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

OVERVIEW

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

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

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

The third factor is profitability. In general, profitability indicates our success in generating present and future cash flows from our operating activities. The key components of our profitability are net sales, cost of sales, and operating expenses. See the discussion directly below and "Comparison of the Years Ended December 31, 2007, 2006 and 2005."

Sources of Net Sales

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

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

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

Historically, a significant portion of our net sales have come from a small number of relatively large orders from a limited number of customers. Verizon Communications, Inc. accounted for 13% and 11% of our net sales in 2007 and

2006, respectively. No customer comprised 10% or more of our net sales in 2005. Overall, we anticipate that our operating results for a given period will be dependent on a small number of customers.

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

We have increasing 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. However, foreign currency exposure from sales made in foreign currencies did not have a material impact on our results of operations in 2007. We have also been exposed to fluctuations in non-U.S. currency exchange rates related to our manufacturing activities in Taiwan. In the future, we expect that a growing portion of our international sales may be denominated in currencies other than U.S. dollars, thereby exposing us to gains and losses on non-U.S. currency transactions. See Part I, Item 1A, "Risk Factors-Risks of International Operations."

Cost of Sales

Our cost of sales consists primarily of the following:

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

• production wages, taxes, and benefits;

• allocated production overhead costs;

• warranty costs;

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

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

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

Our industry is characterized by limited sources and long lead times for the materials and components that we use to manufacture our products. If we underestimate our requirements, we may have inadequate inventory, resulting in additional product costs for expediting delivery of long lead time components. An increase in the cost of components could result in lower margins. These long lead times have caused in the past, and may in the future, cause us to purchase larger quantities of some parts, increasing our investment in inventory and the risk of the parts' obsolescence. Additionally, initiatives to remove lead and other hazardous substances may require redesign of our products and could result in higher rates of obsolescence for components currently on hand. Any subsequent write-off of inventory could result in lower margins. See Part I, Item 1A, "Risk Factors-Dependence on Sole and Single Source Suppliers."

Operating Costs

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

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

We adopted Statement of Financial Accounting Standards ("SFAS") No. 123R, Share-Based Payment ("SFAS 123R") effective January 1, 2006, using the modified-prospective method of recognition of compensation expense related to share-based payments. Our consolidated statements of operations for the year ended December 31, 2006 reflect the impact of adopting SFAS 123R. In accordance with the modified prospective transition method, our consolidated statements of operations for prior periods have not been restated to reflect, and do not include, the impact 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. We have estimated the fair value of each award as of the date of grant or assumption using the Black-Scholes option pricing model. For the years ended December 31, 2007 and 2006, we recorded stock-based compensation of $0.4 million and $1.0 million, respectively.

During 2007, 2006, and 2005, we charged $0.3 million, $0.8 million, and $1.8 million, respectively, to general and administrative expense for amortization of intangible assets, such as developed technology and non-compete agreements, obtained through various business acquisitions.

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 the closing of certain international offices. On May 1, 2008, we also announced 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 consolidate our broadband, 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 geographic areas, resulting in a reduction in our revenues and expenses in the short term.

The cost reduction program, when fully implemented, is expected to save approximately $10-12 million per year on a pre-tax basis. We will recognize a one-time charge of approximately $1.4 million in the first quarter of 2008 and $0.3 million in the second quarter of 2008 associated with employee severance payments, lease terminations, and other related impairment charges. The restructuring and impairment costs include employee severance and benefit costs, costs related to leased facilities to be abandoned or subleased, and impairment of owned equipment that will be disposed.

RESULTS OF OPERATIONS

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

                                                2007       2006      2005
            Net sales                           100.0 %    100.0 %   100.0 %
            Cost of sales                        38.5       34.5      33.4

            Gross profit                         61.5       65.5      66.6

            Operating expenses:
            Research and development             25.3       21.1      26.9
            Selling and marketing                30.9       27.7      34.2
            General and administrative           20.1       16.6      21.6
            Gain from legal settlement             -          -       (2.2 )

            Total operating expenses             76.3       65.4      80.5

            Income (loss) from operations       (14.8 )      0.1     (13.9 )
            Other income, net                     2.2        2.2       0.7

            Income (loss) before income taxes   (12.6 )      2.3     (13.2 )
            Income tax expense                    0.9        1.8       1.7

