Conditions and Trends in Our Industry

In our fiscal year ended September 30, 2008, we experienced lower revenues due to the effects of consolidation among major customers outside Japan, such as Alcatel-Lucent (which also acquired the 3G wireless business from Nortel) and Nokia Siemens Networks, and to continued competition from our customers' own test equipment offerings in the Japanese market. These factors resulted in reduced purchasing of our products and services by our customers throughout the world. We expect these factors to continue to impact our revenues to some extent in fiscal 2009.

Summary of Our Financial Performance in Fiscal 2008 compared to Fiscal 2007

Our operating financial performance in the fiscal year ended September 30, 2008 deteriorated marginally in comparison with our performance in the prior year:
our revenues decreased by 4% to $37.9 million, but our operating loss decreased by 10% to $7.4 million due to improved gross profit margins and lower operating expenses.

The revenue decrease related to the two geographic sales regions that have been most affected by customer consolidation: revenues in the Americas fell by 28% to $8.8 million and revenues in Europe, the Middle East and Africa fell by 15% to $10.3 million. However, revenues in Japan increased by 34% to $12.1 million due to stronger demand, a reduced impact of competition from internal customer test groups and an increase of 10% in the average value of the Japanese yen, and revenues in Asia Pacific increased by 12% to $6.7 million due to stronger demand in India, New Zealand and China.

We saw an increase of three percentage points in our gross profit margin to the 81% level due primarily to decreased hardware component and manufacturing overhead costs as a percentage of product revenues and to lower cost of services.

Operating expenses decreased by $0.9 million, primarily due to the following expense reductions:

• $2.3 million in research and development salaries and benefits due to the closure of our Australian research and development office and to the capitalization of expenses related to one software development project;

• $0.5 million in accounting expenses;

• $0.6 million in non-cash stock option expenses; and

• $0.4 million in expenses associated with new product introductions.

These reductions were partly offset by $2.2 million in restructuring charges and by increases of $0.4 million in contractor expenses, $0.3 million in sales and marketing salaries and benefits and $0.2 million in legal costs.

Our pre-tax loss in fiscal 2008 was increased by two additional factors:

• a decrease of $1.3 million in interest income from the fiscal 2007 level; and

• a decrease of $1.4 million in other income.

Our results of operations are discussed in more detail in the section below entitled "Fiscal Years Ended September 30, 2008 and 2007".

During fiscal 2008, our cash, cash equivalents and short-term investment balances decreased by $20.9 million. We used $12.2 million for the repurchase of common shares, invested $3.5 million in capitalized software development costs and reclassified $5.0 million in illiquid auction rate securities as long-term investments. Our sources and uses of cash are discussed in more detail in the section below entitled "Liquidity and Capital Resources."

Critical Accounting Policies and Estimates

We have identified the accounting policies below and the methods, estimates and judgments that we use in applying these policies as critical to our business operations and the understanding of our results of operations. The impact and any associated risks related to these policies on our business operations are discussed below and

throughout "Management's Discussion and Analysis of Financial Condition and Results of Operations" where such policies affect our reported and expected future financial results. We also have other key accounting policies that we believe either do not generally require us to make estimates and judgments that are as difficult or as subjective, or are likely to have a material impact on our reported results of operations. For a discussion on the application of these other accounting policies, see Note 1 of the Notes to Consolidated Financial Statements.

Revenue Recognition

Sales of our product arrangements normally include hardware and software. We also offer training, consulting and maintenance services separately from our product arrangements. We recognize revenue in accordance with Statement of Position ("SOP") 97-2, Software Revenue Recognition, as amended, as follows.

In connection with each transaction involving these arrangements:

• We examine the customer agreement and/or purchase order to determine that persuasive evidence of an arrangement exists and there is no basis for considering that the transaction forms a single arrangement with one or more other transactions.

• We assess that the fee is fixed or determinable by verifying that it is not subject to an agreement to provide additional products or services at a later date or to renegotiation or contingencies including refund, right of return or third-party financing or transactions, and that the payment terms do not extend significantly beyond our customary range.

