UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2008.

OR

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             .

Commission File Number: 000-30757

Sunrise Telecom Incorporated

(Exact name of Registrant as specified in its charter)

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

302 Enzo Drive, San Jose, California 95138

(Address of principal executive offices, including zip code)

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

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

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

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.)    Yes  ¨    No  x

As of November 30, 2008, there were 51,349,058 shares of the registrant’s Common Stock outstanding, par value $0.001 per share.

SUNRISE TELECOM INCORPORATED AND SUBSIDIARIES

TABLE OF CONTENTS

		Page Number
PART I.	Financial Information
	Cautionary Statement	3
Item 1.	Financial Statements (unaudited)
	Condensed Consolidated Balance Sheets as of June 30, 2008 and December 31, 2007	4
	Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2008 and 2007	5
	Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2008 and 2007	6
	Notes to Condensed Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	24
Item 4.	Controls and Procedures	25
PART II.	Other Information
Item 1.	Legal Proceedings	27
Item 1A.	Risk Factors	28
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	39
Item 3.	Defaults Upon Senior Securities	39
Item 4.	Submission of Matters to a Vote of Security Holders	39
Item 5.	Other Information	39
Item 6.	Exhibits	39
	Signatures	41
	Exhibit Index	42

“3GMaster,” “FTT,” “HTT,” “RealWORX,” “Sunrise Telecom,” “SunSet,” “SunLite,” “STT,” “Sunset MTT,” and “NeTracker,” are trademarks of Sunrise Telecom Incorporated. This Quarterly Report on Form 10-Q also includes references to registered service marks and trademarks of other entities.

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CAUTIONARY STATEMENT

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

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PART I FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

SUNRISE TELECOM INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share data, unaudited)

	June 30, 2008			December 31, 2007
ASSETS
Current assets:
Cash and cash equivalents	$	11,588		$	15,981
Accounts receivable, net of allowance of $490 and $270, respectively		15,654			17,972
Inventories		16,656			17,445
Prepaid expenses and other assets		2,110			2,283
Deferred tax assets		1,092			982
Total current assets		47,100			54,663
Property and equipment, net		26,969			27,211
Restricted cash		296			296
Goodwill		12,915			12,736
Intangible assets, net		1,205			1,116
Other assets		920			854
Total assets	$	89,405		$	96,876
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Short-term borrowings and current portion of notes payable	$	2,183		$	183
Accounts payable		3,262			4,653
Other accrued liabilities		17,568			15,158
Income taxes payable		18			181
Deferred revenue		2,542			2,520
Total current liabilities		25,573			22,695
Notes payable, less current portion		374			424
Income taxes payable		1,773			1,700
Deferred revenue, less current portion		14			13
Deferred tax liabilities		2,370			2,106
Total liabilities		30,104			26,938
Stockholders’ equity:
Preferred stock, $0.001 par value per share; 10,000,000 shares authorized; none issued and outstanding		—			—
Common stock, $0.001 par value per share; 175,000,000 shares authorized; 51,349,058 shares outstanding as of June 30, 2008 and December 31, 2007, respectively		51			51
Additional paid-in capital		77,879			77,788
Accumulated deficit		(19,342	)		(8,792	)
Accumulated other comprehensive income		713			891
Total stockholders’ equity		59,301			69,938
Total liabilities and stockholders’ equity	$	89,405		$	96,876

See accompanying notes to condensed consolidated financial statements.

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SUNRISE TELECOM INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data, unaudited)

	Three Months Ended June 30						Six Months Ended June 30
	2008			2007			2008			2007
Net sales	$	20,172		$	23,047		$	40,139		$	43,187
Cost of sales		7,779			9,563			18,930			16,261
Gross profit		12,393			13,484			21,209			26,926
Operating expenses:
Research and development		4,996			5,613			10,270			11,894
Selling and marketing		6,395			6,893			12,726			14,067
General and administrative		4,534			4,184			9,429			9,283
Restructuring charges		296			—			1,239			—
Total operating expenses		16,221			16,690			33,664			35,244
Loss from operations		(3,828	)		(3,206	)		(12,455	)		(8,318	)
Other income, net		414			380			2,178			890
Loss before income taxes		(3,414	)		(2,826	)		(10,277	)		(7,428	)
Income tax expense (benefit)		134			(240	)		273			27
Net loss	$	(3,548	)	$	(2,586	)	$	(10,550	)	$	(7,455	)
Net loss per share:
Basic and diluted	$	(0.07	)	$	(0.05	)	$	(0.21	)	$	(0.15	)
Shares used in per share computation:
Basic and diluted		51,349			51,349			51,349			51,349

See accompanying notes to condensed consolidated financial statements.

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SUNRISE TELECOM INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands, unaudited)

	Six Months Ended June 30,
	2008			2007
Cash flows from operating activities:
Net loss	$	(10,550	)	$	(7,455	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		2,073			2,357
Stock-based compensation expense		91			185
Provision for losses on accounts receivable		214			275
Loss on disposal of property and equipment		45			533
Non-cash restructuring charges		193			—
Gain on sale of marketable securities		—			(248	)
Deferred income taxes		154			486
Changes in operating assets and liabilities:
Accounts receivable		2,104			5,174
Inventories		837			(2,951	)
Prepaid expenses and other assets		107			54
Accounts payable and accrued liabilities		1,025			(422	)
Income taxes payable		(90	)		(1,462	)
Deferred revenue		23			1,129
Net cash used in operating activities		(3,774	)		(2,345	)
Cash flows from investing activities:
Proceeds from sales of short-term investments		—			4,556
Purchases of short-term investments		—			(992	)
Sales of marketable securities		—			445
Capital expenditures		(1,941	)		(2,165	)
Acquisition of intangible assets		(190	)		(230	)
Net cash provided by (used in) investing activities		(2,131	)		1,614
Cash flows from financing activities:
Decrease (increase) in restricted cash		—			3
Proceeds from credit facility		2,000			—
Payments on notes payable		(89	)		(81	)
Net cash provided by (used in) financing activities		1,911			(78	)
Effect of exchange rate changes on cash and cash equivalents		(399	)		(57	)
Net decrease in cash and cash equivalents		(4,393	)		(866	)
Cash and cash equivalents at the beginning of the period		15,981			17,450
Cash and cash equivalents at the end of the period	$	11,588		$	16,584

See accompanying notes to condensed consolidated financial statements.

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SUNRISE TELECOM INCORPORATED AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

(1) Business and Certain Significant Accounting Policies

(a) Business

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

(b) Basis of Presentation

These unaudited condensed consolidated financial statements and notes to the condensed consolidated financial statements included herein have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information and footnotes required by United States generally accepted accounting principles for complete financial statements. In the opinion of management, these financial statements include all adjustments, which are only normal recurring adjustments, necessary for their fair presentation. These financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007, as filed with the SEC on October 2, 2008.

The interim results presented are not necessarily indicative of results that may be expected for any subsequent interim period or for the full year.

(c) Risks and Uncertainties

The Company’s continued losses reduced its cash and cash equivalents in 2007 and 2008. As of November 30, 2008, the Company had approximately $6.9 million in cash and cash equivalents and $4.0 million outstanding under its bank lending facility. In order to meet its liquidity needs, the Company may be required to sell assets, or to borrow on potentially unfavorable terms, to finance capital expenditures and working capital needs for the business. The Company may be unable to sell assets, or unable to borrow, to meet these needs. As a result, the Company may become unable to pay its ordinary expenses, including its debt service, on a timely basis. The Company’s current lack of liquidity could harm it by:

• increasing vulnerability to adverse economic conditions in its industry or the economy in general;

• requiring substantial amounts of cash to be used for debt service, rather than other purposes, including operations;

• limiting the Company’s ability to plan for, or react to, changes in its business and industry; and

• influencing investor and customer perceptions about the Company’s financial stability and limiting its ability to obtain financing or acquire customers.

During 2008, the Company initiated several restructuring activities intended to reduce costs, improve operating efficiencies and change its operations to more closely align them with its key strategic focus. The total restructuring charges are estimated to be approximately $2.5 million and include employee severance and benefit costs, costs related to leased facilities to be abandoned or subleased, and impairment of owned equipment.

The Company believes that its current cash balances, the cash generated from the sale of its Protocol Products Group in December 2008 (see Note 15, “Subsequent Events”), and expected future cash flows from operations will be sufficient to meet its anticipated cash needs for the next twelve months from the filing of this Form 10-Q.

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(d) Net Loss per Share

Basic net loss per share is computed using the weighted-average number of common shares outstanding during the period. Diluted net loss per share is computed using the weighted-average number of common and dilutive potential common equivalent shares outstanding during the period. Potential common equivalent shares consist of common stock issuable upon exercise of stock options using the treasury stock method. Potential common equivalent shares from weighted-average outstanding stock options of 2,472,386 and 2,614,576 for the three and six months ended June 30, 2008, respectively, and 3,384,991 and 3,399,437 for the three and six months ended June 30, 2007, respectively, were excluded from the calculation of diluted net loss per share because their effect would be anti-dilutive.

(e) Share-Based Compensation

The Company has in effect stock incentive plans under which incentive stock options have been granted to employees and non-qualified stock options have been granted to employees and non-employee members of the Board of Directors. The Company also has an employee stock purchase plan for all eligible employees, which was suspended in May 2006. Effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 123R, Share-Based Payment (“SFAS 123R”), which requires all share-based payments to employees, including grants of employee stock options and employee stock purchase rights, to be recognized in the financial statements based on their respective grant date fair values and does not allow the previously permitted pro forma disclosure-only method as an alternative to financial statement recognition. SFAS 123R supersedes Accounting Principles Board Opinion (“APB”) No. 25, Accounting for Stock Issued to Employees (“APB 25”), and related interpretations and amends SFAS No. 95, Statement of Cash Flows. SFAS 123R also requires the benefits of tax deductions in excess of recognized compensation cost be reported as a financing cash flow, rather than as an operating cash flow as required under previous literature. In March 2005, the SEC issued Staff Accounting Bulletin (“SAB”) No. 107, Share-Based Payment (“SAB 107”), which provides guidance regarding the interaction of SFAS 123R and certain SEC rules and regulations. The Company has applied the provisions of SAB 107 in its adoption of SFAS 123R.

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

(f) Recent Accounting Pronouncements

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

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

(2) Fair Value of Financial Instruments

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (“SFAS 157”), which defines fair value, establishes guidelines for measuring fair value and expands disclosures regarding fair value measurements. SFAS 157 does not require any new fair value measurements but rather eliminates inconsistencies in guidance found in various prior accounting pronouncements. On February 12, 2008, the FASB issued FSP SFAS 157-2, Effective Date of FASB Statement No. 157, which deferred the effective date for adoption of fair value measurements for nonfinancial assets and liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually), to fiscal years beginning after November 15, 2008. These nonfinancial items include assets and liabilities, such as reporting units measured at fair value in a goodwill impairment test and nonfinancial assets acquired and liabilities assumed in a business combination. Fair value is defined under SFAS 157 as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value under SFAS 157 must maximize the use of observable inputs and minimize the use of unobservable inputs.

