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

OVERVIEW

We 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 business's survival. See "Liquidity and Capital Resources."

The third factor is profitability. In general, profitability indicates our success in generating present and future cash flows from our operating activities. The key components of our profitability are net sales, cost of sales, and operating expenses. See the discussion directly below and "Comparison of Years Ended December 31, 2005 and 2004" and "Comparison of the Years Ended December 31, 2004 and 2003."

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 customer's 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 cost educating them about the value of the proposed solutions. Delays associated

with potential customers' internal approval and contracting procedures, procurement practices, and testing and acceptance processes are common and may cause potential sales to be delayed or foregone. As a result of these and related factors, the sales cycle of new products for large customers typically ranges from six to twenty-four months. Substantially all of our sales are made on the basis of purchase orders rather than long-term agreements or requirements contracts. As a result, we commit resources to the development and production of products without having received advance or long-term purchase commitments from customers. We anticipate that our operating results for any given period will continue to be dependent, to a significant extent, on purchase orders, which can be delayed or cancelled by our customers.

Historically, a significant portion of our net sales have come from a small number of relatively large orders from a limited number of customers. Verizon Communications Inc. accounted for 11% of our net sales in 2006. No customers comprised more than 10% of our net sales in 2005 or 2004. One customer, AT&T, Inc. (formerly SBC Communications Inc.), comprised 13%, of our net sales in 2003. Overall, we anticipate that our operating results for a given period will be dependent on a small number of customers.

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

A portion of our sales are denominated in Euros, as well as small amounts in the Canadian Dollar, Japanese Yen, Korean Won, and other currencies, and we have, in prior years, used derivative financial instruments to hedge our foreign exchange risks. As of December 31, 2005, we had $6,000 in forward contracts in Euros. To date, foreign exchange exposure from sales has not been material to our operations. We have also been exposed to fluctuations in non-U.S. currency exchange rates related to our manufacturing activities in Taiwan. In the future, we expect that a growing portion of international sales may be denominated in currencies other than U.S. dollars, thereby exposing us to gains and losses on non-U.S. currency transactions. See Part I, Item 1A, "Risk Factors-Risks of International Operations" and "-Operations in Taiwan."

Cost of Sales

Our cost of sales consists primarily of the following:

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

• production wages, taxes, and benefits;

• allocated production overhead costs;

• warranty costs;

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

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

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

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

could result in lower margins. These long lead times have caused in the past, and may in the future, cause us to purchase larger quantities of some parts, increasing our investment in inventory and the risk of the parts' obsolescence. Additionally, initiatives to remove lead and other hazardous substances may require redesign of our products and could result in higher rates of obsolescence for components currently on hand. Any subsequent write-off of inventory could result in lower margins. See Part I, Item 1A, "Risk Factors-Dependence on Sole and Single Source Suppliers."

Operating Costs

We classify our operating expenses into three general 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.

In 2005, 2004, and 2003, we recorded amortization of deferred stock-based compensation expense of $51,000, $1.5 million, and $3.1 million, respectively, related to the grant of options to purchase our common stock prior to our initial public offering and in 2001 and 2002 at exercise prices that were subsequently deemed to be below fair market value. Total compensation expense related to the options granted prior to our initial public offering, which were granted in 1999 and the first quarter of 2000, and the options granted at below fair market value in the first quarter of 2001 and the second quarter of 2002, are amortized on a straight-line basis, over the respective four-year vesting periods of the options, to the departments of the employees who received these below-market option grants. The 1999 options were fully amortized by the end of 2003, the 2000 options were fully amortized at the end of 2004, and the 2001 options were fully amortized as of the end of 2005.

Also, during 2005, 2004, and 2003, we charged $1.8 million, $2.7 million, and $3.3 million, respectively, to general and administrative expense for amortization of intangible assets obtained through various business acquisitions, such as developed technology and non-compete agreements.

Acquisitions and Consolidation of Wireless Operations

We believe that acquisitions and joint ventures may be an important part of our growth and competitive strategy. See Part I, Item 1A, "Risk Factors-Acquisitions."