• We assess that collection is probable based on customer credit information and payment history.

For arrangements with multiple elements, we allocate revenue to each component of the arrangement based on vendor-specific objective evidence of fair value ("VSOE"). If we have VSOE for the undelivered elements only, we allocate value using the residual method, under which we defer revenue from the arrangement fee equivalent to the VSOE of the undelivered elements and apply any discount to the delivered elements. VSOE for the ongoing maintenance and support obligations within an arrangement is based upon substantive renewal rates quoted in the contracts or, in the absence of stated renewal rates, upon a history of separate sales of renewals to each customer or class of customers. VSOE for services such as training or consulting is based upon separate sales of these services to other customers without the bundling of other elements.

Subject to the foregoing considerations, we recognize revenue on product sales upon delivery. We recognize revenues allocated to training and consulting services at the time the services are completed. We recognize revenues allocated to maintenance ratably over the term of the maintenance contract during which the services are delivered.

The amount and timing of revenue recognized in any period may differ materially if we make different judgments in any of these areas involving revenue recognition.

Income Taxes

Significant management judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities, any valuation allowance recorded against our deferred tax assets, and our accrued liability for uncertain tax positions.

At the end of each interim reporting period, we estimate an expected effective tax rate for the full fiscal year based on our most current forecast of pre-tax income in each of the jurisdictions in which we operate, permanent book and tax differences and global tax-planning strategies. We use this effective rate to provide for income taxes on a year-to-date basis, excluding the effect of discrete items or items that are reported net of their related tax effects. We recognize the tax effect of discrete items in the period in which they occur.

Deferred tax assets and liabilities included on our consolidated balance sheet arise from temporary differences resulting from differing treatment of items such as deferred revenue for tax and accounting purposes. We assess the likelihood that the value of our deferred tax assets will be recovered from future taxable income and, to the extent that we believe that recovery is not likely, we establish a valuation allowance. If we establish or increase a valuation allowance in a period, the change is included as an expense within the tax provision in our consolidated statement of

operations. Based on our estimates concerning future pre-tax U.S. profitability, we have recorded a full valuation allowance against all of our U.S. deferred tax assets. If actual future profitability exceeds our estimates or if we adjust these estimates in future periods, we may need to reduce our valuation allowances, which could materially improve our financial position and results of operations. No reduction in the valuation allowance was made in fiscal 2008.

We operate in numerous tax jurisdictions and are subject to regular examinations by various U.S. federal, U.S. state, and foreign tax authorities. Our income tax filing positions in each of the jurisdictions in which we do business are supported by interpretations of the local income tax laws and rulings. Cross-jurisdictional transactions involving the transfer prices for products, services and intellectual property comprise our significant income tax exposures. Tax authorities are increasingly asserting interpretations of laws and facts to challenge cross-jurisdictional transactions. We regularly assess our position with regard to tax exposures, and we record liabilities for uncertain tax positions and related interest and penalties, if any, according to the principles of FASB Interpretation No. 48 ("FIN 48"), Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109, based on our estimate of the possibility that additional taxes will be due. Due to the uncertainty in estimating the final resolution of complex tax matters, actual amounts payable as finally determined by tax audits may differ from our estimates, and such differences could have a material effect on our financial position.

Additional information regarding income taxes is contained in Note 7 of the Notes to the Consolidated Financial Statements.

Allowance for Doubtful Accounts and Excess or Obsolete Inventory

When judging the adequacy of our allowance for doubtful accounts, we specifically analyze accounts receivable, historical bad debt experience, customer concentration, customer credit-worthiness, current economic trends and changes in customer payment terms. Bad debt expenses recognized in any period may differ materially if we make different judgments. Our accounts receivable balance as of September 30, 2008 was $6.5 million, net of an allowance for doubtful accounts of $16,000.