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

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

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

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

The following table summarizes the Company’s financial assets measured at fair value on a recurring basis, by level within the fair value hierarchy (in thousands):

	June 30, 2008
	Level 1		Level 2		Total
Investments in money market funds	$	178	$	—	$	178
U.S. Government obligations and agencies		—		5,090		5,090
	$	178	$	5,090	$	5,268

As of June 30, 2008, the Company had no financial assets or liabilities requiring Level 3 classification.

(3) Inventories

Inventories consisted of the following (in thousands):

	June 30, 2008		December 31, 2007
Raw materials	$	8,385	$	8,187
Work in process		3,865		5,486
Finished goods		4,406		3,772
	$	16,656	$	17,445

(4) Comprehensive Loss

Comprehensive loss comprises net loss and other comprehensive income (loss). Other comprehensive income (loss) includes certain changes in the equity of the Company that are excluded from net loss. The components of the Company’s comprehensive loss, net of tax, were as follows (in thousands):

	Three Months Ended June 30,						Six Months Ended June 30,
	2008			2007			2008			2007
Net loss	$	(3,548	)	$	(2,586	)	$	(10,550	)	$	(7,455	)
Change in unrealized gain on available-for-sale investments, net of related tax effect		—			(30	)		—			(189	)
Change in foreign currency translation adjustments, net of tax		(62	)		(23	)		(178	)		(45	)
Total comprehensive loss	$	(3,610	)	$	(2,639	)	$	(10,728	)	$	(7,689	)

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(5) Goodwill and Other Intangible Assets

Acquired intangible assets consisted of the following (in thousands):

	As of June 30, 2008
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
Developed technology (five years)	$	6,898	$	(6,883	)	$	15
Non-compete (four years)		275		(275	)		—
Licenses (five years)		637		(631	)		6
Patents and trademarks (two to seventeen years)		1,375		(191	)		1,184
	$	9,185	$	(7,980	)	$	1,205
	As of December 31, 2007
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
Developed technology (five years)	$	6,886	$	(6,855	)	$	31
Non-compete (four years)		249		(249	)		—
Licenses (five years)		637		(608	)		29
Patents and trademarks (two to seventeen years)		1,223		(167	)		1,056
	$	8,995	$	(7,879	)	$	1,116

The Company amortizes intangible assets on a straight-line basis over their estimated useful lives of up to seventeen years. Aggregate amortization expense for the three months ended June 30, 2008 and 2007 was $41,000 and $57,000, respectively, and for the six months ended June 30, 2008 and 2007 was $81,000 and $218,000, respectively. Amortization expense is classified as a general and administrative expense on the Company’s condensed consolidated statements of operations.

Estimated future aggregate annual amortization expense for intangible assets is as follows (in thousands):

Year ending December 31,	Amount
2008 (remaining 6 months)	$	43
2009		48
2010		48
2011		48
2012		48
Thereafter		970
	$	1,205

The change in the carrying amount of goodwill during the six months ending June 30, 2008 was as follows (in thousands):

Balance as of December 31, 2007	$	12,736
Effect of foreign currency translation		179
Balance as of June 30, 2008	$	12,915

The Company performs its annual impairment test of goodwill, as required by SFAS No. 142, Goodwill and Other Intangible Assets, as of November 30 of each fiscal year, unless a triggering event occurs before that date. See Note 15, “Subsequent Events,” for discussion on impairment of goodwill and other intangible assets.

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(6) Other Assets

Other assets consisted of the following (in thousands):

	June 30 2008		December 31, 2007
Insurance deposits	$	520	$	452
Rental deposits		167		335
Other deposits		233		67
	$	920	$	854

(7) Product Warranties Liability

Changes in the Company’s liability for product warranties, which is included in other accrued liabilities in the condensed consolidated balance sheets, during the six months ended June 30, 2008 and 2007 are shown in the schedule below (in thousands). During the six months ended June 30, 2008, the Company recorded a warranty charge of approximately $2.5 million related to a warranty issue for its CM750 product that had been sold to a major customer in prior years. The warranty problem was not known until the fourth quarter of 2008, but in accordance with SFAS No. 5 Accounting for Contingencies, the Company recorded the warranty liability and corresponding charge in the three months ended March 31, 2008, as the information related to this issue was available before the issuance of the Company’s financial statements.

	Balance at Beginning of Period		Warranty Expense		Warranty Costs			Balance at End of Period
Six months ended June 30, 2008	$	1,454	$	3,110	$	(830	)	$	3,734
Six months ended June 30, 2007	$	1,656	$	678	$	(749	)	$	1,585

(8) Short-term Borrowings and Notes Payable

As a result of various acquisitions completed prior to 2004, the Company assumed three non-interest bearing notes payable. The aggregate outstanding balance on these notes at June 30, 2008 was nominal. In addition, the Company’ Italian subsidiary, Sunrise S.R.L, has a loan from the Italian government which bears interest at 2% per year. As of June 30, 2008, the outstanding balance on this loan was $0.5 million, which is being repaid by semi-annual principal payments over an eight-year period which began in July 2003.

On December 12, 2008, the Company completed the sale of Sunrise Telecom S.r.l to LTE Innovations OY and as a result, the loan from the Italian government was assumed by the buyer. See Note 15, “Subsequent Events.”

On August 13, 2007, the Company entered into a $10 million secured revolving credit arrangement (“Loan Agreement”) with Silicon Valley Bank (“SVB”) to improve liquidity and working capital for the Company. The Company may borrow, repay and reborrow under the line of credit facility at any time. The amount that the Company is able to borrow under the Loan Agreement will vary based on the eligible accounts receivable, as defined in the agreement. The borrowing base on the Loan Agreement is $5 million plus 80% of eligible accounts receivable. The line of credit facility bears interest at the bank’s prime rate (4.0% at November 30, 2008). This line of credit is collateralized by substantially all of the Company’s assets and requires the Company to comply with customary affirmative and negative covenants principally relating to the use and disposition of assets, tangible net worth and the satisfaction of a quick ratio test. In addition, the Loan Agreement contains customary events of default. Upon the occurrence of an uncured event of default, among other things, the bank may declare that all amounts owed under the credit arrangement are due and payable. As of December 28, 2007, the Loan Agreement was amended to reduce the Company’s tangible net worth requirement from $57 million to $50 million.

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

As of June 30, 2008, the Company was in default of its Tangible Net Worth Covenant due to the Company’s tangible net worth being less than $50 million. In addition, the Company was or expects to be in default of this same covenant for the March 31, 2008, September 30, 2008 and December 31, 2008 periods. Under this revolving credit agreement, there was $2.0 million outstanding as of June 30, 2008 and $4.0 million was outstanding as of November 30, 2008. The Company obtained a waiver from SVB for the June 30, 2008 violation and is in the process of obtaining a waiver from SVB for the other violations, although no assurance can be given that the Company will be successful in obtaining such waivers.

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

Annual amounts to be repaid under all of these notes are as follows (in thousands):

Year ending December 31,	Amount
2008 (remaining 6 months)	$	2,099
2009		182
2010		183
2011		93
	$	2,557

(9) Restructuring

During the first half of 2008 and subsequently, the Company initiated several restructuring activities intended to reduce costs, improve operating efficiencies and change its operations to more closely align them with its key strategic focus. The total restructuring charges are estimated to be approximately $2.5 million when completed and include employee severance and benefit costs, costs related to leased facilities to be abandoned or subleased, and impairment of owned equipment. The Company expects to complete its restructuring activities by the end of the fourth quarter of 2008. During the six months ended June 30, 2008, the Company recognized $0.9 million of expense for workforce reduction and $0.4 million of other exit costs associated with restructuring activities in 2008. These expenses are presented as “Restructuring charges” in the Company’s Condensed Consolidated Statements of Operations.

The following table summarizes the activity in the accrued restructuring balance, included in other accrued liabilities in the accompanying condensed consolidated balance sheet, for the six months ended June 30, 2008 (in thousands):

	Balance as of December 31, 2007		Restructuring Charges		Cash Payments			Non-cash Charges			Balance as of June 30, 2008
Workforce reduction	$	—	$	862	$	(563	)	$	—		$	299
Other exit costs		—		377		(184	)		(193	)		—
	$	—	$	1,239	$	(747	)	$	(193	)	$	299

(10) Share-Based Compensation

The purpose of the Company’s various share-based compensation plans is to attract, motivate, retain, and reward high-quality employees, directors, and consultants by enabling such persons to acquire or increase their proprietary interest in the Company’s common stock in order to strengthen the mutuality of interests between such persons and its stockholders and to provide such persons with annual and long-term performance incentives to focus their best efforts in the creation of stockholder value. Consequently, share-based compensatory awards issued subsequent to the initial award to the Company’s employees are determined primarily on the basis of individual performance. The Company’s share-based compensation plans with outstanding awards consist of the 1993 Stock Option Plan, the 2000 Stock Plan, and the 2000 Employee Stock Purchase Plan.

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Share-based compensation expense recognized in the Company’s condensed consolidated statements of operations for the three and six months ended June 30, 2008 and 2007 under SFAS 123R was as follows (in thousands):

	Three Months Ended June 30,				Six Months Ended June 30,
	2008		2007		2008		2007
Cost of sales	$	3	$	5	$	5	$	11
Research and development		12		28		25		59
Selling and marketing		18		34		37		75
General and administrative		12		21		24		40
Total	$	45	$	88	$	91	$	185

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

Stock Options

In April 2000, the Company’s Board of Directors approved the adoption of the 2000 Stock Plan (the “Stock Plan”). The Stock Plan became effective upon the Company’s initial public offering in July 2000. The total number of shares reserved for issuance under the Stock Plan equaled 7,750,000 shares of common stock, plus 5,250,000 shares of common stock that remained reserved for issuance under the 1993 stock option plan as of the date the Stock Plan became effective, for a total of 13,000,000 shares. All outstanding options under the 1993 stock option plan are administered under the 2000 Stock Plan but will continue to be governed by their existing terms. As of June 30, 2008, the Company had granted options to purchase 9,846,346 shares of its common stock to its employees, directors, and consultants and 4,491,632 options were canceled and returned to the Stock Plan, leaving 7,645,286 shares available for future grants.

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

The options granted under the 1993 stock option plan include a provision whereby the option holder may elect at any time to exercise the option prior to its vesting. Unvested shares so purchased are subject to a repurchase right by the Company at the original purchase price. Such right lapses at a rate equivalent to the vesting period of the original option. As of June 30, 2008, there were no shares issued and subject to repurchase.

The Company has not granted stock options or other share-based awards since August 2005 and options holders have not been permitted to exercise options since December 2005 due to the Company not being current in its SEC filings. As of November 30, 2008, management has committed to present to the Compensation Committee of the Board of Directors proposed new-hire grants totaling 370,500 shares at an exercise price to be determined at the date of grant upon the Company becoming current with its filings with the SEC.

Unrecognized compensation expense as of June 30, 2008 was $0.1 million and will be recognized ratably over the expected remaining term of approximately 0.6 years.