RESULTS OF OPERATIONS

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

                                               Percentage of Net Sales
                                              Years Ended December 31,
                                        2005          2004            2003
                                                   (Restated)      (Restated)
         Net sales                      100.0 %         100.0 %         100.0 %
         Cost of sales                   33.4            30.8            36.0

         Gross profit                    66.6            69.2            64.0

         Operating expenses:
         Research and development        26.9            27.0            30.2
         Selling and marketing           34.2            29.3            31.7
         General and administrative      21.6            16.4            18.4
         Gain from legal settlement      (2.2 )

         Total operating expenses        80.5            72.7            80.3

         Loss from operations           (13.9 )          (3.5 )         (16.3 )
         Other income, net                0.7             1.5             1.6

         Loss before income taxes       (13.2 )          (2.0 )         (14.7 )
         Income tax expense (benefit)     1.7            17.0            (4.5 )

         Net loss                       (14.9 )%        (19.0 )%        (10.2 )%

COMPARISON OF YEARS ENDED DECEMBER 31, 2005 AND 2004

Net Sales. Net sales increased 11%, to $68.5 million in 2005 from $61.7 million in 2004. During 2005, sales of our wireline access products decreased by $3.8 million or 14%, sales of our fiber optics products increased by $5.6 million or 41%, sales of our broadband products increased by $5.1 million or 32%, and sales of our signaling products remained substantially flat. The sales increases in fiber optics and broadband products were generally due to increased demand for our products resulting from our continuing penetration of diverse geographic markets with product lines that we continue to enhance in terms of breadth, functionality, and performance. The decline in wireline access products is primarily the result of the expected transition to new technologies. Overall sales growth is primarily due to increased unit sales and not changes in average selling price.

During 2005, sales increased $3.7 million or 11% in North America, increased $3.1 million or 23% in Europe/Africa/Middle East, increased $0.7 million or 53% in Latin America and decreased $0.6 million or 5% in Asia/Pacific compared to 2004. The increase in North American sales was primarily the result of increased sales of cable broadband products. Our growth in Europe/Africa/Middle East reflected the results of our ongoing development of distribution channels in these regions. International sales increased to $32.5 million, or 47% of net sales in 2005, from $29.2 million, or 47% of net sales in 2004.

Cost of Sales. Cost of sales increased 21%, to $22.9 million in 2005 from $19.0 million in 2004. Cost of sales represented 34% and 31% of net sales in 2005 and 2004, respectively. This increase in cost of sales was primarily the result of increased sales and increases in the overall cost of materials relative to 2004 and the impact of product mix. Although cost of sales has increased as a percentage of sales in 2005 relative to 2004, the gross margin percentage in 2005 was consistent with historic margins. This percentage is susceptible to change from variations in our product mix, changes in the proportion of our sales going to international customers, and pricing pressures.

Research and Development. Research and development expenses increased 10.8% to $18.4 million in 2005 compared to $16.6 million in 2004. Research and development expenses represented 27% of net sales in both 2005 and 2004. Research and development expenses tend to fluctuate from period to period, depending on requirements at the various stages of our product development cycles. Through our research and development activities, we have attempted to balance two conflicting strategic priorities. The first is to tightly control costs in response to sales volume that has significantly increased since 2002. The second is to continue to develop products that address customer needs in a rapidly changing and very competitive market so that we can increase our share in new markets. We opened a Chinese research facility in 2004, which lowered the average cost per man-hour of engineering during 2005 relative to 2004.

Selling and Marketing. Selling and marketing expenses increased 30%, to $23.5 million in 2005 from $18.1 million in 2004. Selling and marketing expenses represented 34% of net sales in 2005 and 29% of net sales in 2004. During 2005, we invested heavily in our sales channels to better penetrate large accounts and regions where we believed substantial future growth is possible. In particular, the consolidation of the North American sales channel and the establishment of sales offices in France, Mexico, Spain, Italy, and China increased sales expenses in the near term but is expected to result in increased sales in the future. The commission expenses included in selling and marketing can fluctuate both with changes in sales volume and with changes in the channels through which the sales flow. We use different distribution methods to supply our products to different geographical regions and different customers, and the commission rates we incur can vary among these channels.

