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**UNITED STATESSECURITIES 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**                                                                                                                                                                                                                                            |
| ** **                                                                                                                                                                                                                                        | ** ** | ** **                                                                                                   |
| **o**                                                                                                                                                                                                                                             | ** ** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|                                                                                                                                                                                                                                              |       |                                                                                                         |
| **For  the transition period from                 to                 ** |

 

**CommissionFile Number: 001-33511**

 

**STARENT NETWORKS, CORP.**

(Exact name ofregistrant as specified in its charter)

 

| **Delaware**                                                     | ** ** | **04-3527533**                        |
|------------------------------------------------------------------|------------|---------------------------------------|
| (State or other  jurisdiction of  incorporation or organization) |       | (I.R.S. Employer  Identification No.) |

 

**30International PlaceTewksbury, MA 01876**

(Address ofprincipal executive offices) (zip code)

 

**(978) 851-1100**(Registrant’stelephone number, including area code)

 

 

(Former name,former address and former fiscal year, if changed since last report)

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required tofile such reports), and (2) has been subject to such filing requirementsfor the past 90 days. x  Yes    o  No

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, or a smaller reporting company. See definition of “largeaccelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2of the Exchange Act. (Check one):

 
| Large accelerated  filer o |   | Accelerated  filer o |   | Non-accelerated  filer x  (Do not check if a  smaller reporting  company) |   | Smaller  reporting company o |
|---------------------------------|--------|---------------------------|--------|-------------------------------------------------------------------------------------|--------|-----------------------------------|

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act). o  Yes    x  No

As of August 4,2008, there were 69,973,251 shares of the registrant’s $0.001 par value pershare common stock outstanding. 

 

 

 

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**STARENTNETWORKS, CORP.**

 

**QUARTERLYREPORT ON FORM 10-Q**

 

**FORTHE QUARTERLY PERIOD ENDED JUNE 30, 2008**

 

**Table of Contents**

 
| **Item**                            | ** **                                                                                                       | **Page**   |
|-------------------------------------|------------------------------------------------------------------------------------------------------------------|------------|
| ** **                          | ** **                                                                                                       | ** ** |
| PART I.  FINANCIAL INFORMATION | 3                                                                                                                |
|                                |                                                                                                             |       |
| ITEM 1.                             | Condensed Consolidated  Financial Statements (unaudited)                                                         | 3          |
|                                |                                                                                                             |       |
|                                | Condensed  Consolidated Balance Sheets as of June 30, 2008 and December 31,  2007                      | 3          |
|                                |                                                                                                             |       |
|                                | Condensed  Consolidated Statements of Operations for the Three and Six Months Ended  June 30, 2008 and 2007 | 4          |
|                                |                                                                                                             |       |
|                                | Condensed Consolidated Statements of Cash Flows for  the Six Months Ended June 30, 2008 and 2007            | 5          |
|                                |                                                                                                             |       |
|                                | Notes to Condensed Consolidated Financial Statements                                                             | 6          |
|                                |                                                                                                             |       |
| ITEM 2.                             | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                      | 12         |
|                                |                                                                                                             |       |
| ITEM 3.                             | Quantitative  and Qualitative Disclosures About Market Risk                                                      | 24         |
|                                |                                                                                                             |       |
| ITEM 4T.                            | Controls and  Procedures                                                                                         | 24         |
|                                |                                                                                                             |       |
| PART II.  OTHER INFORMATION    | 25                                                                                                               |
|                                |                                                                                                             |       |
| ITEM 1.                             | Legal Proceedings                                                                                                | 25         |
|                                |                                                                                                             |       |
| ITEM 1A.                            | Risk Factors                                                                                                     | 26         |
|                                |                                                                                                             |       |
| ITEM 2.                             | Unregistered  Sales of Equity Securities and Use of Proceeds                                                     | 36         |
|                                |                                                                                                             |       |
| ITEM 4.                             | Submission  of Matters to a Vote of Security Holders                                                             | 37         |
|                                |                                                                                                             |       |
| ITEM 6.                             | Exhibits                                                                                                         | 37         |

 

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**PART I. FINANCIAL INFORMATION**

 

**ITEM 1. CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS**

 

**STARENTNETWORKS, CORP.**

 

**CONDENSED CONSOLIDATED BALANCE SHEETS**

 