Inventory is stated at the lower of cost (computed using standard cost, which approximates actual cost on a first-in, first-out basis) or market value. We regularly review inventory quantities on hand and write down excess or obsolete inventories to their estimated net realizable value. We make significant estimates and assumptions based on our judgment of inventory age, shipment history and our forecast of future demand. A significant decrease in market demand for our product could result in an increase in our reserve for excess inventory quantities on hand. In addition, our industry is subject to technological change that could result in an increase in the amount of our reserve for obsolete inventory quantities on hand. When we record provisions for excess and obsolete inventory, we create a new cost basis for the inventory. Recoveries of previously written down inventory are recognized only when the related inventory has been sold and revenue has been recognized. Our inventory balance as of September 30, 2008 was $2.3 million, net of excess or obsolete inventories of $1.7 million. The amount and timing of cost of goods sold recognized in any period may differ materially if we make different judgments.

Goodwill

In accordance with SFAS No. 142, Goodwill and Other Intangible Assets, we evaluate goodwill for impairment on an annual basis, or as other indicators exist for a potential impairment. We performed our most recent annual impairment test as of September 30, 2008 and determined that we have a single reporting unit. We did not record an impairment of goodwill during the fiscal years ended September 30, 2008 and 2007. In assessing potential impairment, we make significant estimates and assumptions regarding the discounted future cash flows of our reporting unit to determine its fair value. These estimates include, but are not limited to, projected future operating results, working capital ratios, cash flow, terminal values and growth rates, market discount rates and tax rates. If our estimates or the related assumptions change in the future, we may be required to record an impairment charge on goodwill to reduce its carrying amount to its estimated fair value. Goodwill was $49.4 million at September 30, 2008 and 2007.

Stock-Based Compensation

We account for stock-based compensation in accordance with SFAS 123(R), Share-Based Payment. Under the fair value recognition provisions of this statement, share-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense ratably over the requisite service period of the award. Determining the fair value of share-based awards at the grant date requires judgment, including estimating stock price volatility, forfeiture rates, and expected option life. If actual experience differs significantly from these estimates, stock-based compensation expense and our results of operations could be materially impacted.

Capitalized Software Development Costs

We capitalize software development costs on a project-specific basis once technological feasibility is established. Technological feasibility is defined as the completion of a detailed program design or completion of a working model. Such project-specific capitalized costs include primarily salaries and benefits (including stock-based compensation), contractor expenses, facilities-related costs and depreciation expenses. In April 2008, we began capitalizing costs related to one major project.

Upon general release of the product, capitalized costs are amortized on a straight-line basis over the greater of the estimated economic life of the product or based on the ratio of current gross revenues to total projected gross revenues for that product. In the twelve months ended September 30, 2008 and 2007, there was no amortization of capitalized costs. Unamortized software development costs were $3.5 million at September 30, 2008 and were included in other assets. There were no unamortized software development costs at September 30, 2007.

The determination of estimates relating to technological feasibility and economic life or projected gross revenues of a product requires the exercise of judgment. Changes in judgment as to when technological feasibility is reached and the determination of economic life or projected gross revenues could materially affect the amount of costs capitalized and amortized, respectively.

Results of Operations

The following table sets forth, for the periods indicated, the percentage relationship of certain items from our consolidated statements of operations to total revenues.

                                               Percentage of Total Revenues
                                                 Year Ended September 30,
                                                2008                  2007

     Revenues:
     Products                                        66.5 %                63.8 %
     Services                                        33.5                  36.2

     Total revenues                                 100.0                 100.0

     Cost of revenues:
     Products                                        11.9                  13.5
     Services                                         6.6                   7.9
     Amortization of purchased technology             0.1                   0.1

     Total cost of revenues                          18.6                  21.5

     Gross profit(1)                                 81.4                  78.5

     Operating expenses:
     Research and development                        29.3                  33.9
     Sales and marketing                             43.1                  42.5
     General and administrative                      22.8                  23.1
     Restructuring costs                              5.8                     -

     Total operating expenses                       101.0                  99.5

     Operating loss                                 (19.6 )               (21.0 )
     Interest income                                  5.3                   8.3
     Other income, net                                1.0                   4.5

     Loss before income taxes                       (13.3 )                (8.2 )
     Provision for income taxes                       2.6                   3.0

     Net loss                                       (15.9 )%              (11.2 )%

     Gross profit margin on products                 82.1 %                78.8 %

     Gross profit margin on services                 80.3 %                78.2 %

(1) Gross profit margin on products and services excludes amortization of purchased technology.