(11) Income Taxes

As of June 30, 2008, income tax liabilities associated with uncertain tax positions were $1,567,000, which would affect the tax rate upon realization. The Company has unrecognized tax benefits related to its deferred tax assets that have not yet been recognized due to the full valuation allowance recorded for these assets as of June 30, 2008. During the six months ended June 30, 2008, the Company increased the income tax liabilities for the unrecognized tax benefits, not including interest and penalties, from $3,885,000 at December 31, 2007 to approximately $4,019,000. The Company records interest related to unrecognized tax benefits in income tax expense and income taxes payable. At December 31, 2007, the Company had approximately $165,000 accrued for estimated interest. No estimated penalties have been accrued. The Company accrued an additional $41,000 of interest in the six months ended June 30, 2008. The Company does not anticipate any significant changes to its unrecognized tax benefits within the next twelve months.

The Company determines the need for a valuation allowance on deferred tax assets in accordance with the provisions of SFAS No. 109, Accounting for Income Taxes (“SFAS 109”), which requires that the Company weigh both positive and negative evidence in order to ascertain whether it is more likely than not that deferred tax assets will be realized. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of

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existing assets and liabilities and their respective tax basis and for the future tax consequences attributable to operating losses and tax credit carryforwards. The ultimate realization of deferred tax assets is dependent on the generation of future taxable income during the periods in which the related temporary differences become deductible. The Company evaluated all significant available positive and negative evidence, including the existence of cumulative net losses in recent periods, benefits that could be realized from available tax strategies, and forecasts of future taxable income, in determining the need for a valuation allowance on its deferred tax assets. Cumulative net losses in recent periods represented sufficient negative evidence that was difficult for positive evidence to overcome the evaluation guidance of SFAS 109. Accordingly, the Company intends to maintain a valuation allowance against all of the Company’s net deferred tax assets in the United States and certain of the foreign jurisdictions until sufficient positive evidence, such as the resumption of a consistent earnings pattern, exists to support its reversal in accordance with SFAS 109. The Company has recorded deferred tax assets in certain foreign locations based on a history of profitability in those foreign locations.

The Company files U.S. federal, U.S. state and foreign tax returns. The Company’s major tax jurisdictions are the U.S., California, Canada, Italy, and Taiwan. The Company’s fiscal years 2003 through 2008 remain subject to examination by the IRS for U.S. federal tax purposes, 2002 through 2008 remain subject to examination by the California Franchise Tax Board, 2002 through 2008 remain subject to examination for Canada tax purposes, 2002 through 2008 remain subject to examination for Italy tax purposes, and 2005 through 2008 remain subject to examination for Taiwan tax purposes.

(12) Enterprise Wide Information

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

	Three Months Ended June 30,				Six Months Ended June 30,
	2008		2007		2008		2007
United States	$	7,694	$	12,612	$	14,297	$	21,080
Canada		348		718		1,270		883
Asia/Pacific		4,703		4,717		9,441		8,872
Europe/Africa/Middle East		6,696		4,342		13,528		10,973
Latin America		731		658		1,603		1,379
	$	20,172	$	23,047	$	40,139	$	43,187

Long-lived assets, which consist of property and equipment, were located in the following geographic regions (in thousands):

	June 30, 2008		December 31, 2007
United States	$	22,005	$	21,979
Canada		904		1,163
Taiwan and other Asia/Pacific		2,860		2,735
Europe/Africa/Middle East		1,200		1,334
	$	26,969	$	27,211

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

	Three Months Ended June 30,				Six Months Ended June 30,
	2008		2007		2008		2007
Wireline access	$	6,799	$	7,472	$	14,856	$	13,337
Cable broadband		5,004		10,145		10,281		16,231
Fiber optics		6,032		5,035		11,355		11,941
Signaling		2,337		395		3,647		1,678
	$	20,172	$	23,047	$	40,139	$	43,187

No customer accounted for 10% or more of the Company’s sales during the three or six months ended June 30, 2008. Verizon Communications, Inc. accounted for 26% and 21%, respectively, of the Company’s sales during the three and six months ended June 30, 2007.

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(13) 401(k) Plan

In 1996, the Company adopted a 401(k) Plan (the “Plan”). Participation in the Plan is available to all full-time employees. Each participant may elect to contribute up to 15% of his or her annual salary, but not to exceed the statutory limit as prescribed by the Internal Revenue Code. The Company may make discretionary contributions to the Plan, which vest over a six-year period beginning on the employee’s date of hire. The Plan does not provide participants with an election to use their contributions to purchase the Company’s stock. The Company made contributions to the Plan during both of the three months ended June 30, 2008 and 2007 of $0.2 million and $0.3 million during both of the six months ended June 30, 2008 and 2007.

(14) Legal Proceedings and Contingencies

Cash Payments for Expired Employee Stock Options

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

Stockholder Litigation

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

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

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

The Company intends to continue to assert all available defenses. The parties may continue with their mediation efforts in the future. The outcome of this litigation is uncertain and should the Company experience an unfavorable ruling, there exists the possibility of a material adverse impact on its financial condition, results of operations and cash flows for the period in which the ruling occurs. No amount was accrued for this contingency as of June 30, 2008, as a loss is not considered probable or estimable.

Settlement with Wind River, Inc.

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

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

Other Legal Contingencies

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

(15) Subsequent Events

On November 19, 2008, the Company and LTE Innovations OY (“LTE”) entered into a Participation Purchase Agreement (“Purchase Agreement”) pursuant to which the Company agreed to sell its wholly-owned Italian subsidiary, Sunrise Telecom S.r.l. (“Protocol Products Group or PPG”) to LTE for approximately 8.0 million Euros, or approximately $10.7 million in cash, of which approximately $2.1 million will be held in escrow for up to fifteen months to secure indemnities under the Purchase Agreement. The Company agreed to use $2.0 million of the proceeds from the sale to repay its borrowings outstanding under the Loan Agreement with SVB. The closing of the transaction occurred on December 12, 2008. The results of PPG will be shown as discontinued operations starting in the Company’s third quarter of 2008 when the PPG business became held for sale. The Company expects to recognize a gain on the sale in the third quarter of 2008. PPG represented approximately 8% and 7% of net sales of the Company for the three and six months ended June 30, 2008, respectively.

As a result of a substantial decline in the Company’s stock price during the third quarter ended September 30, 2008, the Company concluded that this was a triggering event to evaluate whether its goodwill was impaired. The Company anticipates that it will record impairment charges for goodwill, intangible assets and other long-lived assets during the third quarter ended September 30, 2008.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

In addition to the other information in this report, certain statements in the following Management’s Discussion and Analysis of Financial Condition and Results of Operations are forward-looking statements. When used in this report, the words “expects,” “anticipates,” “estimates,” and similar expressions are intended to identify forward-looking statements. Such statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected. Such risks and uncertainties are set forth below under Part II, Item 1A, “Risk Factors.” The following discussion should be read in conjunction with those risk factors, our consolidated financial statements and the notes thereto that are included elsewhere in this report.

OVERVIEW

We manufacture and market service verification equipment that enables service providers to pre-qualify facilities for services, verify newly installed services, and diagnose problems relating to telecommunications, cable broadband, and internet networks. Our products offer broad functionality, leading edge technology, and compact size to test broadband services. These include wireline access services (including DSL), fiber optics, cable broadband networks, and signaling networks. We design our products to provide rapid answers for technicians in centralized network operations centers. Our customers include incumbent local exchange carriers, cable companies, competitive local exchange carriers, and other service providers, network infrastructure suppliers, and installers throughout North America, Latin America, Europe, Africa, the Middle East, and the Asia/Pacific region.

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

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

The third factor is profitability. In general, profitability indicates our success in generating present and future cash flows from our operating activities. Key components of our profitability are net sales, cost of sales, and operating expenses. See the discussion directly below and “Results of Operations”.

Our net sales for the six months ended June 30, 2008 decreased $3.0 million, or 7 %, from our net sales for the six months ended June 30, 2007. Our backlog at June 30, 2008 increased to $13.1 million, representing a $0.7 million increase from the backlog of $12.4 million at June 30, 2007 and a $3.2 million increase from the backlog of $9.9 million at March 31, 2008. Variations in the size and delivery schedules of purchase orders that we receive, as well as changes in customers’ delivery requirements, may result in substantial fluctuations in the amount of backlog orders for our products from quarter to quarter.

Sources of Net Sales

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

We sell our products predominantly to large telecommunications service providers. These types of customers generally commit significant resources to the evaluation of our and our competitors’ products and require each vendor to expend substantial time, effort, and expense educating them about the value of the proposed solutions. Delays associated with potential customers’ internal approval and contracting procedures, procurement practices, and testing and acceptance processes are common and may cause potential sales to be delayed or foregone. As a result of these and related factors, the sales cycle of new products for large customers typically ranges from six to twenty-four months. Substantially all of our sales are made on the basis of purchase orders rather than long-term agreements or requirements contracts. As a result, we commit resources to the development and production of products without having received advance or long-term purchase commitments from customers. We anticipate that our operating results for any given period will continue to be dependent, to a significant extent, on purchase orders, which can be delayed or cancelled by our customers.

Historically, a significant portion of our net sales have come from a small number of relatively large orders from a limited number of customers. No single customer accounted for 10% or more of our sales during the three and six months ended June 30, 2008.

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Verizon Communications, Inc. accounted for 26% and 21% of our net sales during the three and six months ended June 30, 2007, respectively. Overall, we anticipate that our operating results for a given period will be dependent on a small number of customers. These large customers have substantial negotiating leverage and the ability to obtain concessions that may negatively affect our business and products. We have occasionally offered terms and conditions, such as extended payment terms, that can impact our revenue recognition, margins and/or cash flows.

Competition in the telecommunications equipment market is intense and is characterized by declining prices. Because of these market conditions and potential pricing pressures from large customers in the future, we expect that the average selling price for our products will decline over time. If we fail to reduce our production costs accordingly, or fail to introduce higher margin new products, there will be a corresponding decline in our gross margin percentage. See Part II, Item 1A, “Risk Factors-Competition” and “- Consolidation and Other Risks Within the Telecommunications Industry.”

We have significant sales denominated in Euros, and to a lesser degree, amounts in the Canadian dollar, Japanese yen, Korean won and other currencies, and have in prior years used derivative financial instruments to hedge our foreign exchange risks. We record the impact of changes in the current value of such forward contracts as other income or expense. We currently do not use forward contracts to hedge our foreign exchange risks. Foreign exchange exposure from sales made in foreign currencies is becoming more material to our results of operations. We have also been exposed to fluctuations in non-U.S. currency exchange rates related to our manufacturing activities in Taiwan. In the future, we expect continued sales denominated in currencies other than U.S. dollars, thereby exposing us to gains and losses on non-U.S. currency transactions. See Part II, Item 1A, “Risk Factors-Risks of International Operations.”

Cost of Sales

Our cost of sales consists primarily of the following:

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

• production wages, taxes, and benefits;

• allocated production overhead costs;

• warranty costs;

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

• scrapped and reserved material originally purchased for use in the production process.