**(unauditedand in thousands, except share and per share data)**

** **
| ** **                                                                                                                                                                               | ** ** | **June 30,  2008** | ** ** | **December 31,  2007** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| **Assets**                                                                                                                                                                               |       |                    |       |                        |       |
| Current assets:                                                                                                                                                                          |       |                    |       |                        |       |
| Cash and cash  equivalents                                                                                                                                                               |       | $                       | 321,147    |                        | $          | 223,987 |   |
| Short-term  investments                                                                                                                                                                  |       | —                  |       | 9,612                       |       |
| Accounts  receivable                                                                                                                                                                     |       | 39,304                  |       | 56,363                      |       |
| Inventories                                                                                                                                                                              |       | 41,519                  |       | 29,638                      |       |
| Prepaid expenses  and other current assets                                                                                                                                               |       | 6,291                   |       | 6,656                       |       |
| Total current  assets                                                                                                                                                                    |       | 408,261                 |       | 326,256                     |       |
|                                                                                                                                                                                     |       |                    |       |                        |       |
| Property and  equipment, net                                                                                                                                                             |       | 26,620                  |       | 20,452                      |       |
| Other assets                                                                                                                                                                             |       | 2,035                   |       | 1,955                       |       |
| Restricted cash                                                                                                                                                                          |       | 832                     |       | 716                         |       |
|                                                                                                                                                                                     |       |                    |       |                        |       |
| Total assets                                                                                                                                                                             |       | $                       | 437,748    |                        | $          | 349,379 |   |
|                                                                                                                                                                                     |       |                    |       |                        |       |
| **Liabilities  and stockholders’ equity**                                                                                                                                           |       |                    |       |                        |       |
| Current  liabilities:                                                                                                                                                                    |       |                    |       |                        |       |
| Accounts payable                                                                                                                                                                         |       | $                       | 9,800      |                        | $          | 7,448 |   |
| Accrued expenses                                                                                                                                                                         |       | 7,286                   |       | 6,163                       |       |
| Accrued payroll  and related expenses                                                                                                                                                    |       | 11,936                  |       | 15,568                      |       |
| Income taxes  payable                                                                                                                                                                    |       | 1,545                   |       | 1,075                       |       |
| Current portion  of deferred revenue                                                                                                                                                     |       | 109,874                 |       | 52,733                      |       |
| Total current  liabilities                                                                                                                                                               |       | 140,441                 |       | 82,987                      |       |
|                                                                                                                                                                                     |       |                    |       |                        |       |
| Deferred  revenue, net of current portion                                                                                                                                                |       | 8,056                   |       | 10,670                      |       |
| Refundable  purchase price of restricted common stock                                                                                                                                    |       | 645                     |       | 783                         |       |
|                                                                                                                                                                                     |       |                    |       |                        |       |
| Commitments and  contingencies (Note 7)                                                                                                                                             |       |                    |       |                        |       |
|                                                                                                                                                                                     |       |                    |       |                        |       |
| Stockholders’  equity:                                                                                                                                                              |       |                    |       |                        |       |
| Preferred stock,  $0.001 par value, 5,000,000 shares authorized and no shares outstanding                                                                                                |       | —                  |       | —                      |       |
| Common stock,  $0.001 par value, 250,000,000 shares authorized, 69,557,678 and 68,252,858  shares issued and outstanding at June 30, 2008 and December 31,  2007, respectively |       | 70                      |       | 68                          |       |
| Additional  paid-in capital                                                                                                                                                              |       | 359,155                 |       | 348,917                     |       |
| Accumulated  other comprehensive income                                                                                                                                                  |       | —                  |       | 2                           |       |
| Accumulated  deficit                                                                                                                                                                     |       | (70,619                 | )          | (94,048                     | )          |
| Total  stockholders’ equity                                                                                                                                                         |       | 288,606                 |       | 254,939                     |       |
| Total  liabilities and stockholders’ equity                                                                                                                                         |       | $                       | 437,748    |                        | $          | 349,379 |   |

 

The accompanyingnotes are an integral part of these condensed consolidated financialstatements.

 

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**STARENTNETWORKS, CORP.**

 

**CONDENSED CONSOLIDATED STATEMENTS OFOPERATIONS**

 

**(unauditedand in thousands, except per share data)**

** **
| ** **                                                                       | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|----------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                       | ** ** | **2008**                                        | ** ** | **2007**                                      | ** ** | **2008** | ** ** | **2007** | ** ** |
| Revenues:                                                                        |       |                                            |       |                                          |       |   |   |   |   |
| Product                                                                          |       | $                                               | 52,160     |                                          | $          | 25,121 |   | $ | 101,047 |   | $ | 49,573 |   |
| Service                                                                          |       | 9,008                                           |       | 5,733                                         |       | 16,349 |   | 8,923 |   |
| Total revenues                                                                   |       | 61,168                                          |       | 30,854                                        |       | 117,396 |   | 58,496 |   |
| Cost of  revenues:                                                               |       |                                            |       |                                          |       |   |   |   |   |
| Product                                                                          |       | 9,497                                           |       | 6,316                                         |       | 18,546 |   | 10,754 |   |
| Service                                                                          |       | 3,806                                           |       | 1,942                                         |       | 7,716 |   | 3,329 |   |
| Total cost of  revenues                                                          |       | 13,303                                          |       | 8,258                                         |       | 26,262 |   | 14,083 |   |
| Gross profit                                                                     |       | 47,865                                          |       | 22,596                                        |       | 91,134 |   | 44,413 |   |
|                                                                             |       |                                            |       |                                          |       |   |   |   |   |
| Operating  expenses:                                                             |       |                                            |       |                                          |       |   |   |   |   |
| Research and  development                                                        |       | 12,500                                          |       | 7,585                                         |       | 24,843 |   | 17,651 |   |
| Sales and  marketing                                                             |       | 16,173                                          |       | 8,867                                         |       | 35,024 |   | 15,936 |   |
| General and  administrative                                                      |       | 5,931                                           |       | 3,398                                         |       | 11,087 |   | 6,242 |   |
| Total operating  expenses                                                        |       | 34,604                                          |       | 19,850                                        |       | 70,954 |   | 39,829 |   |
|                                                                             |       |                                            |       |                                          |       |   |   |   |   |
| Income from  operations                                                          |       | 13,261                                          |       | 2,746                                         |       | 20,180 |   | 4,584 |   |
| Interest income                                                                  |       | 2,009                                           |       | 890                                           |       | 4,293 |   | 1,598 |   |
| Foreign currency  exchange gain (loss)                                           |       | (148                                            | )          | (91                                           | )          | 751 |   | (89 | ) |
| Income before  income tax expense                                                |       | 15,122                                          |       | 3,545                                         |       | 25,224 |   | 6,093 |   |
| Income tax  expense                                                              |       | (1,346                                          | )          | (164                                          | )          | (1,795 | ) | (407 | ) |
| Net income                                                                       |       | 13,776                                          |       | 3,381                                         |       | 23,429 |   | 5,686 |   |
| Accretion of  redeemable convertible preferred stock                             |       | —                                          |       | (1,448                                        | )          | — |   | (3,445 | ) |
| Income allocated  to preferred stockholders                                      |       | —                                          |       | (1,108                                        | )          | — |   | (1,583 | ) |
| Net income  applicable to common stockholders                                    |       | $                                               | 13,776     |                                          | $          | 825 |   | $ | 23,429 |   | $ | 658 |   |
|                                                                             |       |                                            |       |                                          |       |   |   |   |   |
| Net income per  share applicable to common stockholders (Note 3):                |       |                                            |       |                                          |       |   |   |   |   |
| Basic                                                                            |       | $                                               | 0.20       |                                          | $          | 0.03 |   | $ | 0.34 |   | $ | 0.04 |   |
| Diluted                                                                          |       | $                                               | 0.19       |                                          | $          | 0.03 |   | $ | 0.32 |   | $ | 0.03 |   |
| Weighted-average  shares used in computing net income per common share (Note 3): |       |                                            |       |                                          |       |   |   |   |   |
| Basic                                                                            |       | 69,379                                          |       | 23,919                                        |       | 69,105 |   | 15,864 |   |
| Diluted                                                                          |       | 74,407                                          |       | 30,197                                        |       | 74,372 |   | 21,769 |   |