            Net income (loss)                   (13.5 )%     0.5 %   (14.9 )%

COMPARISON OF THE YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005



Net Sales by Product Category



Our net sales by product category for the years ended December 31, 2007, 2006
and 2005 are summarized as follows (in thousands, except percentages):




                             Years Ended                        Variance          Years Ended       Variance    Variance
                            December 31,         Variance          in            December 31,          in          in
(Dollars in thousands)     2007       2006      in Dollars      Percent         2006       2005      Dollars    Percent
Wireline access          $ 33,226   $ 35,618   $     (2,392 )         (7 )%   $ 35,618   $ 22,778   $  12,840         56 %
Cable broadband            27,732     31,306         (3,574 )        (11 )%     31,306     20,704      10,602         51 %
Fiber optics               25,227     24,969            258            1 %      24,969     19,285       5,684         29 %
Signaling                   7,206      7,987           (781 )        (10 )%      7,987      5,747       2,240         39 %

                         $ 93,391   $ 99,880   $    (6,489)           (6 )%   $ 99,880   $ 68,514   $  31,366         46 %

Net Sales by Product Category

Net sales decreased 6% to $93.4 million in 2007 from $99.9 million in 2006. The decrease in wireline access products was primarily due to decreased sales of our HTT product and the decrease in cable broadband products was primarily due to lower demand for the AT2500 products. The decrease in signaling products was primarily due to lower sales of our NeTracker and 3GMaster products. During the years ended December 31, 2007, 2006, and 2005, our sales were not significantly affected by changes in prices.

Net sales increased 46% to $99.9 million in 2006 from $68.5 million in 2005. The sales increases in fiber optics and cable 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 increase in wireline access products was primarily the result of the expected transition to new technologies.

Net Sales by Geography



Our net sales by geographic areas for the years ended December 31, 2007, 2006
and 2005 are summarized as follows (in thousands, except percentages):




                                  Years Ended         Variance       Variance           Years Ended         Variance       Variance
                                  December 31,           in             in              December 31,           in             in
(Dollars in thousands)          2007        2006       Dollars       Percent          2006        2005       Dollars       Percent
United States                 $ 40,351    $ 52,433    $ (12,082 )         (23 )%    $ 52,433    $ 35,195    $  17,238            49 %
Canada                           2,609       1,340        1,269            95 %        1,340       1,797         (457 )         (25 )%
Asia/Pacific                    17,353      18,313         (960 )          (5 )%      18,313      13,071        5,242            40 %
Europe/Africa/Middle East       29,517      24,540        4,977            20 %       24,540      16,440        8,100            49 %
Latin America                    3,561       3,254          307             9 %        3,254       2,011        1,243            62 %

                              $ 93,391    $ 99,880    $  (6,489 )          (6 )%    $ 99,880    $ 68,514    $  31,366            46 %

The decrease in sales in the United States in 2007 as compared to 2006 was due to decreased sales of our wireline access and cable broadband products. Our growth in Europe/Africa/Middle East in 2007 as compared to 2006 was due primarily to a $5.4 million increase in sales of wireline access products, partially offset by a decline in sales of our fiber optics products. International sales increased to $53.0 million, or 57% of net sales in 2007, from $47.4 million, or 48% of net sales in 2006.

The increase in North American sales in 2006 compared to 2005 was primarily the result of increased sales of wireline access products and cable broadband products. Our growth in Europe/Africa/Middle East reflected the results of our ongoing development of distribution channels in these regions.

Cost of Sales




                                 Years Ended           Variance    Variance          Years Ended          Variance    Variance
                                December 31,              in          in            December 31,             in          in
(Dollars in thousands)        2007         2006        Dollars     Percent        2006         2005        Dollars    Percent
Cost of sales               $ 36,018     $ 34,504     $    1,514          4 %   $ 34,504     $ 22,874     $  11,630         51 %
Percentage of net sales           39 %         35 %                                   35 %         33 %

Gross margins were 61% and 65% for 2007 and 2006, respectively. The lower gross margin was primarily the result of higher direct material costs and recording a charge for excess and obsolete inventory. Margins are expected to be approximately 60-65% in 2008.