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

Our industry is characterized by limited sources and long lead times for the materials and components that we use to manufacture our products. If we underestimate our requirements, we may have inadequate inventory, resulting in additional product costs for expediting delivery of long lead time components. An increase in the cost of components could result in lower margins. These long lead times have in the past, and may in the future cause us to purchase larger quantities of some parts, increasing our investment in inventory and the risk of the parts’ obsolescence. Any subsequent write-off of inventory could result in lower margins. See Part II, Item 1A, “Risk Factors-Dependence on Sole and Single Source Suppliers.”

Operating Costs

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

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

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During the first half of 2008 and subsequently, we initiated several restructuring activities intended to reduce costs, improve operating efficiencies and change our operations to more closely align them with our key strategic focus. The total restructuring charges are estimated to be approximately $2.5 million and include employee severance and benefit costs, costs related to leased facilities to be abandoned or subleased, and impairment of owned equipment.

Results of Operations

Comparisons of the Three and Six Months Ended June 30, 2008 and 2007

Net Sales by Product Category

Our net sales by product category for the three and six months ended June 30, 2008 compared to the three and six months ended June 30, 2007 are summarized as follows (in thousands, except percentages):

	Three Months Ended June 30				Variance in Dollars			Variance in Percent		Six Months Ended June 30				Variance in Dollars			Variance in Percent
	2008		2007							2008		2007
Wireline access	$	6,799	$	7,472	$	(673	)	(9	)%	$	14,856	$	13,337	$	1,519		11	%
Cable broadband		5,004		10,145		(5,141	)	(51	)%		10,281		16,231		(5,950	)	(37	)%
Fiber optics		6,032		5,035		997		20	%		11,355		11,941		(586	)	(5	)%
Signaling		2,337		395		1,942		492	%		3,647		1,678		1,969		117	%
	$	20,172	$	23,047	$	(2,875	)	(12	)%	$	40,139	$	43,187	$	(3,048	)	(7	)%

Net sales decreased 12% to $20.2 million and 7% to $40.1 million for the three and six months ended June 30, 2008, respectively, from the same periods in 2007. The decreases in sales were primarily attributable to decreased demand for both cable broadband and wireline access products related to the deployment of triple play services. The increase in signaling products for the three and six months ended June 30, 2008 as compared to the same periods in 2007 was primarily due to increased sales of our TAMS system products as the functionality of this product has been expanded significantly causing higher demand. The increase in fiber optics products for the three months ended June 30, 2008 as compared to the same period in 2007 was primarily due to increased sales of our SunSet SDH product by international carriers, with particular strength in Japan. The decrease in fiber optics products for the six months ended June 30, 2008 as compared to the same period in 2007 was primarily due to lower sales of Ethernet products being negatively impacted by customer budgetary cycles. The decrease in cable broadband products for the three and six months ended June 30, 2008 as compared to the same periods in 2007 was primarily due to decreased sales of our CM products, which reflected very strong sales of our CM750 product to Verizon in the first half of 2007, as that customer significantly expanded their triple play offering to U.S. customers. The decrease in wireline access products for the three months ended June 30, 2008 as compared to the same period in 2007 was primarily due to weak demand from Tier 1 carriers in North America as the demand for test equipment related to the deployment of triple play services has slowed down. The increase in wireline access products for the six months ended June 30, 2008 as compared to the same period in 2007 was primarily due to higher sales of our MTT product family to a major customer in Europe that occurred during the first quarter of 2008. During the three and six months ended June 30, 2008 and 2007, our sales were not significantly affected by changes in prices.

Net Sales by Geography

Our net sales by geographic areas for the three and six months ended June 30, 2008 and 2007 are summarized as follows (in thousands, except percentages):

	Three Months Ended June 30				Variance in Dollars			Variance in Percent		Six Months Ended June 30				Variance in Dollars			Variance in Percent
	2008		2007							2008		2007
United States	$	7,694	$	12,612	$	(4,918	)	(39	)%	$	14,297	$	21,080	$	(6,783	)	(32	)%
Canada		348		718		(370	)	(52	)%		1,270		883		387		44	%
Asia/Pacific		4,703		4,717		(14	)	0	%		9,441		8,872		569		6	%
Europe/Africa/Middle East		6,696		4,342		2,354		54	%		13,528		10,973		2,555		23	%
Latin America		731		658		73		11	%		1,603		1,379		224		16	%
	$	20,172	$	23,047	$	(2,875	)	(12	)%	$	40,139	$	43,187	$	(3,048	)	(7	)%

The decrease in the North American sales for the three and six months ended June 30, 2008 as compared to the same periods in 2007 is primarily due to lower sales of cable broadband products in the three months ended June 30, 2008 and lower sales of cable broadband and fiber optics products in the six months ended June 30, 2008. The lower sales of cable broadband products is primarily attributable to decreased demand for test equipment related to the deployment of triple play services and to delays in new product introductions. The increase in sales in Europe/Africa/Middle East for the three months ended June 30, 2008 as compared to the same period in 2007 is primarily due to increased sales of fiber optics and signaling products. The increase in sales in Europe/Africa/Middle East for the six months ended June 30, 2008 as compared to the same period in 2007 is primarily due to increased sales of wireline access and signaling products. Sales to Latin America remain a small part of our business, and small changes in order volume from this region can represent large percentage fluctuations.

International sales, including sales to Canada, increased to $12.5 million, or 62% of net sales, for the three months ended June 30, 2008, from $10.4 million, or 45% of net sales, for the three months ended June 30, 2007 and increased to $25.8 million or 64% of net sales, for the six months ended June 30, 2008, from $22.1 million, or 51% of net sales, for the six months ended June 30, 2007.

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Cost of Sales

	Three Months Ended June 30				Variance in Dollars		Variance in Percent		Six Months Ended June 30				Variance in Dollars	Variance in Percent
(Dollars in thousands)	2008		2007						2008		2007
Cost of sales	7,779		9,563		(1,784	)	(19	)%	18,930		16,261		2,669	16	%
Percentage of net sales	39	%	41	%					47	%	38	%

Cost of sales decreased $1.8 million, to $7.8 million for the three months ended June 30, 2008, compared to $9.6 million for the same period in 2007. Gross margins were 61% and 59% of net sales for the three months ended June 30, 2008 and 2007, respectively. The higher gross margin was primarily the result of sales of our higher margin products. Gross margins are expected to be under continued pressure through 2008 as product mix, lack of new product introductions and the regulatory impact on components adversely impact margins. Margins are expected to be at approximately 60-65% in 2009, although the worldwide recession threatens demand and competition may harm our margins.

Cost of sales increased $2.7 million to $18.9 million for the six months ended June 30, 2008, compared to $16.3 million for the same period in 2007. Gross margins were 53% and 62% of net sales for the six months ended June 30, 2008 and 2007, respectively. The lower gross margin percentage was primarily the result of a product warranty charge of $2.5 million relating to the CM750 product sold to a major customer in prior years, a charge of $0.8 million for excess and obsolete inventory and a royalty settlement of $0.4 million with Wind River, Inc., partially offset by lower material costs of $0.6 million due to changes in the mix of products sold and lower headcount related expenses of $0.3 million. The warranty and royalty matters were not known until the fourth quarter of 2008, but in accordance with SFAS No. 5, Accounting for Contingencies, we recorded these charges in the three months ended March 31, 2008, as the information related to these issues were available before the issuance of such financial statements.

Research and Development

	Three Months Ended June 30						Variance in Dollars			Variance in Percent		Six Months Ended June 30						Variance in Dollars			Variance in Percent
(Dollars in thousands)	2008			2007								2008			2007
Research and development	$	4,996		$	5,613		$	(617	)	(11	)%	$	10,270		$	11,894		$	(1,624	)	(14	)%
Percentage of net sales		25	%		24	%							26	%		28	%

Research and development (“R&D”) expenses decreased during the three months ended June 30, 2008 compared to the same period in 2007, primarily due to decreased headcount-related expenses of $0.4 million and lower outside services expense of $0.2 million. R&D expenses decreased during the six months ended June 30, 2008 compared to the same period in 2007, primarily due to decreased headcount-related expenses of $0.9 million, lower spending for outside services of $0.4 million and reduced prototype expenses of $0.4 million. R&D expenses tend to fluctuate from period to period, depending on requirements at the various stages of our product development cycles. R&D expenses are expected to decline slightly in future periods as a result of our efforts to consolidate product development activity and more narrowly focus our business.

Selling and Marketing

	Three Months Ended June 30						Variance in Dollars			Variance in Percent		Six Months Ended June 30						Variance in Dollars			Variance in Percent
(Dollars in thousands)	2008			2007								2008			2007
Selling and marketing	$	6,395		$	6,893		$	(498	)	(7	)%	$	12,726		$	14,067		$	(1,341	)	(10	)%
Percentage of net sales		32	%		30	%							32	%		33	%

Selling and marketing expenses decreased during the three months ended June 30, 2008 compared to the same period in 2007 primarily due to lower commission expense of $0.2 million and decreased expense for outside services of $0.2 million. The decrease in selling and marketing expenses for the six months ended June 30, 2008 compared to the same period in 2007 was primarily due to lower commission expense of $0.8 million, reduced spending for outside services of $0.2 million and lower depreciation expense of $0.2 million. We expect our selling and marketing expenses to decrease in 2009 as we reduce our direct sales force.

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General and Administrative

	Three Months Ended June 30						Variance in Dollars		Variance in Percent		Six Months Ended June 30						Variance in Dollars		Variance in Percent
(Dollars in thousands)	2008			2007							2008			2007
General and administrative	$	4,534		$	4,184		$	350	8	%	$	9,429		$	9,283		$	146	2	%
Percentage of net sales		22	%		18	%						23	%		21	%

General and administrative (“G&A”) expenses increased during the three months ended June 30, 2008 compared to the same period in 2007 primarily due to increased spending for accounting and audit related professional services of $0.4 million and higher bad debt expense of $0.4 million, partially offset by lower legal expenses of $0.4 million. G&A expenses increased during the six months ended June 30, 2008 compared to the same period in 2007 primarily due to increased spending for accounting and audit related professional services of $0.9 million related to getting current with regulatory filings with the SEC, increased temporary labor expense of $0.2 million and increased bad debt expense of $0.2 million, partially offset by lower legal expenses of $1.1 million as a result of decreased litigation related expenses. We expect our G&A expenses to decrease in 2009 as we consolidate certain G&A functions as a result of our restructuring actions taken in 2008 and as our legal expenses continue to decline.

Restructuring Charges

	Three Months Ended June 30					Variance in Dollars		Variance in Percent	Six Months Ended June 30					Variance in Dollars		Variance in Percent
(Dollars in thousands)	2008			2007					2008			2007
Restructuring charges	$	296		$	—	$	296	—	$	1,239		$	—	$	1,239	—
Percentage of net sales		1	%		—					3	%		—

During the first half 2008 and subsequently, we initiated several restructuring activities intended to reduce costs, improve operating efficiencies and change our operations to more closely align them with our key strategic focus. The total restructuring charges are estimated to be approximately $2.5 million and include employee severance and benefit costs, costs related to leased facilities to be abandoned or subleased, and impairment of owned equipment. During the six months ended June 30, 2008, we recognized $0.9 million of expense for workforce reduction and $0.4 million of other exit costs associated with restructuring activities in 2008.