 

The accompanyingnotes are an integral part of these condensed consolidated financialstatements.

 

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**STARENTNETWORKS, CORP.**

 

**CONDENSED CONSOLIDATED STATEMENTS OFCASH FLOWS**

 

**(unauditedand in thousands)**

** **
| ** **                                                                                  | ** ** | **Six Months Ended  June 30,** | ** ** |
|---------------------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                                  | ** ** | **2008**                                      | ** ** | **2007** | ** ** |
| **Cash  flows from operating activities:**                                                  |       |                                          |       |   |   |
| Net income                                                                                  |       | $                                             | 23,429     |   | $ | 5,686 |   |
| Adjustments to  reconcile net income to net cash provided by (used in) operating activities |       |                                          |       |   |   |
| Depreciation and  amortization expense                                                      |       | 5,018                                         |       | 2,238 |   |
| Share-based  compensation                                                                   |       | 7,888                                         |       | 4,754 |   |
| Foreign currency  gains                                                                     |       | (737                                          | )          | (26 | ) |
| Changes in  operating assets and liabilities:                                               |       |                                          |       |   |   |
| Accounts  receivable                                                                        |       | 17,146                                        |       | (3,066 | ) |
| Inventories                                                                                 |       | (11,875                                       | )          | (3,385 | ) |
| Prepaid expenses  and other current assets                                                  |       | 293                                           |       | (878 | ) |
| Other assets                                                                                |       | (71                                           | )          | (240 | ) |
| Accounts payable                                                                            |       | 2,373                                         |       | 3,780 |   |
| Accrued expenses                                                                            |       | (2,368                                        | )          | 897 |   |
| Income taxes  payable                                                                       |       | 493                                           |       | 327 |   |
| Deferred revenue                                                                            |       | 54,527                                        |       | (22,727 | ) |
|                                                                                        |       |                                          |       |   |   |
| Net cash  provided by (used in) operating activities                                        |       | 96,116                                        |       | (12,640 | ) |
|                                                                                        |       |                                          |       |   |   |
| **Cash  flows from investing activities:**                                                  |       |                                          |       |   |   |
| Purchases of  property and equipment                                                        |       | (11,215                                       | )          | (8,474 | ) |
| Purchases of  short-term investments                                                        |       | —                                        |       | (11,208 | ) |
| Proceeds from  maturities of short-term investments                                         |       | 9,610                                         |       | 26,580 |   |
| Change in  restricted cash                                                                  |       | (130                                          | )          | 452 |   |
|                                                                                        |       |                                          |       |   |   |
| Net cash  provided by (used in) investing activities                                        |       | (1,735                                        | )          | 7,350 |   |
|                                                                                        |       |                                          |       |   |   |
| **Cash  flows from financing activities:**                                                  |       |                                          |       |   |   |
| Proceeds from  public offerings, net of expenses                                            |       | (87                                           | )          | 116,037 |   |
| Proceeds from  exercises of stock options                                                   |       | 2,301                                         |       | 1,208 |   |
| Proceeds from  issuance of restricted common stock                                          |       | —                                        |       | 347 |   |
|                                                                                        |       |                                          |       |   |   |
| Net cash  provided by financing activities                                                  |       | 2,214                                         |       | 117,592 |   |
|                                                                                        |       |                                          |       |   |   |
| Effect of  exchange rate changes on cash and cash equivalents                               |       | 565                                           |       | 88 |   |
|                                                                                        |       |                                          |       |   |   |
| Net increase in  cash and cash equivalents                                                  |       | 97,160                                        |       | 112,390 |   |
|                                                                                        |       |                                          |       |   |   |
| Cash and cash  equivalents, beginning of period                                             |       | 223,987                                       |       | 24,010 |   |
|                                                                                        |       |                                          |       |   |   |
| Cash and cash  equivalents, end of period                                                   |       | $                                             | 321,147    |   | $ | 136,400 |   |

 

The accompanyingnotes are an integral part of these condensed consolidated financialstatements.