Fiscal Years Ended September 30, 2008 and 2007

Revenues

Our revenues for fiscal 2008 decreased by 4% from fiscal 2007 to $37.9 million. Over the same period, product revenues remained substantially unchanged at $25.1 million. Services revenues decreased approximately 11% to $12.7 million primarily due to a decrease in product support revenues.

Our revenues by sales territory, based on origin of order taken, varied as follows in fiscal 2008 in comparison with fiscal 2007:

• revenues in the Americas decreased by 28% to $8.8 million;

• revenues in Europe, the Middle East and Africa decreased by 15% to $10.3 million;

• revenues in Japan increased by 34% to $12.1 million; and

• revenues in Asia Pacific outside Japan increased by 12% to $6.7 million.

Information on revenues from major customers is provided in Note 1 of the Notes to Consolidated Financial Statements included with this Annual Report on Form 10-K.

Cost of Revenues

Cost of product revenues consists of the costs of purchased components, circuit board assembly by independent contractors, payroll, benefits and stock-based compensation for personnel in purchasing, product testing, shipping and inventory management, as well as supplies, media and freight. Cost of product revenues decreased by 15% to $4.5 million in fiscal 2008 in comparison with the prior year. Gross margin on product revenues increased to 82% from 79% in the prior year due primarily to decreased hardware component and manufacturing overhead costs as a percentage of product revenues.

Cost of services revenues consists primarily of the costs of payroll, benefits and stock-based compensation for customer support and training personnel, as well as the costs of travel, materials and equipment. Cost of services revenues decreased by approximately 19% to $2.5 million in fiscal 2008 in comparison with the prior year, due primarily to a decrease of 13%, or 2 employees, in the average number of employees engaged in customer support. Gross margin on services revenues increased to 80% from 78% as the cost of services revenues decreased more than the services revenues themselves.

Gross margins did not vary significantly by geographic region.

Research and Development

Research and development expenses consist primarily of salaries, benefits and stock-based compensation for engineers, as well as materials, equipment and contractor services. To date, $3.5 million in expenses related to one software development project have been capitalized since that project met the applicable requirements for capitalization in early April 2008. All other software development costs have been expensed as research and development expenses as incurred.

Research and development expenses decreased by approximately 17% to $11.1 million in fiscal 2008 in comparison with the prior year due primarily to a $2.3 million decrease in research and development salaries and benefits due to the closure of our Australian research and development office and to the capitalization of expenses related to one software development project. As a percentage of total revenues, research and development expenses decreased to 29% in fiscal 2008 from 34% in the prior year. We expect the absolute annual level of research and development expenses to increase significantly in fiscal 2009 as we cease to capitalize software development expenses and begin to amortize cumulative capitalized expenses with the release of the resultant product.*

Sales and Marketing

Sales and marketing expenses consist primarily of salaries, benefits, commissions, bonuses and stock-based compensation, as well as occupancy costs, travel and promotional expenses.

Sales and marketing expenses decreased approximately 2% to $16.4 million in fiscal 2008 in comparison with the prior year, due primarily to decreases in product demonstration and travel costs. As a percentage of total revenues, sales and marketing expenses increased to 43% from 42% in the prior year. We expect the absolute annual level of sales and marketing expenses to remain relatively unchanged in fiscal 2009.*

General and Administrative

General and administrative expenses consist primarily of salaries, benefits, bonuses and stock-based compensation, as well as third party costs associated with our general corporate and risk management, public reporting, employee recruitment and retention, regulatory compliance, investor relations, finance, accounting and internal control functions, as well as amortization and impairment of certain acquired intangible assets.