Other Income, Net

	Three Months Ended June 30						Variance in Dollars		Variance in Percent		Six Months Ended June 30						Variance in Dollars		Variance in Percent
(Dollars in thousands)	2008			2007							2008			2007
Other income, net	$	414		$	380		$	34	9	%	$	2,178		$	890		$	1,288	145	%
Percentage of net sales		2	%		2	%						5	%		2	%

Other income, net primarily consists of interest earned on cash and investment balances, gains and losses on assets, liabilities, and transactions denominated in foreign currencies, and realized investment gains and losses. Other income, net increased for the three and six months ended June 30, 2008 compared to the same periods in 2007 primarily due to the impact of currency fluctuations.

Income Tax Expense (Benefit)

Income tax expense (benefit) consisted primarily of state and foreign income taxes. We recorded an income tax expense of $0.1 million and an income tax benefit of $0.2 million during the three months ended June 30, 2008 and 2007, respectively and recorded an income tax expense of $0.3 million and $27,000 during the six months ended June 30, 2008 and 2007, respectively.

Liquidity and Capital Resources

Cash Requirements and Capital Resources

At June 30, 2008 and December 31, 2007, we had working capital of $21.5 million and $32.0 million, respectively, and cash and cash equivalents of $11.6 million and $16.0 million, respectively.

On August 13, 2007, we entered into a $10 million secured revolving credit arrangement (“Loan Agreement”) with Silicon Valley Bank (“SVB”) to improve our liquidity and working capital. We may borrow, repay and reborrow under the line of credit facility at any time. The amount that we are able to borrow under the Loan Agreement will vary based on the eligible accounts receivable, as defined in the agreement. The borrowing base on the revolving credit agreement is $5 million plus 80% of eligible accounts receivable. The line of credit facility bears interest at the bank’s prime rate (4.0% at November 30, 2008). This line of credit is collateralized by substantially all of our assets and requires us to comply with customary affirmative

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and negative covenants principally relating to the use and disposition of assets, tangible net worth and the satisfaction of a quick ratio test. In addition, the Loan Agreement contains customary events of default. Upon the occurrence of an uncured event of default, among other things, the bank may declare that all amounts owed under the credit arrangement are due and payable. As of December 28, 2007, the Loan Agreement was amended to reduce our tangible net worth requirement from $57 million to $50 million.

On August 12, 2008, we amended our Loan Agreement with SVB, which was to expire on August 13, 2008, to extend the term of all indebtedness to August 12, 2009. The amendment also reduced the required Quick Ratio Covenant to 0.80:1.00 (from 1:1) and the required minimum Tangible Net Worth Covenant to $44 million for the fiscal quarters ending September 30, 2008 and December 31, 2008 and to $40 million for the fiscal quarters ending March 31, 2009 and June 30, 2009 (from $50 million for all such periods).

As of June 30, 2008, we were in default of our Tangible Net Worth Covenant due to our tangible net worth being less than $50 million. In addition, we were or expect to be in default of this same covenant for the March 31, 2008 and September 30, 2008 periods. Under this revolving credit agreement, there was $2.0 million outstanding as of June 30, 2008 and $4.0 million was outstanding as of November 30, 2008. We obtained a waiver from SVB for the June 30, 2008 violation and are in the process of obtaining a waiver from SVB for the other violations, although no assurance can be given that we will be successful in obtaining such waivers.

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

During the first half of 2008, we initiated several restructuring activities intended to reduce costs, improve operating efficiencies and change our operations to more closely align them with our key strategic focus. The total restructuring charges are estimated to be approximately $2.5 million and include employee severance and benefit costs, costs related to leased facilities to be abandoned or subleased, and impairment of owned equipment.

On November 19, 2008, the Company and LTE entered into a Participation Purchase Agreement (“Purchase Agreement”) pursuant to which we agreed to sell our Italy-based Protocol Products Group to LTE for approximately 8.0 million Euros, or approximately $10.7 million in cash, of which approximately $2.1 million will be held in escrow for up to fifteen months to secure indemnities under the Purchase Agreement. We agreed to use $2.0 million of the proceeds from the sale to repay our borrowings outstanding under the Loan Agreement with SVB. The closing of the transaction occurred on December 12, 2008. The results of PPG will be shown as discontinued operations starting in the Company’s third quarter of 2008 when the PPG business became held for sale. We expect to recognize a gain on the sale in the third quarter of 2008. PPG represented approximately 8% and 7% of our net sales for the three and six months ended June 30, 2008, respectively.

We believe that our current cash balances, the cash generated from the sale of our Protocol Products Group in December 2008 and expected future cash flows from operations, will be sufficient to meet our anticipated cash needs for our operations, complete needed business projects, achieve our plans and objectives, meet financial commitments, meet working capital requirements, make capital expenditures, and fund other activities beyond the next twelve months from the filing date of this Form 10-Q.

Sources and Uses of Cash

In general, we have financed our operations and capital expenditures primarily using cash flows generated by our operating activities.

Cash used in operating activities of $3.8 million during the six months ended June 30, 2008 was primarily attributable to our net loss of $10.6 million, offset by non-cash items including depreciation and amortization of $2.1 million, provision for losses on accounts receivable of $0.2 million, and restructuring charges of $0.2 million and further offset by decreases in working capital of $4.0 million. Cash used in operating activities of $2.3 million during the six months ended June 30, 2007 was primarily attributable to our net loss of $7.5 million, offset by non-cash items including depreciation and amortization of $2.4 million, deferred income taxes of $0.5 million, loss on disposal of property and equipment of $0.5 million, provision for losses on accounts receivable of $0.3 million and further offset by decreases in working capital of $1.5 million.

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Cash used in investing activities of $2.1 million during the six months ended June 30, 2008 was primarily for capital expenditures of $1.9 million. During the six months ended June 30, 2007, cash provided by investing activities was primarily attributable to proceeds of $4.6 million from sales of short-term investments, offset by $2.2 million in cash used for capital expenditures and $1.0 million of purchases of short-term investments. As of June 30, 2008, we had no plans for nonrecurring capital expenditures outside the usual course of those needed for our ongoing production, research and development, and selling and marketing activities.

Cash provided by financing activities of $1.9 million during the six months ended June 30, 2008 was primarily attributable to proceeds of $2.0 million from our credit facility, offset by the repayment of $0.1 million on notes payable. During the six months ended June 30, 2007, cash used in financing activities was the result of the repayment of $0.1 million on notes payable.

Debt Instruments, Guarantees, and Related Covenants

Our outstanding debt at June 30, 2008 consisted primarily of $2.0 million outstanding under our Loan Agreement with SVB and a $0.5 million loan from the Italian government for research and development use that is payable in semi-annual payments that started in the second half of 2003 and ends in 2011. On December 12, 2008, we completed the sale of Sunrise Telecom S.r.l. to LTE Innovations OY and as a result, the loan from the Italian government was assumed by the buyer. We have not used off-balance sheet financing arrangements, issued or purchased derivative instruments linked to our stock, or used our stock as a form of liquidity. We do not believe that there are any known or reasonably likely changes in credit ratings or ratings outlook, or an inability to achieve such changes, which would have any significant impact on our operations.

On August 13, 2007, we entered into a $10 million revolving credit arrangement and line of credit facility with Silicon Valley Bank. It is collateralized by substantially all of our assets. Under the Loan Agreement, $2.0 million was outstanding as of June 30, 2008 and $4.0 million was outstanding as of November 30, 2008.

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

Off-Balance Sheet Arrangements

As of June 30, 2008, we did not have any off-balance sheet arrangements that have or are reasonably likely to have a material effect on our current or future financial condition, revenues or expenses, results of operations, liquidity, or capital resources.

Contractual Obligations

During the three and six months ended June 30, 2008, there were no material changes outside the ordinary course of our business in long-term debt obligations, capital lease obligations, operating lease obligations, purchase obligations, liability for uncertain tax positions or any other long-term liabilities reflected on our condensed consolidated balance sheet.

As of June 30, 2008, the liability for unrecognized tax benefits was $1.8 million, including accrued interest. No cash payment is expected to be paid within one year.

Critical Accounting Policies

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

We consider “critical” those accounting policies that require our most subjective or complex judgments, which often result from a need to make estimates about the effect of matters that are inherently uncertain, and that are among the most important of our accounting policies to the portrayal of our financial condition and results of operations. These critical accounting policies are the

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determination of our allowance for doubtful accounts receivable, valuation of excess and obsolete inventory, valuation of goodwill and other intangible assets, accounting for the liability of product warranty, deferred income tax assets and liabilities, revenue recognition, and accounting for stock-based compensation.

Our management has reviewed our critical accounting policies and the related disclosures with our Audit Committee. These policies and our procedures related to these policies are described further in our Annual Report on Form 10-K for the year ended December 31, 2007 in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” under the heading “ Critical Accounting Policies.”

Recent Accounting Pronouncements

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

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

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Foreign Currency Risk

We sell our products in North America, the Asia/Pacific region, Latin America, Africa, the Middle East, and Europe and maintain operations in several different countries. Changes in currency exchange rates affect the valuation in our financial statements of the assets and liabilities of these operations. We also have a portion of our sales denominated in Euros, the Canadian dollar, Japanese yen, Korean won, and other currencies, which are also affected by changes in currency exchange rates. To hedge these risks, we have, at certain times, used derivative financial instruments. During the three and six months ended June 30, 2008, we had no material derivative financial instruments or other foreign exchange risk hedging devices. With or without hedges, our financial results could be affected by changes in foreign currency exchange rates.

Interest Rate Risk

We are exposed to the impact of interest rate changes and changes in the market values of our investments. Our exposure to market rate risk for changes in interest rates relates primarily to our investment portfolio. We have not held derivative financial instruments in our investment portfolio. We invest our excess cash in depository accounts with financial institutions, in debt instruments of United States governmental agencies, and in debt instruments of high-quality corporate issuers, and, by policy, we limit the amount of credit exposure to any one issuer. We protect and preserve our invested funds by limiting default, market, and reinvestment risk through portfolio diversification and review of the financial stability of the institutions with which we deposit funds and from whom we purchase debt instruments.

Investments in both fixed rate and floating rate interest earning instruments carry a degree of interest rate risk. Fixed rate securities may have their fair market value adversely impacted due to a rise in interest rates, while floating rate securities may produce less income than expected if interest rates fall. Due in part to these factors, our future investment income may fall short of expectations due to changes in interest rates, or we may suffer losses in principal if forced to sell securities that have declined in market value due to changes in interest rates. Because our investment policy restricts us to conservative, interest-bearing investments and because our business strategy does not rely on generating material returns from our investment portfolio, we do not expect our market risk exposure on our investment portfolio to be material.

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ITEM 4. CONTROLS AND PROCEDURES

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, as of the end of the period covered in this report, evaluated the effectiveness of our disclosure controls and procedures, as that term is defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and determined that, as a result of the material weaknesses in internal control over financial reporting described below, as of June 30, 2008, our disclosure controls and procedures were not effective to ensure that information required to be disclosed by us in reports that we file or submitted under the Exchange Act was recorded, processed, summarized and reported within the time periods specified in SEC rules and forms.