 

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**STARENTNETWORKS, CORP.**

 

**NOTES TO CONDENSED CONSOLIDATEDFINANCIAL STATEMENTS**

 

**1.****    ****Overview**

 

***Business Description***

 

Starent Networks, Corp. (“Starent”or the “Company”) was incorporated in Delaware on August 11, 2000 and is aleading provider of infrastructure hardware and software products and servicesthat enable mobile operators to deliver multimedia services to theirsubscribers. The Company’s products and services integrate multiple networkfunctions and services needed for the delivery of advanced multimedia services,such as video, Internet access, voice-over-IP, e-mail, mobile TV, photo sharingand gaming.

 

***Basis of Presentation***

 

The accompanying interimcondensed consolidated financial statements presented herein have been preparedby the Company, are unaudited and, in the opinion of management, include alladjustments, consisting only of normal, recurring adjustments and accruals,necessary for a fair statement of the Company’s financial position at June 30,2008, results of operations for the three and six months ended June 30,2008 and 2007 and cash flows for the six months ended June 30, 2008 and2007 in accordance with accounting principles generally accepted in the UnitedStates. Interim results are not necessarily indicative of results for any otherinterim period or a full year. The condensed consolidated balance sheetpresented as of December 31, 2007 has been derived from the auditedconsolidated financial statements as of that date.

 

The condensedconsolidated financial statements and notes are presented as permitted by Form 10-Qand do not contain all of the information that is included in the annualfinancial statements and notes of the Company. The condensed consolidatedfinancial statements and notes presented herein should be read in conjunctionwith the financial statements and notes included in the Company’s Annual Reporton Form 10-K for the year ended December 31, 2007.

 

***Significant Estimates and Assumptions***

 

The preparation offinancial statements in conformity with accounting principles generallyaccepted in the United States requires management to make estimates and assumptionsthat affect the reported amounts of assets, liabilities, revenues and expenses,and disclosures of contingent assets and liabilities. Management evaluatesthese estimates and assumptions on an ongoing basis. Significant estimates andassumptions relied upon by management in preparing these financial statementsinclude revenue recognition, allowances for doubtful accounts, net realizablevalue of inventories, expensing and capitalization of research and developmentcosts for software, the determination of fair value of share-based compensationand the recoverability of the Company’s net deferred tax assets and relatedvaluation allowance.

 

Although the Companyregularly assesses these estimates, actual results could differ materially fromthese estimates. Changes in estimates are recorded in the period in which theybecome known. The Company bases its estimates on historical experience andvarious other assumptions that it believes to be reasonable under thecircumstances. Actual results could differ from management’s estimates if pastexperience or other assumptions do not turn out to be substantially accurate.

 

***Concentrations of Risk and Off-Balance-Sheet Risk***

 

The Company has nosignificant off-balance-sheet risk such as foreign exchange contracts, optioncontracts or other foreign hedging arrangements. Financial instruments thatpotentially subject the Company to concentrations of credit risk areprincipally cash and cash equivalents, short-term investments, accountsreceivable and inventories. The Company’s cash equivalents and its short-terminvestments are principally maintained with one commercial bank.

 

The Company had twocustomers for the three and six months ended June 30, 2008, respectively,that each accounted for more than 10% of revenues and in the aggregateaccounted for 85% and 83% of revenues for each of the respective periods. TheCompany had three customers for the three months ended June 30, 2007 thataccounted for more than 10% of revenues and in the aggregate accounted for 89%of revenues. The Company had four customers for the six months ended June 30,2007 that accounted for more than 10% of revenues and in the aggregateaccounted for 90% of revenues.

 

At June 30, 2008,the Company had two customers that accounted for 60% of accounts receivable. AtDecember 31, 2007, the Company had two customers that accounted for 74% ofaccounts receivable.

 

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The Company relies on asingle contract manufacturer to manufacture and assemble its products. TheCompany has no long-term supply arrangements with this manufacturer andaccordingly no obligation exists for the manufacturer to supply products to theCompany in specific quantities or within specific time frames.

 

In addition, certain ofthe components included in the Company’s products are sourced from single orlimited sources and lead times for some of these components may be significant.The Company has no long-term contracts to purchase these components.

 

**2.****    ****Share-Based Compensation**

 

In December 2004,the Financial Accounting Standards Board, or FASB, issued Statement ofFinancial Accounting Standard, or SFAS, 123 (Revised),*Share-Based Payment*, which is a revisionof SFAS 123,*Accounting for Stock-BasedCompensation*. SFAS 123R supersedes Accounting Principles Board,or APB, Opinion 25,*Accounting for StockIssued to Employees* and SFAS 123 and amends SFAS 95,*Statement of Cash Flows*. Generally, theapproach in SFAS 123R is similar to the approach described inSFAS 123. However, SFAS 123R requires all share-based payments toemployees, including grants of employee stock options, to be recognized in theincome statement based on their grant date fair value. The Company adoptedSFAS 123R effective January 1, 2006 utilizing the prospectivetransition method, which requires the Company to apply the provisions ofSFAS 123R only to new awards granted, and to awards modified, repurchasedor cancelled on or after January 1, 2006.

