907152--11/2/2007--SUNRISE_TELECOM

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Our investigation of our historical stock option granting practices and resulting restatement of our financial statements have had, and may continue to have, a material adverse effect on our financial performance. 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. 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. 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. 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 stockholders. 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. 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. Consolidation and Other Risks Within the Telecommunications Industry Our operating results and financial condition could be adversely affected by several risks related to the telecommunication industry, including the continuing consolidation among our principal customers, the uncertainty of growth of end-user demand for telecommunication services, the possible effects of its unpredictable growth or decline, and the risk that deregulation will slow. 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. Dependence on Wireline Access Products 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. 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. 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. If we are unable to develop new products successfully and enhance our existing products, our future success may be threatened. The length and unpredictability of the sales and implementation cycles for our products make it difficult to forecast revenues. We may have difficulty managing expansions and contractions in our operations, which could reduce our chances of maintaining or restoring our profitability. If demand for our products does not match our manufacturing capacity, our earnings may suffer. Competition could reduce our market share and decrease our net sales. 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. Our plan to expand sales in international markets could lead to higher operating expenses and may subject us to unpredictable regulatory and political systems. 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. 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. 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. 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. 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. Our financial results could be materially and adversely affected if it is determined that the book value of goodwill is higher than the fair value. If one or more of our senior managers were to leave, we could experience difficulty in replacing them and our operating results could suffer. Anti-takeover provisions in our charter documents could prevent or delay a change of control and, as a result, negatively impact our stockholders. We will be required to evaluate our system of internal control over financial reporting in 2007 and our independent auditor will be required to attest to the effectiveness of our internal controls in 2008. Any deficiencies found in our internal control over financial reporting or the inability of our independent auditor to conclude on the effectiveness could negatively impact our stock price.

Full 10-K form ▸

907152--11/2/2007--SUNRISE_TELECOM_INC