The Public Company Accounting Oversight Board’s Auditing Standard No. 5, An Audit of Internal Control Over Financial Reporting That Is Integrated with An Audit of Financial Statements (“AS 5”), defines a material weakness as a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.

Controls at division level

During the course of our external audits for fiscal 2005, 2006 and 2007, our external auditors identified several adjustments associated with our Broadband operating division. In addition, revenue classification errors associated with this division caused a material error in the financial results for the first quarter of 2007 provided in our first quarter 2007 earnings release. We believe these errors were the result of various control weaknesses, including inadequate controls over staffing requirements and policies regarding timely replacement of financial personnel. We consider these control deficiencies to be significant and in aggregate led to a material weakness in our internal control over financial reporting as of June 30, 2008.

We took the following actions during 2007 to improve our internal controls at this division:

• We hired an experienced senior financial manager with an appropriate professional accounting certification as division controller.

• We filled all open positions in the division’s finance organization with personnel with adequate competence to ensure compliance with finance policies and procedures.

• We refined the job requirements for the division’s finance staff to emphasize familiarity with U.S. generally accepted accounting principles.

• We require division finance staff to notify corporate finance staff of any leaves of absence or job vacancies that might impact the accuracy and timeliness of financial reporting.

• We hired corporate finance staff to perform site reviews of finance staff at our various locations to review local financial reporting, evaluate the effectiveness of the local internal control systems and staff performance, and initiate prompt corrective action.

Subsequent to June 30, 2008, we instituted additional internal control policies and procedures intended to ultimately remediate the material weakness. Specifically, management is in the process of consolidating financial and administrative functions of the Broadband division with corporate level controls at our corporate headquarters to provide improved oversight of financial reporting.

CHANGES IN INTERNAL CONTROL

There were no other changes in internal control over financial reporting during the second fiscal quarter of 2008 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. However, subsequent to the second quarter of 2008, we merged our broadband and telecom groups, resulting in the elimination of our Broadband controller and a change in many of our business processes. In the third quarter of 2008, our telecom product group controller responsible for the financial processes of the group and our corporate director of tax both resigned. Also, in the fourth quarter of 2008, our corporate controller resigned. In a similar fashion, several of our key operational employees at our headquarters location have been replaced during 2008. These employees are responsible for managing our inventories, and driving our worldwide supply chain. In our opinion, although we have put capable, qualified people in place to continue to perform all these business and reporting processes, these new employees are less familiar with the details of our business and processes, as well as the details of its recent history. These new employees are responsible for or support the creation of this Form 10-Q report and subsequent filings in 2008. We believe that we have a higher risk at this time of having unknown financial reporting problems as a result of the turnover experienced in our finance and operations function.

INHERENT LIMITATIONS ON INTERNAL CONTROL

A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the benefits of controls must be considered relative to their costs. Because of the

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

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PART II OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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

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

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

The Company intends to continue to assert all available defenses. The parties may continue with their mediation efforts in the future. The outcome of this litigation is uncertain and should the Company experience an unfavorable ruling, there exists the possibility of a material adverse impact on its financial condition, results of operations and cash flows for the period in which the ruling occurs. No amount was accrued for this contingency as of June 30, 2008, as a loss is not considered probable or estimable.

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

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ITEM 1A. RISK FACTORS

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

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

Our continued losses reduced our cash and cash equivalents in 2007 and 2008. As of November 30, 2008, we had approximately $6.9 million in cash and cash equivalents and $4.0 million outstanding under our bank lending facility. In order to meet our liquidity needs, we may be required to sell assets, or to borrow on potentially unfavorable terms, to finance our capital expenditures and working capital needs for our business. We may be unable to sell assets, or unable to borrow, to meet these needs. As a result, we may become unable to pay our ordinary expenses, including our debt service, on a timely basis. Our current lack of liquidity could harm us by:

• increasing our vulnerability to adverse economic conditions in our industry or the economy in general;

• requiring substantial amounts of cash to be used for debt service, rather than other purposes, including operations;

• limiting our ability to plan for, or react to, changes in our business and industry; and

• influencing investor and customer perceptions about our financial stability and limiting our ability to obtain financing or acquire customers.

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

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

Goodwill Valuation—Our financial results could be materially and adversely affected if we determine that the book value of our goodwill is higher than the fair value.

Our balance sheet at June 30, 2008 included an amount designated as “Goodwill” of $12.9 million. Current accounting rules require that goodwill be assessed for impairment at least annually or whenever changes in circumstances indicate that the carrying amount may not be recoverable from estimated future cash flows. Factors that may be considered a change in circumstance indicating the carrying value of our intangible assets, including goodwill, may not be recoverable include, but are not limited to, significant underperformance relative to historical or projected future operating results, a significant decline in our stock price and

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market capitalization, and negative industry or economic trends. For example, our stock price has declined in 2008 and our market capitalization has been consistently below our net asset value during the third and fourth quarters of 2008. We expect that this decline in our market capitalization will lead to an impairment of our Goodwill in our third quarter of 2008. Additionally, we periodically evaluate the recoverability and the amortization period of our acquired technology rights. Some factors we consider important in assessing whether or not impairment exists include performance relative to expected historical or projected future operating results.

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

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

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

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

Management concluded that there remained a material weakness in our internal control over financial reporting as of June 30, 2008 and as a result, the Company did not maintain effective internal control over financial reporting as of June 30, 2008. We identified a material weakness in our internal control over financial reporting associated with deficiencies in our staffing requirements and policy regarding the timely filling of key financial positions at one of our operating divisions which impacted the preparation of our consolidated financial statements.

We do not expect that our internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Controls can be circumvented by the individual acts of some persons, by the collusion of two or more people, or by management override of the controls. Over time, controls may become inadequate because changes in conditions or deterioration in the degree of compliance with policies or procedures may occur. In addition, misstatements due to error or fraud may occur and not be detected because of the inherent limitations in a cost-effective control system. As a result, significant deficiencies or material weaknesses in our internal controls may be identified in the future. Any failure to maintain or implement required new or improved controls, or any difficulties we encounter in their implementation, could result in significant deficiencies or material weaknesses, cause us to fail to timely meet our periodic reporting obligations, result in material misstatements in our financial statements and/or cause investors to lose confidence in our reported financial information, all of which could lead to a decline in our stock price. Any such failure could also adversely affect the results of periodic management evaluations and annual auditor attestation reports regarding disclosure controls and the effectiveness of our internal control over financial reporting.

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

As a public company, we are subject to many financial accounting, disclosure and governance requirements, with relatively high associated compliance costs. For example, we must have our annual financial statements audited and our quarterly statements reviewed by an independent registered public accounting firm, and we must prepare, review and file annual, quarterly and current reports with the SEC. Costs of these and other compliance activities are particularly significant to us because of our small size and our

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financial position. We have reviewed proposals to make the Company more successful with its current capital structure and with alternative ones. The process of evaluating different alternatives and proposals is time consuming, expensive, and distracts management attention from the operations of the Company. Moreover, so long as we are not current in our SEC filings, our opportunities are more limited. If we are not able to file all of our delinquent reports, our financial condition and stockholder confidence in our company may be harmed. Even if we do file all our delinquent reports, we may not be able to comply with all the requirements of being a public company on a regular basis in the future, or we may be unable to reduce the costs of compliance or increase our revenue or profitability sufficiently to cover those costs.

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

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

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

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

To date, we are not yet current in the filing of our periodic reports with the SEC, and our efforts to become current require substantial management time and attention as well as additional accounting and legal expense. In addition, if we are unable to become current in our filings with the SEC, we may face several adverse consequences. If we are unable to remain current in our filings with the SEC, investors in our securities will not have information regarding our business and financial condition with which to make decisions regarding investment in our securities. In addition, we will not be able to have a registration statement under the Securities Act of 1933, covering a public offering of securities, declared effective by the SEC, and will not be able to make offerings pursuant to existing registration statements pursuant to certain “private placement” rules of the SEC under Regulation D to any purchasers not qualifying as “accredited investors.” These restrictions could adversely affect our business, financial condition and results of operations.

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

We may face challenges in hiring and retaining qualified personnel due to the restatement, the related internal investigations and our delisting from NASDAQ. We depend on our employees and on our ability to attract and retain highly qualified personnel. Given the lengthy restatement process, the related internal investigations and the delisting of our common stock from NASDAQ, it has become, and may continue to be, more difficult to retain key personnel, including members of our finance team. Our inability to hire qualified personnel and retain existing key personnel has disrupted, and may continue to disrupt, our ability to effectively manage our business and to complete our outstanding periodic reports. In addition, the loss of the services of any of our key employees, the inability to attract or retain qualified personnel in the future, or delays in hiring required personnel, particularly engineers and sales personnel, could delay the development and introduction of, and negatively affect our ability to sell, our products.

We will not apply to relist our common stock on a national securities exchange until we have filed all reports required to be filed with the SEC. There can be no assurance that we will be able to obtain listing of our common stock on a national securities exchange. We may decide it is not in our stockholders’ best interests to apply for a listing on a national securities exchange once we become current with our SEC reporting requirements.

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

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

On February 6, 2008, we announced a restructuring plan intended to reduce costs and improve operating efficiencies. The plan included a 12% reduction in our worldwide workforce, across all functional areas, and a shut-down of certain international offices.

On May 1, 2008, we announced our plans to restructure our operations to more closely align them with our key strategic focus and more effectively target the residential triple play market, enhanced business services and the converging core network. We announced that we would combine our broadband and wireline and fiber optics operations. As a result of combining our business units and operations, we are likely to reduce or eliminate investment in some or all of them, reduce or eliminate product lines, reduce or eliminate our sales presence in certain geographies, reduce our market share and likely reduce our revenues. As a part of a reduction in workforce associated with our restructuring and streamlining efforts, we released from service our Chief Operating Officer, Gerhard Beenen, effective June 30, 2008.

On November 17 and 24, 2008, we announced additional plans to restructure our operations by divesting of our optical and protocol products groups and taking additional cost cutting actions during the fourth quarter of 2008 to reduce operating expenses by approximately 25% once the restructuring is fully implemented.

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

Stock Option Issuance and Exercise of Existing Options—We have not issued option grants since August 2005 and option holders have not been permitted to exercise options since December 2005.

Because we are not current in our SEC filings, the Compensation Committee has not approved any grants of new options since August 2005, and option holders have not been able to exercise stock options since December 2005. Some options that would otherwise be exercisable have expired unexercised and purchases under the Employee Stock Purchase Plan have been suspended.

The purpose of our various share-based compensation plans is to attract, motivate, retain, and reward employees, directors, and consultants by enabling them to acquire or increase their proprietary interest in our common stock in order to strengthen the mutuality of interests between such persons and our stockholders and to provide such persons with annual and long-term performance incentives to focus their best efforts in the creation of stockholder value. As long as these equity compensation plans are not available to us, we have less available means of compensating and providing incentives to employees, directors and consultants, which may harm our business and financial results. The failure to meet employee expectations could harm our ability to retain and motivate our employees.