 

The fair value of optionsgranted for the three and six months ended June 30, 2008 and 2007 wasestimated at the date of grant using the following assumptions:

 
| ** **                | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|---------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                | ** ** | **2008**                                        | ** ** | **2007**                                      | ** ** | **2008** | ** ** | **2007** | ** ** |
| Risk-free  interest rates |       | 3.26                                            | %          | 4.76                                          | %          | 3.01 - 3.26 | % | 4.61 - 4.76 | % |
| Expected  dividend yield  |       | 0                                               | %          | 0                                             | %          | 0 | % | 0 | % |
| Expected life             |       | 6.25 years                                      |       | 6.25 years                                    |       | 6.25 years |   | 6.25 years |   |
| Expected  volatility      |       | 54                                              | %          | 64                                            | %          | 54 - 56 | % | 64 - 68 | % |

 

The expected life wascalculated based on the simplified method as permitted by the SEC’s StaffAccounting Bulletin 110, *Share-Based Payment*.The computation of expected volatility was based on the historical volatilityof comparable companies from a representative peer group selected based onindustry and market capitalization. The risk-free interest rate was based on aU.S. Treasury instrument whose term is consistent with the expected life of thestock options. In addition to the assumptions above, as required underSFAS 123R, management made an estimate of expected forfeitures and isrecognizing compensation costs only for those equity awards expected to vest.

 

The results for theperiods set forth below included share-based compensation expense in thefollowing expense categories of the condensed consolidated statements ofoperations (in thousands):

 
| ** **                                            | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                            | ** ** | **2008**                                        | ** ** | **2007**                                      | ** ** | **2008** | ** ** | **2007** | ** ** |
| Share-based  compensation included in:                |       |                                            |       |                                          |       |   |   |   |   |
| Cost of revenues                                      |       | $                                               | 381        |                                          | $          | 130 |   | 694 |   | $ | 198 |   |
| Total  share-based compensation in cost of revenues   |       | 381                                             |       | 130                                           |       | 694 |   | 198 |   |
|                                                  |       |                                            |       |                                          |       |   |   |   |   |
| Research and  development                             |       | 1,803                                           |       | 1,660                                         |       | 3,107 |   | 2,141 |   |
| Sales and  marketing                                  |       | 1,366                                           |       | 644                                           |       | 2,293 |   | 993 |   |
| General and  administrative                           |       | 968                                             |       | 847                                           |       | 1,794 |   | 1,422 |   |
| Total  share-based compensation in operating expenses |       | 4,137                                           |       | 3,151                                         |       | 7,194 |   | 4,556 |   |
| Total  share-based compensation                       |       | $                                               | 4,518      |                                          | $          | 3,281 |   | $ | 7,888 |   | $ | 4,754 |   |
|                                                       |            |                                                 |            |                                               |            |  |  |  |  |  |  |  |  |

 

**3.****    ****Net Income per Share**

 

Basic and diluted netincome per share applicable to common stockholders is presented in conformitywith SFAS 128, *Earnings per Share*and the related interpretation in Emerging Issues Task Force 03-06,*Participating Securities and the Two-Class Methodunder FASB Statement No. 128.* Basic net income per share applicable to common stockholders is computedby dividing net income applicable to common stockholders by theweighted-average number of common shares outstanding during the period,excluding the dilutive effects of common stock equivalents. Income applicableto common stockholders includes accretion of redeemable 

 

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convertible preferredstock and earnings allocated to participating preferred stockholders. Commonstock equivalents include stock options, restricted stock and, in certaincircumstances, convertible securities such as the convertible preferred stock.Diluted net income per share assumes the conversion of the convertiblepreferred stock using the “if converted” method, if dilutive, and includes thedilutive effect of stock options and restricted stock under the treasury stockmethod. The following table presents the calculation of basic and diluted netincome per share (in thousands, except per share data):

 
| ** **                                                  | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                  | ** ** | **2008**                                        | ** ** | **2007**                                      | ** ** | **2008** | ** ** | **2007** | ** ** |
| Net income                                                  |       | $                                               | 13,776     |                                          | $          | 3,381 |   | $ | 23,429 |   | $ | 5,686 |   |
| Accretion of  redeemable convertible preferred stock        |       | —                                          |       | (1,448                                        | )          | — |   | (3,445 | ) |
| Income allocated  to preferred stockholders                 |       | —                                          |       | (1,108                                        | )          | — |   | (1,583 | ) |
| Net income  applicable to common stockholders               |       | $                                               | 13,776     |                                          | $          | 825 |   | $ | 23,429 |   | $ | 658 |   |
|                                                        |       |                                            |       |                                          |       |   |   |   |   |
| Weighted-average  common shares outstanding – basic    |       | 69,379                                          |       | 23,919                                        |       | 69,105 |   | 15,864 |   |
| Dilutive effect  of stock options and restricted stock      |       | 5,028                                           |       | 6,278                                         |       | 5,267 |   | 5,905 |   |
| Weighted-average  common shares outstanding – dilutive |       | 74,407                                          |       | 30,197                                        |       | 74,372 |   | 21,769 |   |
|                                                        |       |                                            |       |                                          |       |   |   |   |   |
| Net income per  share:                                      |       |                                            |       |                                          |       |   |   |   |   |
| Basic                                                       |       | $                                               | 0.20       |                                          | $          | 0.03 |   | $ | 0.34 |   | $ | 0.04 |   |
| Diluted                                                     |       | $                                               | 0.19       |                                          | $          | 0.03 |   | $ | 0.32 |   | $ | 0.03 |   |