General and Administrative. General and administrative expenses increased 45%, to $14.8 million in 2005 from $10.2 million in 2004. General and administrative expenses represented 22% of net sales in 2005 and 16% of net sales in 2004. During 2005, we experienced costs aggregating $3.2 million related to litigation to protect our intellectual property rights and $0.8 million associated with a special investigation undertaken by the Audit Committee. Excluding these items, general and administrative expense for 2005 was substantially flat compared to 2004.

Gain from Legal Settlement. A legal settlement of $1.5 million was received during 2005 relating to patent litigation. This item represents 2% of net sales in 2005. This is considered an unusual item and reported separately on the statement of operations as a component of operating expenses.

Other Income, Net. Other income, net primarily represents interest earned on cash and investment balances and, to a lesser extent, gains and/or losses on assets, liabilities, and transactions denominated in foreign currencies. Other income, net decreased 44%, to $0.5 million in 2005 from $0.9 million in 2004 reflecting decreased interest earned due to lower investment balances and the impact of currency fluctuations.

Income Tax Expense. Income tax expense consists of federal, state, and foreign income taxes. Income tax expense decreased to $1.2 million in 2005 from $10.5 million in 2004. During the three months ended March 31, 2004, we reevaluated our need for a valuation allowance in light of forecast industry conditions. As a result of this assessment, the consideration of cumulative losses in prior periods, uncertain industry conditions and the inability to predict future earnings, we recorded a valuation allowance against our deferred tax assets in most jurisdictions aggregating $9.0 million during the first quarter of 2004.

COMPARISON OF YEARS ENDED DECEMBER 31, 2004 AND 2003

Net Sales. Net sales increased 12%, to $61.7 million in 2004 from $54.9 million in 2003. During 2004, sales of our wireline access products increased by $2.2 million or 9%, sales of our fiber optics products increased by $0.3 million or 2%, sales of our broadband products increased by $1.3 million or 9%, and sales of our signaling products increased by $2.9 million or 102% over sales in the prior year. These sales increases were generally due to increased demand for our products resulting from our continuing penetration of diverse geographic markets with product lines that we continue to enhance in terms of breadth, functionality, and performance.

During 2004, sales decreased $1.8 million or 5% in North America, increased $5.5 million, or 70% in Europe/Africa/Middle East, and increased $3.0 million or 29% in Asia/Pacific compared to 2003. Sales were substantially unchanged in Latin America. The decrease in North American sales was primarily the result of decreased sales of cable broadband products. Our growth in Asia/Pacific reflected the results of our ongoing development of distribution channels in these regions, and our growth in Europe continued to rebound from a particularly weak 2002. International sales, increased to $29.2 million or 47% of net sales in 2004 from $21.3 million or 39% of net sales in 2003.

Cost of Sales. Cost of sales decreased 4% to $19.0 million in 2004 from $19.8 million in 2003. Cost of sales represented 31% and 36% of net sales in 2004 and 2003, respectively. This decrease in cost of sales was primarily the result of the lower cost of labor due to the transition of production activity to our Taiwan facility, a reduction in the overall cost of materials due to the sale of materials with an original cost of $0.6 million that had previously been fully reserved, and the impact of product mix.

Research and Development. Research and development expenses remained substantially the same at $16.6 million in both 2004 and 2003. Research and development expenses represented 27% of net sales in 2004 and 30% of net sales in 2003. Research and development expenses tend to fluctuate from period to period, depending on requirements at the various stages of our product development cycles.

Selling and Marketing. Selling and marketing expenses increased 4% to $18.1 million in 2004 from $17.4 million in 2003. Selling and marketing expenses represented 29% of net sales in 2004 and 32% of net sales in 2003. During 2004 and 2003, we reached a level of selling and marketing effort that allowed us to actively promote our products to potential customers, but that simultaneously recognized the cost constraints that we faced during a period of economic difficulty in the telecommunications industry.