In addition, current and former employees who were unable to exercise in-the-money vested stock options before the options expired may have claims against the Company. As a result, we have offered compensation to those affected current and former employees provided that they execute and return a limited release of potential claims. The proposed compensation being offered represents the difference between (i) the average closing price of the Company’s common stock during the applicable period (further defined below) and (ii) the exercise price of the option (assuming the option was “in-the-money”), multiplied by the number of shares that were vested under the option at the beginning of the applicable period. If an option expired 30 days after termination of employment, the applicable period is the 30 days following termination of employment. If an option expired 90 days after termination of employment, the applicable period is the 90 days following termination of employment. If an option expired during employment because of its ten year term, the applicable period is the 30 days prior to the expiration of the option. We estimate that the aggregate cost of resolving this matter with our option holders is approximately $0.2 million and that the aggregate cost related to any options that expire in the future due to terminations or expiration of the term will not be material.

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

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

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

Change in SEC Guidance and Disclosure Requirements—Judgments and estimates utilized by us in determining stock option grant dates and related adjustments in connection with the restatement of our consolidated financial statements may be subject to change due to subsequent SEC guidance or other disclosure requirements.

In determining the financial restatement adjustments in connection with our investigation of our historical stock option granting practices, we used all reasonably available relevant information to form conclusions we believe are appropriate as to the most likely option granting actions that occurred, the dates when such actions occurred, and the determination of grant dates for financial accounting purposes based on when the requirements of the accounting standards were met. We considered various alternatives throughout the course of our investigation and the restatement of our financial statements, and we believe the approaches used were appropriate, and the choices of measurement dates used in our investigation of stock option grant accounting and restatement of our financial statements were reasonable and appropriate in our circumstances. Nevertheless, the issues surrounding our historical stock option granting practices are complex and the regulatory guidelines or requirements continue to evolve. There can be no assurance that the SEC will not issue additional guidance on disclosure requirements related to the financial impact of past stock option grant measurement date errors and that we will not be required to further amend this report or other filings with the SEC to provide additional disclosures pursuant to such additional guidance. Any such circumstance could also lead to future delays in filing our subsequent SEC reports. Furthermore, if we are subject to adverse findings in any of these matters, we could be required to pay damages or penalties or have other remedies imposed upon us which could harm our business, financial condition, results of operations and cash flows.

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

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

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

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

• the variety of price, product, and technology competition;

• the proportion of our sales that is domestic or international;

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

• developments relating to our ongoing litigation; and

• economic downturns reducing demand for telecommunication and cable equipment and services.

The factors listed above may affect our business and stock price in several ways. Given our high fixed costs from overhead, research and development, and selling and marketing, and other activities necessary to run our business, if our net sales are below our expectations in any quarter, we may not be able to adjust spending accordingly. Our stock price may decline and may be volatile,

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particularly if public market analysts and investors perceive that the factors listed above may contribute to unfavorable changes in operating results. Furthermore, the above factors, taken together, may make it more difficult for us to issue additional equity in the future or raise debt financing to fund future acquisitions and accelerate growth.

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

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

The telecommunications industry has also experienced consolidation, such as among incumbent local exchange carriers and competitive local exchange carriers, some of which are major customers. For example, GTE and Bell Atlantic, both of which were customers of ours, merged to create Verizon Communications Inc. and Southwestern Bell, Pacific Bell, Ameritech, Bell South, and AT&T have consolidated and now operate as AT&T, Inc. Continued consolidation in the telecommunication industry may cause delay or cancellation of orders for our products. The consolidation of our customers will likely provide them with greater negotiating leverage with us and may lead them to pressure us to lower the prices of our products.

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

Sales of our DSL and other wireline access products for the three months ended June 30, 2008 and 2007 accounted for approximately 34% and 32%, respectively, of our total net sales and for the six months ended June 30, 2008 and 2007 accounted for approximately 37% and 31%, respectively, of our total net sales. Currently, our DSL products are primarily used by a limited number of incumbent local exchange carriers, including the regional Bell operating companies, and competitive local exchange carriers who offer DSL services. These parties, and other Internet service providers and users, are continuously evaluating alternative high-speed data access technologies, including cable modems, fiber optics, wireless technology, and satellite technologies, and may, at any time, adopt these competing technologies. These competing technologies may ultimately prove to be superior to DSL services and continue to reduce or eliminate the demand for our DSL products.

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

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

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

Our customers are concentrated in the telecommunications and cable broadband industries. Accordingly, our future success depends on the buying patterns of these customers and the continued demand by these customers for our products. Additionally, the market is characterized by rapidly changing technology, evolving industry standards, changes in end-user requirements and frequent new product introductions and enhancements. See “Risk Factors-Consolidation and Other Risks within the Telecommunications Industry” for a discussion of risks associated with the telecommunications industry. Our continued success will depend upon our ability to enhance existing products and to develop and introduce, on a timely basis, new products and features that keep pace with technological developments and emerging standards.

Moreover, a relatively small number of customers account for a large percentage of our net sales. Net sales from our top five customers for the three months ended June 30, 2008 and 2007, accounted for approximately 27% and 43%, respectively, of our total net sales and for the six months ended June 30, 2008 and 2007, accounted for approximately 27% and 38%, respectively, of our total net sales. In general, our customers are not subject to long-term supply contracts with us and are not obligated to purchase a specific amount of products from us or to provide us with binding forecasts of purchases for any period.

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

The loss of a major customer or the reduction, delay, or cancellation of orders from one or more of our significant customers could cause our net sales and, therefore, profits to decline. In addition, many of our customers are able to exert substantial negotiating leverage over us. As a result, they may pressure us to lower our prices to them, and they may successfully negotiate other terms and provisions that may adversely affect our business and profits.

Product Development—If we are unable to develop new products successfully and enhance our existing products, our future success may be threatened.

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

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

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

• anticipate and develop new products and solutions for networks based on emerging technologies, characterized by evolving industry standards;

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

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

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

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

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

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

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

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

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

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

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• the need to hire, train and retain highly skilled personnel; and

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

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

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

We cannot immediately adapt our production capacity and related cost structures to rapidly changing demand for our products. When demand does not meet our expectations or manufacturing capacity exceeds our production requirements, profitability may decline. Conversely, if during a market upturn we cannot increase our manufacturing capacity to meet product demand, we will not be able to fulfill orders in a timely manner, which in turn may have a negative effect on our earnings and overall business.

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

The market for our products is fragmented and intensely competitive, both inside and outside of the United States, and is subject to rapid technological change, evolving industry standards, regulatory developments, and varied and changing customer preferences and requirements. We compete with a number of United States and international suppliers that vary in size and in the scope and breadth of the products and services offered. Many of these competitors have longer operating histories, larger installed customer bases, longer relationships with customers, wider name recognition and product offerings, and greater financial, technical, marketing, customer service and other resources than we have.

We expect that as our industry and markets evolve, new competitors or alliances among competitors with existing and new technologies may emerge and acquire significant market share. We anticipate that competition in our markets will increase, and we will face continued challenges to our market share and price pressure on our products. Also, over time, our profitability, if any, may decrease. In addition, it is difficult to assess accurately the market share of each of our products and lines of products because of the high degree of fragmentation in the market for service verification equipment. As a result, it may be difficult for us to forecast accurately trends in the market and which of our products will be the most competitive over the longer term, and therefore, what is the best use of our cash, personnel and other forms of resources.

Dependence on Sole and Single Source Suppliers—Because we depend on a limited number of suppliers and some sole and single source suppliers that are not bound by long-term contracts, our future supply of parts is uncertain.

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

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

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

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

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

• the unavailability of, or interruption in, access to some process technologies; and

• exposure to the financial problems and stability of our suppliers.

In addition, the purchase of these components on a sole source basis subjects us to risks of price increases and potential quality assurance problems. Long lead-times for delivery of certain sole-sourced components may impact our ability to respond to changes in production demand in a timely fashion to satisfy customers’ orders and we may not be able to ensure customer satisfaction. We cannot ensure that one or more of these factors will not cause delays or reductions in product shipments or increases in product costs, which in turn could have a material adverse effect on our business.

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

Sales to customers located outside of the United States for the three months ended June 30, 2008 and 2007, accounted for approximately 62% and 45%, respectively, of our total net sales and for the six months ended June 30, 2008 and 2007, accounted for approximately 64% and 51%, respectively, of our total net sales. We expect international revenues to continue to account for a significant percentage of net sales for the foreseeable future. As a result, we will face various risks relating to our international operations, including the following:

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

• potentially adverse tax consequences related to acquisitions and operations, including the ability to claim goodwill deductions and a foreign tax credit against U.S. federal income taxes; and

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

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

In addition, the Asia/Pacific and Latin America regions, both high-growth emerging markets for telecommunications equipment, have experienced instability in many of their economies and significant devaluations in local currencies. Sales from customers located in these regions accounted for approximately 27% and 23%, respectively, of our total net sales for the three months ended June 30, 2008 and 2007 and accounted for approximately 28% and 24%, respectively, of our total net sales for the six months ended June 30, 2008 and 2007. These economic instabilities may continue or worsen, which could have a material adverse effect on our results of operations. If international revenues are not adequate to offset the additional expense of expanding international operations, our future growth and profitability could suffer.

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

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

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

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

As of November 30, 2008, Paul A. Marshall, our President and Chief Executive Officer and a member of our Board, and Robert C. Pfeiffer, a member of our Board, beneficially owned approximately 23% and 12%, respectively, of our outstanding shares of common stock. Consequently, these two individuals together control approximately 35% of our outstanding shares of common stock and, to the extent that they act together, may be able to control the election of our directors and the approval of significant corporate transactions that must be submitted to a vote of the stockholders. In addition, Messrs. Marshall and Pfeiffer constitute two of the six members of our Board and have significant influence in directing the actions taken by the Board. Further, to our knowledge, Paul Ker-Chin Chang, our former Chief Executive Officer, President and Chairman of the Board, continues to hold a significant stake in our common stock. To the extent that Mr. Chang acts together with Messrs. Marshall and Pfeiffer, the three individuals together control a significant portion of our outstanding shares of common stock. The interests of these persons may conflict with the interests of other stockholders, and the actions they take or approve may be contrary to those desired by other stockholders. This concentration of ownership and control of the management and affairs of us may also delay or prevent a change in control of us that other stockholders may consider desirable. In addition, conflict among the controlling stockholders may adversely impact their ability to take joint actions in the best interests of us and our other stockholders.

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

Our products are complex and may contain undetected defects or errors when first introduced or as enhancements are released. These errors may occur despite our testing and may not be discovered until after a product has been shipped and used by our

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

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

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

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

Most of our intellectual property and proprietary technology is not protected by patents, and as a result our intellectual property may not be adequately protected. If unauthorized persons were to copy, obtain, or otherwise misappropriate our intellectual property or proprietary technology, the value of our investment in research and development would decline, our reputation and brand could be diminished, and we would likely suffer a decline in revenues. We believe these risks, which are present in any business in which intellectual property and proprietary technology play an important role, are exacerbated by the difficulty in monitoring and detecting the unauthorized use of intellectual property in our business, the increasing incidence of patent infringement in our industry in general, and the difficulty of enforcing intellectual property rights in some foreign countries.