 

The following outstandingoptions, restricted common stock subject to repurchase and convertiblepreferred stock were excluded from the computation of diluted net income percommon share for the periods presented because including them would have had ananti-dilutive effect (in thousands):

 
| ** **                                                               | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|--------------------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                               | ** ** | **2008**                                        | ** ** | **2007**                                      | ** ** | **2008** | ** ** | **2007** | ** ** |
| Options to  purchase common stock and common stock subject to repurchase |       | 2,913                                           |       | 66                                            |       | 2,151 |   | 66 |   |
| Convertible  preferred stock (as converted basis)                        |       | —                                          |       | 32,121                                        |       | — |   | 38,171 |   |

 

 

**4.****    ****Fair Value Measurements**

 

On January 1, 2008,the Company adopted the provisions of SFAS 157 ( “SFAS 157”), *Fair Value Measurements,* for its financial assets andliabilities. As permitted by FASB Staff Position No. SFAS 157-2,*Effective Date of FASB Statement No. 157*,the Company elected to defer until January 1, 2009 the adoption ofSFAS 157 for all non-financial assets and non-financial liabilities,except those that are recognized or disclosed at fair value in the financialstatements on a recurring basis. The adoption of this accounting pronouncementdid not have a material effect on the Company’s consolidated financialstatements for financial assets and liabilities and any other assets andliabilities carried at fair value. The Company is currently in the process ofevaluating the impact of adopting this pronouncement for other non-financialassets or liabilities. SFAS 157 provides a framework for measuring fairvalue under generally accepted accounting principles in the United States andrequires expanded disclosures regarding fair value measurements. SFAS 157defines fair value as the exchange price that would be received for an asset orpaid to transfer a liability (an exit price) in the principal or mostadvantageous market for the asset or liability in an orderly transactionbetween market participants on the measurement date. SFAS 157 alsoestablishes a fair value hierarchy that requires an entity to maximize the useof observable inputs, where available, and minimize the use of unobservableinputs when measuring fair value. The standard describes three levels of inputsthat may be used to measure fair value:

 
| Level 1 |   | Quoted prices in active  markets for identical assets or liabilities. At June 30, 2008, the  Company’s Level 1 assets and liabilities included the Company’s money  market funds included in cash and cash equivalents. |
|--------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

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| Level 2 |   | Observable inputs other  than Level 1 prices, such as quoted prices for similar assets or  liabilities; quoted prices in markets that are not active; or other inputs  that are observable or can be corroborated by observable market data for  substantially the full term of the assets or liabilities. At June 30,  2008, the Company had no Level 2 assets or liabilities. |
|--------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|         |   |                                                                                                                                                                                                                                                                                                                                                                                           |
| Level 3 |   | Unobservable inputs  that are supported by little or no market activity and that are significant  to the fair value of the assets or liabilities. At June 30, 2008, the  Company had no Level 3 assets or liabilities.                                                                                                                                                               |

 

At June 30, 2008,the Company’s financial assets and liabilities that were measured at fair valueon a recurring basis included money market funds of $291.3 million, whichwere level 1 financial assets. The Company did not have any non-financialassets or liabilities that were measured or disclosed at fair value on arecurring basis at June 30, 2008. As required by SFAS 157, assets andliabilities measured at fair value are classified in their entirety based onthe lowest level of input that is significant to the fair value measurement.The Company’s assessment of the significance of a particular input to the fairvalue measurement in its entirety requires judgment and considers factorsspecific to the asset or liability.

 

**5.****    ****Inventories**

 

Inventories are stated atthe lower of cost (first-in, first-out) or market (net realizable value).Inventories principally included the cost of raw materials, subassemblies, thecost of third-party contract manufacturers and cost of sales related todeferred revenue (which is included in finished goods). Inventories consisted ofthe following (in thousands):

 
| ** **      | ** ** | **June 30,  2008** | ** ** | **December 31,  2007** | ** ** |
|-----------------|------------|-------------------------|------------|-----------------------------|------------|
| Raw materials   |       | $                       | 3,341      |                        | $          | 4,632 |   |
| Work in process |       | 7,759                   |       | 5,551                       |       |
| Finished goods  |       | 30,419                  |       | 19,455                      |       |
|            |       | $                       | 41,519     |                        | $          | 29,638 |   |

 

**6.****    ****Income Taxes**

 

The Company’s income taxprovisions for the three and six months ended June 30, 2008 and 2007 areprimarily attributable to federal and state income taxes in the U.S. and taxesrelated to foreign jurisdictions.  Thefederal and state tax provisions for those periods included amounts in relationto the Company’s income generated in the U.S., partially reduced by theutilization of available net operating loss (NOL) carryforwards and tax creditsthat were recorded on its balance sheet with a full valuation allowance priorto their utilization.

 

As of June 30, 2008,a full valuation allowance was recorded against the Company’s net deferred taxassets in the U.S. As of December 31, 2007, the Company had U.S. federalNOL carryforwards of $27.6 million, state NOL carryforwards of$28.0 million, U.S. federal tax credits of $4.4 million and stateresearch and development credits of $0.6 million.

