue
statement of a material fact or omit to state a material fact  necessary to make
the statements made, in light of the  circumstances  under which such statements
were made, not  misleading  with respect to the period covered by this quarterly
report;

      3. Based on my knowledge,  the financial  statements,  and other financial
information  included  in this annual  report,  fairly  present in all  material
respects the financial  condition,  results of operations  and cash flows of the
registrant as of, and for, the periods presented in this annual report;

      4. The registrant's  other  certifying  officers and I are responsible for
establishing and maintaining  disclosure  controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

           a) designed such  disclosure  controls and  procedures to ensure that
      material   information   relating  to  the   registrant,   including   its
      consolidated  subsidiaries,  is made  known to us by others  within  those
      entities,  particularly  during the period in which this annual  report is
      being prepared;

           b)  evaluated  the  effectiveness  of  the  registrant's   disclosure
      controls  and  procedures  as of a date within 90 days prior to the filing
      date of this annual report (the "Evaluation Date"); and

           c)  presented  in  this  annual  report  our  conclusions  about  the
      effectiveness  of the  disclosure  controls  and  procedures  based on our
      evaluation as of the Evaluation Date;

      5. The registrant's other certifying officers and I have disclosed,  based
on our most  recent  evaluation,  to the  registrant's  auditors  and the  audit
committee  of  registrant's  board  of  directors  (or  persons  performing  the
equivalent function):

           a)  all  significant  deficiencies  in the  design  or  operation  of
      internal controls which could adversely affect the registrant's ability to
      record,  process,  summarize and report financial data and have identified
      for  the  registrant's   auditors  any  material  weaknesses  in  internal
      controls; and

           b) any fraud,  whether or not material,  that involves  management or
      other employees who have a significant role in the  registrant's  internal
      controls; and

      6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.


Date:  March 28, 2003                 /S/    C STEPHEN CORDIAL
       ---------------------------    ------------------------------------------
                                      C. Stephen Cordial
                                      Vice President and Chief Financial Officer


                                       55
<PAGE>

                                   SIGNATURES

      Pursuant  to the  requirements  of Section  13 or 15(d) of the  Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the  undersigned,  thereunto  duly  authorized on this 28th day of
March 2002.

                      Somera Communications, Inc.


                                        /S/ RICK DARNABY
                           --------------------------------------------
                      By:  (Rick Darnaby, President and Chief Executive Officer)





                                POWER OF ATTORNEY


      KNOW ALL  PERSONS BY THESE  PRESENTS,  that each  person  whose  signature
appears  below hereby  constitutes  and  appoints  jointly and  severally,  Rick
Darnaby and C. Stephen Cordial, and each of them, as his attorney-in-fact,  with
full power of substitution,  for him in any and all capacities,  to sign any and
all  amendments to this Annual Report on Form 10-K,  and to file the same,  with
exhibits  thereto  and  other  documents  in  connection  therewith,   with  the
Securities  and Exchange  Commission,  hereby  ratifying and confirming all that
each said attorneys-in-fact,  or his substitute or substitutes,  may do or cause
to be done by virtue hereof.

      Pursuant to the requirements of the Securities  Exchange Act of 1934, this
Report  has  been  signed  below  by the  following  persons  on  behalf  of the
Registrant and in the capacities and on March 28, 2003:



            Signature                              Title
        ----------------                    ---------------------

        /S/ RICK DARNABY         President, Chief Executive Officer and Director
-------------------------------- (Principal Executive Officer)
         (Rick Darnaby)


    /S/ DANIEL A. FIRESTONE      Executive Chairman of the Board
-------------------------------- Chief Financial Officer
     (Daniel A. Firestone)


     /S/ C. STEPHEN CORDIAL
--------------------------------
      (C. Stephen Cordial)


          /S/ GIL VARON          Director
--------------------------------
          (Gil Varon)


     /S/ WALTER G. KORTSCHAK     Director
--------------------------------
     (Walter G. Kortschak)


       /S/ PETER Y. CHUNG        Director
--------------------------------
        (Peter Y. Chung)


        /S/ BARRY PHELPS         Director
--------------------------------
         (Barry Phelps)


                                       56
<PAGE>

        Report of Independent Accountants on Financial Statement Schedule


To the Board of Directors and Stockholders of
Somera Communications, Inc.

      Our audits of the  consolidated  financial  statements  referred to in our
report  dated  January  28,  2003,  appearing  in page 28 of this Form 10-K also
included an audit of the financial  statement  schedule appearing in Schedule II
of this Form 10-K. In our opinion,  this financial  statement  schedule presents
fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements.



/s/ PricewaterhouseCoopers LLP

San Jose, California
January 28, 2003


                 Valuation and Qualifying Accounts and Reserves


SCHEDULE II


                        VALUATION AND QUALIFYING ACCOUNTS
                                 (in thousands)
<TABLE>
<CAPTION>
                                                                           Additions
                                                           Balance at     Charged to
                                                          Beginning of     Costs and                    Balance at
                                                             Period        Expenses      Deductions    End of Period
                                                             ------        --------      ----------    -------------
<S>                                                         <C>            <C>            <C>            <C>
Year ended December 31, 1999
   Allowance for sales returns and warranty
   obligations......................................        $   285        $   670       $   485       $    470
   Allowance for doubtful accounts..................            249            578            91            736
   Allowance for excess and obsolete inventory......             57          1,258           673            642
Year ended December 31, 2000
   Allowance for sales returns and warranty
   obligations......................................        $   470        $ 3,380       $ 3,118       $    732
   Allowance for doubtful accounts..................            736          1,778         1,184          1,330
   Allowance for excess and obsolete inventory......            642          3,062         1,541          2,163
Year ended December 31, 2001
   Allowance for sales returns and warranty
   obligations......................................        $   732        $ 3,422       $ 3,160       $    994
   Allowance for doubtful accounts..................          1,330            592           221          1,701
   Allowance for excess and obsolete inventory......          2,163          2,974         1,896          3,241
Year ended December 31, 2002
    Allowance for sales returns and warranty
    obligations.....................................        $   994        $ 3,371       $ 3,375       $    990
     Allowance for doubtful accounts................          1,701          1,876         2,885            692
     Allowance for excess and obsolete inventory....          3,241         13,667         2,409         14,499
</TABLE>



                                       57