Gross margins were 65% and 67% for 2006 and 2005, respectively. The lower gross margin was primarily the result of increases in the overall cost of materials and the impact of product mix. The gross margin percentage is susceptible to change from variations in our product mix, changes in the proportion of our sales to international customers, and pricing pressures.

Research and Development




                                  Years Ended           Variance    Variance          Years Ended           Variance    Variance
                                 December 31,              in          in            December 31,              in          in
(Dollars in thousands)         2007         2006        Dollars     Percent        2006         2005        Dollars     Percent
Research and development     $ 23,589     $ 21,068     $    2,521         12 %   $ 21,068     $ 18,402     $    2,666         14 %
Percentage of net sales            25 %         21 %                                   21 %         27 %

Research and development ("R&D") expenses increased in 2007 compared to 2006 primarily due to increased prototype expenses of $0.9 million, higher spending for outside services of $0.7 million and increased headcount-related expenses of $0.5 million in the United States and at our some of our international locations. R&D 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 control costs and to develop products that address customer needs in a rapidly changing and competitive market so that we can increase our share in new markets and grow our sales. R&D expenses are expected to decline over time as a result of our efforts to consolidate product development activity.

R&D expenses increased in 2006 compared to 2005 primarily due to increased salaries and wages of $1.0 million associated with increased staffing in Canada and our Beijing research laboratory and retention bonus payments, increased parts and prototyping costs of $0.4 million, and increased stock-based compensation expense of $0.5 million associated with the adoption of SFAS 123R.

Selling and Marketing




                                  Years Ended           Variance    Variance          Years Ended           Variance    Variance
                                 December 31,              in          in            December 31,              in          in
(Dollars in thousands)         2007         2006        Dollars     Percent        2006         2005        Dollars     Percent
Selling and marketing        $ 28,817     $ 27,688     $    1,129          4 %   $ 27,688     $ 23,462     $    4,226         18 %
Percentage of net sales            31 %         28 %                                   28 %         34 %

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

Selling and marketing expenses increased in 2006 compared to 2005 primarily due to increased salaries and wages of $1.5 million primarily associated with increased headcount and retention bonus payments, increased commission expense of $1.7 million associated with increased sales, and increased stock-based compensation expense of $0.4 million associated with the adoption of SFAS 123R. 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. International sales to distributors are generally made at substantial discounts but without commission, resulting in both lower sales prices and lower marketing expenses than equivalent sales made domestically directly to the end customer.

General and Administrative




                                    Years Ended           Variance    Variance          Years Ended           Variance    Variance
                                   December 31,              in          in            December 31,              in          in
(Dollars in thousands)           2007         2006        Dollars     Percent        2006         2005        Dollars     Percent
General and administrative     $ 18,746     $ 16,586     $    2,160         13 %   $ 16,586     $ 14,795     $    1,791         12 %
Percentage of net sales              20 %         17 %                                   17 %         22 %

General and administrative expenses increased in 2007 compared to 2006 primarily due to increased professional fees of $0.8 million, higher spending for outside services of $0.7 million and increased headcount-related expenses of $0.4 million. General and administrative expenses are expected to continue at similar levels through the first half of 2008 as decreased legal expenses are offset by increased costs of compliance with Sarbanes-Oxley and continuing accounting and audit related expenses. These costs are expected to decline in the second half of 2008 as the Company implements its restructuring plans.

General and administrative expenses increased in 2006 compared to 2005 primarily due to increased salaries and wages of $1.7 million primarily associated with increased headcount and retention bonus payments, increased legal expense of $0.6 million related to special investigations, increased audit related expense of $0.7 million due to expanded procedures as a result of the investigation and restatement, offset in part by lower amortization expense related to intangible assets of $1.0 million and lower legal fees of $0.2 million due to the settlement of litigation with Acterna in August 2005. During 2006, we experienced substantial costs related to a special investigation undertaken by the Audit Committee. Excluding this item, general and administrative expense in 2006 was essentially flat as compared to 2005.

Gain from Legal Settlement

A one-time settlement of $1.5 million was received as a result of the settlement of all litigation between us and Acterna in August 2005. This is considered an unusual item and reported separately on the consolidated statements of operations as a component of operating expenses for the year ended December 31, 2005.

Other Income, Net




                               Years Ended            Variance       Variance          Years Ended           Variance     Variance
                               December 31,              in             in             December 31,             in           in
. . .