General and administrative expenses decreased approximately 5% to $8.7 million in fiscal 2008 in comparison with the prior year, due primarily to a reduction of $0.5 million in accounting expenses. As a percentage of total revenues, general and administrative expenses remained substantially unchanged at 23%. We expect the absolute annual level of general and administrative expenses to remain relatively unchanged in fiscal 2009.*

Restructuring Costs

A $2.2 million restructuring charge was recorded in fiscal 2008 related to a reduction in force of 25 employees and the closure of our Australian office. No restructuring charge was recorded in fiscal 2007.

Interest Income

Interest income decreased to $2.0 million in fiscal 2008 from $3.3 million in fiscal 2007 due to decreases in both short-term interest rates and in the total of funds invested. Realized gains and losses on sale of securities are included in interest income.

Other Income

We recorded $0.4 million in other income in fiscal 2008 resulting from foreign exchange and other gains and $1.8 million in fiscal 2007 on the receipt of shares valued at that amount on the settlement of a lawsuit.

Income Taxes

In fiscal 2008, we recorded a tax provision of $1.0 million in comparison with a provision of $1.2 million in the prior year. Having recorded a full valuation allowance on our deferred tax assets in the U.S. in fiscal 2006, we did not accrue a benefit on U.S. pre-tax losses in fiscal 2008 or 2007. As a result, our tax provision in both years consisted of three main components: an accrual for the increase in deferred tax liability related to goodwill amortization for tax purposes, actual tax payable by international subsidiaries and an increase in our accrual for uncertain overseas tax positions.

Impact of Inflation

We believe that inflation has not had a material impact on our results of operations.

Liquidity and Capital Resources

Operating activities used $97,000 in cash in the year ended September 30, 2008 and provided $1.4 million in cash in the prior year. Over this period, the net loss component of cash flows from operating activities increased to $6.0 million from $4.4 million, and the contribution from adjustments for non-cash charges such as depreciation, amortization and stock-based compensation expense decreased to $3.9 million from $4.6 million. Changes in non-cash assets and liabilities provided net cash of $2.1 million in the year ended September 30, 2008 in comparison with $1.2 million in the prior year.

Our primary source of operating cash flow is the collection of accounts receivable from our customers. We measure the effectiveness of our collection efforts by an analysis of average accounts receivable days outstanding ("days outstanding"). We calculate our days outstanding by dividing our accounts receivable balance net of allowances at the end of a period by the revenues for that period and multiplying the result by the number of days in the period. Our days outstanding improved to 63 days for the year ended September 30, 2008 from 65 days for the prior year. Collections of accounts receivable and related days outstanding will fluctuate in future periods due to the

timing and amount of our future revenues, payment terms extended to our customers and the effectiveness of our collection efforts.

Investing activities have consisted of three components: net purchases of property and equipment decreased to $0.2 million in the year ended September 30, 2008 in comparison with $0.5 million the same period in the prior year, purchases and sales of short-term investments provided net cash of $26.4 million in the year ended September 30, 2008 in comparison with $8.8 million in the prior year, and capitalization of software development expenses used $3.5 million in comparison with zero in the prior year.

Financing activities in the form of the repurchase of common shares net of proceeds of issuance used cash of $12.0 million in the year ended September 30, 2008 in comparison with $9.1 million in the prior year.

As of September 30, 2008, we had working capital of $40.1 million, cash and cash equivalents of $33.8 million and short-term investments of $7.6 million.

We may require additional funds to support our working capital requirements or for other purposes. There can be no assurance that additional financing will be available or that, if available, such financing will be obtainable on terms favorable to us or to our stockholders. We believe that cash and cash equivalents, short-term investments and funds generated from operations will provide us with sufficient funds to finance our requirements for at least the next 12 months.* In the long term, we are ultimately dependent on funds generated from operations to finance our requirements.

Off-Balance Sheet Arrangements

As of September 30, 2008, we did not have any off-balance sheet arrangements as defined in Item 303 of Regulation S-K.