 

The Company concludedthat as of June 30, 2008 it was more likely than not that its net deferredtax assets in the U.S. would not be realized. While the Company has realizedoperating profits over the past three years and in the first six months of2008, those profits of the prior years have been marginal in relation to thesize of the Company’s total deferred tax assets, which could increase in sizebased upon future stock option exercises by its employees. Management judgmentis required to determine when the realization of the Company’s deferred taxassets in the future is considered more likely than not. If and when theCompany concludes that realization is more likely than not, it will record areduction to its valuation allowance that will result in increases to netincome and additional paid-in capital in the period such determination is made.It is reasonably possible that this determination could occur later in 2008 orearly 2009.

 

**7.****    ****Litigation**

 

The Company is presentlydefending two patent infringement lawsuits brought against it by UTStarcom, Inc.In February 2005, UTStarcom filed a complaint against the Company in theUnited States District Court for the Northern District of California seekingunspecified damages and injunctive relief. The complaint alleges infringementby the Company of UTStarcom’s U.S. Patent No. 6,829,473, entitled “Roamingand Hand-Off Support for Prepaid Billing for Wireless Data Networks,” which theCompany refers to as the ‘473 patent. In May 2005, the Company answeredthe complaint, denied the infringement allegations contained in the complaint,and filed counterclaims against UTStarcom seeking a declaratory judgment thatthe Company did not infringe the ‘473 patent and that the ‘473 patent wasinvalid and unenforceable. In July 2005, the Company filed an amendedanswer and counterclaims to the ‘473 patent complaint. In December 2006,UTStarcom filed a reissue patent application relating to the ‘473 patent. In January 2007,by agreement of the parties, the District Court stayed the case pending theoutcome of UTStarcom’s reissue application relating to the ‘473 patent. In June 2007,the Company filed a request for*inter partes*  re-examination of all claims of the ‘473patent with the 

 

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United States Patent andTrademark Office on sixteen different grounds. In August 2007, the Patentand Trademark Office granted the Company’s request for*inter partes* re-examination of all claimson all sixteen grounds. In November 2007, the Patent and Trademark Officemerged the reissue and re-examination proceedings. A first office action hasnot yet been issued. The Company believes that it

has meritorious defensesagainst any resulting reissued patent, and the Company is prepared tovigorously defend the ‘473 patent case through trial.

 

In May 2007,UTStarcom filed an additional complaint against the Company and a number of itsemployees and former employees in the United States District Court for theNorthern District of Illinois alleging violations of the Illinois trade secretsact, infringement of five patents assigned to UTStarcom, intentionalinterference with UTStarcom’s business relations and declarations of ownershiprelating to one of the Company’s patents and three of its patent applications.The complaint contains allegations, among others, that a number of formeremployees of a business unit UTStarcom acquired, who subsequently worked forthe Company, took UTStarcom’s trade secrets with them and improperly used thosetrade secrets to develop, manufacture and market the Company’s 3G wirelessproducts, and that such products incorporate various UTStarcom confidentialtechnical information, including UTStarcom’s proprietary virtual privatenetwork and EV-DO features. UTStarcom further alleges that the Company hasdisclosed UTStarcom’s trade secrets in one of its patents and three of itspatent applications, and that this patent and these patent applications legallybelong to UTStarcom based on the inventors’ previous work at the business unitacquired by UTStarcom. In August 2007, the Company and the current andformer employee defendants filed their answers to the complaint. The Companyalso filed counterclaims for tortious interference with prospective economicadvantage, malicious prosecution, a declaration that the patents-in-suit areinvalid and not infringed, and a declaration that one of the patents-in-suit isunenforceable due to inequitable conduct. In December 2007, UTStarcomfiled an amendment to the complaint, which added new claims for declaration ofownership of four more of the Company’s patent applications, copyrightinfringement, breach of restrictive covenants against the employee and formeremployee defendants, and aiding and abetting the employee and former employeedefendants’ breaches of the duty of loyalty and the employment agreements. Theamendment to the complaint also added another employee as a defendant. On January 4,2008, the Company filed a motion to dismiss, or in the alternative for a moredefinite statement regarding, the trade secret, copyright, breaches ofrestrictive covenants, and aiding and abetting claims of the amendment to thecomplaint. UTStarcom filed its opposition to this motion on January 22,2008, and the Company filed its reply on January 29, 2008. On May 20,2008 the Court granted the Company’s motion, in-part, and ordered UTStarcom toprovide a more definite statement of its claims. On May 30, 2008,UTStarcom filed a Third Amended Complaint. On June 9, 2008, the Companymoved to dismiss the trade secret, copyright, breaches of restrictivecovenants, and aiding and abetting claims (Counts I, VI, and VIII-XV) of theThird Amended Complaint, for failure to comply with the Court’s Order toprovide a more definite statement of those claims. On July 23, 2008, theCourt granted the Company’s motion and dismissed those claims. On August 1,2008, UTStarcom filed a “Motion for Leave to Amend the Complaint to Provide aMore Definite Statement and Clarification of the 7/23 Order.”  Following dismissal of the claims, UTStarcom’spatent infringement and declaration of ownership claims remain.  Discovery is proceeding. No trial date hasbeen set. In this lawsuit, UTStarcom seeks unspecified monetary damages,punitive damages, injunctive relief, declarations of ownership relating to thespecified patent and patent applications owned by the Company, findings ofmisappropriation of trade secrets, patent infringement and copyrightinfringement, costs and attorneys fees. The Company believes it has meritoriousdefenses to each of UTStarcom’s claims in this lawsuit and it is prepared tovigorously defend the lawsuit.