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

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

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

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

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

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

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

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

• developing compatible or complementary products and technologies from previously independent operations; and

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

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The risks stated above are increased by the fact that most of the companies and assets that we have acquired are located outside of the United States, which makes integration more difficult and costly. In addition, if we make future acquisitions, these risks will be exacerbated by the need to integrate additional operations at a time when we may not have fully integrated all of our previous acquisitions.

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

• the diversion of our management’s attention and the expense of identifying and pursuing suitable acquisition candidates, whether or not an acquisition is consummated;

• negotiating and closing these transactions;

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

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

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

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

Our success depends to a significant extent upon the continued service and performance of a relatively small number of key senior management, technical, sales, and marketing personnel. If any of our senior managers were to leave us, we would need to devote substantial resources and management attention to replace them. As a result, management attention may be diverted from managing our business, and we may need to pay higher compensation to replace these employees. We do not have employment contracts with, or key person life insurance for, any of our personnel. During 2006, following the loss of a number of key employees, we announced the adoption of a retention bonus program effective through May 2007 and other inducements to reward long-term employees who remained employed with us. Competition for skilled employees is intense, especially in the San Francisco Bay Area where our main operations are located, and there can be no assurance that we will be able to recruit and retain such personnel.

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

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

• authorizing the issuance of “blank check” preferred stock;

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

• prohibiting cumulative voting in the election of directors;

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

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

• prohibiting stockholder action by written consent; and

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

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

AVAILABLE INFORMATION

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

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

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

None.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

		Incorporated by Reference
Exhibit Number	Description	Form	Date	Exhibit Number	Filed Herewith
2.1	Participation Purchase Agreement, dated November 19, 2008, between Sunrise Telecom Incorporated and LTE Innovations OY.	8-K	November 24, 2008	2.1
3.1	Amended and Restated Certificate of Incorporation.	10-K	March 16, 2001	3.1
3.2	Amended and Restated Bylaws.	10-K	November 2, 2007	3.2
4.1	Specimen Stock Certificate.	S-1/A	April 13, 2000	4.1
10.1	Purchase and Sale Agreement and Escrow Instructions dated November 5, 1999 between Sunrise and Enzo Drive, LLC.	S-1	March 9, 2000	10.2
10.2	Form of Indemnification Agreement between Sunrise and each of its Officers and Directors. †	S-1	March 9, 2000	10.6
10.3	2000 Stock Option Plan. †	S-1/A	April 13, 2000	10.7
10.4	2000 Employee Stock Purchase Plan. †	S-1/A	April 13, 2000	10.8
10.5	Form of Nonstatutory Stock Option Agreement. †	S-8	August 8, 2000	99.3
10.6	Form of Incentive Stock Option Agreement. †	S-8	August 8, 2000	99.4
10.7	Amended and Restated Employment Terms signed by the Company and Richard Kent dated February 9, 2005. †	8-K	February 8, 2005	10.01

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10.8	Employment Offer Letter Supplement signed by the Company and Richard Kent dated February 4, 2005. †	8-K	February 8, 2005	10.02
10.9	Employment Offer Letter signed by the Company and Richard Kent dated January 27, 2005. †	8-K	February 8, 2005	10.03
10.10	Form of Nonstatutory Stock Option Agreement Addendum between the Company and Richard Kent dated February 8, 2005. †	8-K	February 8, 2005	10.04
10.11	Memorandum dated April 27, 2006 from Paul Marshall, Chief Executive Officer and President of Sunrise Telecom Incorporated announcing the retention incentive bonus program.†	8-K	May 3, 2006	10.01
10.12	Change of Control Severance Plan, effective June 21, 2006. †	8-K	June 26, 2006	10.01
10.13	Employment Offer Letter between the Company and Gerhard Beenen. †	8-K	November 3, 2006	99.1
10.14	Separation Agreement between Sunrise Telecom Incorporated and Gerhard Beenen dated July 16, 2008. †	8-K	July 21, 2008	99.1
10.15	Management By Objective Plan (effective January 1, 2007). †	10-K	November 2, 2007	10.22
10.16	Loan and Security Agreement dated as of August 13, 2007 among Silicon Valley Bank, Sunrise Telecom Incorporated and Sunrise Telecom Broadband, Inc.	8-K	August 13, 2007	10.01
10.17	Amendment No. 1 to Loan and Security Agreement by and among Silicon Valley Bank, Sunrise Telecom Incorporated and Sunrise Telecom Broadband, Inc. dated as of December 28, 2007.	8-K	January 3, 2008	10.01
10.18	Amendment No. 2 and Limited Waiver to Loan and Security Agreement by and among Silicon Valley Bank, Sunrise Telecom Incorporated and Sunrise Telecom Broadband, Inc. dated August 12, 2008.	8-K	August 14, 2008	99.1
10.19	Amendment No. 3, Consent and Limited Waiver to Loan and Security Agreement by and among Silicon Valley Bank, Sunrise Telecom Incorporated and Sunrise Telecom Broadband, Inc., dated December 12, 2008.	8-K	December 17, 2008	99.1
10.20	Incentive Stock Option Agreement between the Company and Robert Heintz dated July 21, 2004. †	10-K	November 2, 2007	10.24
10.21	Addendum to 2000 Stock Plan Incentive Stock Option Agreement between the Company and Robert G. Heintz. †	10-K	November 2, 2007	10.25
10.22	Paul Marshall Letter to Compensation Committee Regarding Voluntary Surrender of Options dated April 29, 2008. †	10-K	October 2, 2008	10.23
10.23	Settlement Agreement dated as of October 30, 2008 by and between Sunrise Telecom Incorporated and Wind River, Inc.	8-K	November 5, 2008	99.1
10.24	Target Application License Agreement dated as of October 30, 2008 by and between Sunrise Telecom Incorporated and Winder River, Inc.	8-K	November 5, 2008	99.2
31.1	Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.				X
31.2	Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.				X
32	Certification of Principal Executive Officer and Principal Financial Officer Pursuant to 18 U.S.C. Section 1350.				X

† Indicates management contract or compensatory plan, contract or arrangement

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SIGNATURES

Pursuant to the requirements 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.

	SUNRISE TELECOM INCORPORATED
	(Registrant)
Date: December 29, 2008
	By:	/s/ Paul A. Marshall
		Paul A. Marshall
		President and Chief Executive Officer
	By:	/s/ Richard D. Kent
		Richard D. Kent
		Chief Financial Officer

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EXHIBIT INDEX

		Incorporated by Reference
Exhibit Number	Description	Form	Date	Exhibit Number	Filed Herewith
2.1	Participation Purchase Agreement, dated November 19, 2008, between Sunrise Telecom Incorporated and LTE Innovations OY.	8-K	November 24, 2008	2.1
3.1	Amended and Restated Certificate of Incorporation.	10-K	March 16, 2001	3.1
3.2	Amended and Restated Bylaws.	10-K	November 2, 2007	3.2
4.1	Specimen Stock Certificate.	S-1/A	April 13, 2000	4.1
10.1	Purchase and Sale Agreement and Escrow Instructions dated November 5, 1999 between Sunrise and Enzo Drive, LLC.	S-1	March 9, 2000	10.2
10.2	Form of Indemnification Agreement between Sunrise and each of its Officers and Directors. †	S-1	March 9, 2000	10.6
10.3	2000 Stock Option Plan. †	S-1/A	April 13, 2000	10.7
10.4	2000 Employee Stock Purchase Plan. †	S-1/A	April 13, 2000	10.8
10.5	Form of Nonstatutory Stock Option Agreement. †	S-8	August 8, 2000	99.3
10.6	Form of Incentive Stock Option Agreement. †	S-8	August 8, 2000	99.4
10.7	Amended and Restated Employment Terms signed by the Company and Richard Kent dated February 9, 2005. †	8-K	February 8, 2005	10.01
10.8	Employment Offer Letter Supplement signed by the Company and Richard Kent dated February 4, 2005. †	8-K	February 8, 2005	10.02
10.9	Employment Offer Letter signed by the Company and Richard Kent dated January 27, 2005. †	8-K	February 8, 2005	10.03
10.10	Form of Nonstatutory Stock Option Agreement Addendum between the Company and Richard Kent dated February 8, 2005. †	8-K	February 8, 2005	10.04
10.11	Memorandum dated April 27, 2006 from Paul Marshall, Chief Executive Officer and President of Sunrise Telecom Incorporated announcing the retention incentive bonus program.†	8-K	May 3, 2006	10.01
10.12	Change of Control Severance Plan, effective June 21, 2006. †	8-K	June 26, 2006	10.01
10.13	Employment Offer Letter between the Company and Gerhard Beenen. †	8-K	November 3, 2006	99.1
10.14	Separation Agreement between Sunrise Telecom Incorporated and Gerhard Beenen dated July 16, 2008. †	8-K	July 21, 2008	99.1
10.15	Management By Objective Plan (effective January 1, 2007). †	10-K	November 2, 2007	10.22
10.16	Loan and Security Agreement dated as of August 13, 2007 among Silicon Valley Bank, Sunrise Telecom Incorporated and Sunrise Telecom Broadband, Inc.	8-K	August 13, 2007	10.01

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10.17	Amendment No. 1 to Loan and Security Agreement by and among Silicon Valley Bank, Sunrise Telecom Incorporated and Sunrise Telecom Broadband, Inc. dated as of December 28, 2007.	8-K	January 3, 2008	10.01
10.18	Amendment No. 2 and Limited Waiver to Loan and Security Agreement by and among Silicon Valley Bank, Sunrise Telecom Incorporated and Sunrise Telecom Broadband, Inc. dated August 12, 2008.	8-K	August 14, 2008	99.1
10.19	Amendment No. 3, Consent and Limited Waiver to Loan and Security Agreement by and among Silicon Valley Bank, Sunrise Telecom Incorporated and Sunrise Telecom Broadband, Inc., dated December 12, 2008.	8-K	December 17, 2008	99.1
10.20	Incentive Stock Option Agreement between the Company and Robert Heintz dated July 21, 2004. †	10-K	November 2, 2007	10.24
10.21	Addendum to 2000 Stock Plan Incentive Stock Option Agreement between the Company and Robert G. Heintz. †	10-K	November 2, 2007	10.25
10.22	Paul Marshall Letter to Compensation Committee Regarding Voluntary Surrender of Options dated April 29, 2008. †	10-K	October 2, 2008	10.23
10.23	Settlement Agreement dated as of October 30, 2008 by and between Sunrise Telecom Incorporated and Wind River, Inc.	8-K	November 5, 2008	99.1
10.24	Target Application License Agreement dated as of October 30, 2008 by and between Sunrise Telecom Incorporated and Winder River, Inc.	8-K	November 5, 2008	99.2
31.1	Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.				X
31.2	Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.				X
32	Certification of Principal Executive Officer and Principal Financial Officer Pursuant to 18 U.S.C. Section 1350.				X

† Indicates management contract or compensatory plan, contract or arrangement

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