General and Administrative. General and administrative expenses remained substantially the same, increasing to $10.2 million in 2004 from $10.1 million in 2003. General and administrative expenses represented 16% of net sales in 2004 and 18% of net sales in 2003.

Other Income, Net. Other income, net primarily represents interest earned on cash and investment balances and, to a lesser extent, gains and/or losses on assets, liabilities, and transactions denominated in foreign currencies. Other income, net remained unchanged at $0.9 million in 2004 and 2003.

Income Tax Expense (Benefit). Income tax expense (benefit) consists of federal, state, and foreign income taxes. Income tax expense increased to $10.5 million in 2004 from an income tax benefit of $2.5 million in 2003. During the three months ended March 31, 2004, we reevaluated our need for a valuation allowance in light of forecast industry conditions. As a result of this assessment, the consideration of cumulative losses in prior periods, uncertain industry conditions and the inability to predict future earnings we recorded a valuation allowance against our deferred tax assets in most jurisdictions aggregating $9.0 million in the first quarter of 2004.

LIQUIDITY AND CAPITAL RESOURCES

Cash Requirements and Capital Resources

As of December 31, 2005 and 2004, we had working capital of $40.1 million and $50.5 million, respectively, and cash, cash equivalents and short-term investments of $25.0 million and $33.9 million, respectively. As of December 31, 2006, we had working capital of approximately $41.4 million.

In addition, in 2001, the Company obtained a loan from the Italian government, which bears interest at 2% a year. At December 31, 2005, the outstanding balance on this loan was $729,000, which is to be repaid by semi-annual principal payments over an eight-year period which began in July 2003. As of December 31, 2005, the Company also has short-term notes and other borrowings, with an aggregate amount due of $116,000.

On August 13, 2007, we entered into a $10 million secured revolving credit arrangement, as well as a letter of credit facility, with Silicon Valley Bank. We may borrow, repay and reborrow under the line of credit facility at any time. The line of credit facility bears interest at the bank's prime rate (7.5% at November 1, 2007). Our line of credit is collateralized by substantially all of our assets and requires us to comply with customary affirmative and negative covenants principally relating to use and disposition of assets, tangible net worth and the satisfaction of a quick ratio test. In addition, the credit arrangement contains customary events of default. Upon the occurrence of an uncured event of default, among other things, the bank may declare that all amounts owing under the credit arrangement are due and payable. The line of credit and facility expire on August 13, 2008. As of the date of this report, there is no amount outstanding under this revolving credit arrangement.

As of November 1, 2007, we believe that our current cash balances, future cash flows from operations, and line of credit arrangement 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.

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 was $4.0 million in 2005 and $1.5 million in 2004. Cash provided by operating activities was $5.8 million in 2003. Operating cash flows decreased during 2005 compared to 2004 primarily due to the increased operating loss in 2005, an increase in accounts receivable and inventories, which were partially offset by increased accounts payable and accrued expenses. Operating cash flow decreased during 2004 compared to 2003 primarily due to a significant increase in inventory levels and in accounts receivable. These items were partially offset by the increase in sales volumes and improved overall gross margins on sales. In general, our ability to continue to generate positive cash flows from operations will depend on our ability to generate and collect cash from future sales, while maintaining a cost structure lower than those sales amounts. Therefore, sales volume is the most significant uncertainty in our ability to generate cash flow from operations.

Cash provided by investing activities was $6.2 million in 2005 and $6.1 million in 2003. Cash used in investing activities was $2.5 million in 2004. The $8.7 million increase in net cash provided by investing activities during 2005 compared to 2004 was primarily due to the sale of short-term investments. The $8.5 million decrease in net cash provided by investing activities during 2004 compared to 2003 was primarily due to an increase in capital expenditures and a decrease in proceeds received from the sale of short-term investments. As of December 31, 2005, we had no plans for large capital expenditures, other than . . .