 

In addition, the Companyis subject to other legal proceedings, claims and litigation arising in theordinary course of business. Defending lawsuits requires significant managementattention and financial resources and the outcome of any litigation, includingthe matters described above, is inherently uncertain. The Company does not,however, currently expect that the ultimate costs to resolve pending matterswill have a material adverse effect on its consolidated financial position,results of operations or cash flows.

 

**8.****    ****Business Segments**

 

SFAS 131, *Disclosures About Segments of an Enterprise andRelated Information*, establishes standards for reporting informationabout operating segments in annual financial statements and requires selectedinformation of segments to be presented in financial reports issued tostockholders. Operating segments are defined as components of an enterpriseabout which separate financial information is available and that is evaluatedregularly by the chief operating decision maker, or decision making group, indetermining how to allocate resources and assess performance. The Company’schief operating decision maker, as defined under SFAS 131, is the chiefexecutive officer. The Company views its operations and manages its business asone operating segment.

 

Revenue by geography isbased on the billing address of the customer. The following tables set forthrevenue and long-lived assets by geographic area (in thousands):

 

**Revenues**

 
| ** **                | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|---------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                | ** ** | **2008**                                        | ** ** | **2007**                                      | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                | ** ** | ** **                                      | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| United States  and Canada |       | $                                               | 55,707     |                                          | $          | 16,317 |   | $ | 109,642 |   | $ | 36,936 |   |
| Japan                     |       | 3,999                                           |       | 12,828                                        |       | 5,139 |   | 13,524 |   |
| Korea                     |       | 1,111                                           |       | 539                                           |       | 2,074 |   | 6,273 |   |
| Rest of world             |       | 351                                             |       | 1,170                                         |       | 541 |   | 1,763 |   |
| Total                     |       | $                                               | 61,168     |                                          | $          | 30,854 |   | $ | 117,396 |   | $ | 58,496 |   |

 

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**Long-livedAssets**

 
| ** **    | ** ** | **June 30,  2008** | ** ** | **December 31,  2007** | ** ** |
|---------------|------------|-------------------------|------------|-----------------------------|------------|
| United States |       | $                       | 19,050     |                        | $          | 15,614 |   |
| India         |       | 7,216                   |       | 4,676                       |       |
| Rest of world |       | 354                     |       | 162                         |       |
| Total         |       | $                       | 26,620     |                        | $          | 20,452 |   |

 

**9.****    ****Comprehensive Income**

 

Comprehensive incomeconsists of the following (in thousands):

 
| ** **                                           | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                           | ** ** | **2008**                                        | ** ** | **2007**                                      | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                                           | ** ** | ** **                                      | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income                                           |       | $                                               | 13,776     |                                          | $          | 3,381 |   | $ | 23,429 |   | $ | 5,686 |   |
| Change in  unrealized loss on short-term investments |       | (5                                              | )          | (3                                            | )          | (2 | ) | (8 | ) |
| Comprehensive  income                                |       | $                                               | 13,771     |                                          | $          | 3,378 |   | $ | 23,427 |   | $ | 5,678 |   |

 

**10.**** ****Recent Accounting Pronouncements**

 

The Company adopted theprovisions of SFAS 159, *The Fair ValueOption for Financial Assets and Financial Liabilities, including an amendmentof FASB Statement No. 115,* on January 1, 2008.SFAS 159 permits entities to choose, at specified election dates, tomeasure eligible items at fair value (the “fair value option”). Under thispronouncement, a business entity must report unrealized gains and losses onitems for which the fair value option has been elected in earnings at eachsubsequent reporting period. The Company has not elected the fair value optionfor any items on its balance sheet.

 

In June 2008, theFASB issued FASB Staff Position (FSP) EITF 03-6-1, *Determining Whether Instruments Granted in Share-Based PaymentTransactions Are Participating Securities.* This FSP provides thatunvested share-based payment awards that contain nonforfeitable rights todividends or dividend equivalents (whether paid or unpaid) are participatingsecurities and shall be included in the computation of earnings per sharepursuant to the two-class method. Upon adoption, a company is required toretrospectively adjust its earnings per share data (including any amountsrelated to interim periods, summaries of earnings and selected financial data)to conform with the provisions in this FSP. This FSP will be effective for theCompany on January 1, 2009. The Company has not yet determined the impact,if any, of this FSP on its consolidated financial statements.

 

In May 2008, theFASB released SFAS 162, *The Hierarchy of GenerallyAccepted Accounting Principles.* SFAS 162 establishes the GAAPhierarchy and identifies the sources of accounting principles and the frameworkfor selecting principles used in the preparation of financial statements. SFAS162 is effective 60 days following the Securities and Exchange Commission’sapproval of the Public Company Accounting Oversight Board amendments to AU Section 411,*The Meaning of Present Fairly in Conformity withGenerally Accepted Accounting Principles.*The Company has not yetdetermined the impact, if any, of this statement on its consolidated financialstatements.

 

In December 2007,the FASB released SFAS 141 (revised 2007), *Business Combinations*. This statement will significantly changethe accounting for business combinations in a number of areas including thetreatment of contingent consideration, contingencies, acquisition costs, inprocess research and development and restructuring costs. In addition, underthis statement, changes in deferred tax asset valuation allowances and acquiredincome tax uncertainties in a business combination after the measurement periodwill impact income tax expense. This statement will be effective for theCompany on January 1, 2009 and will change its accounting treatment forbusiness combinations on a prospective basis.

 

In December 2007,the FASB released SFAS 160, *NoncontrollingInterests in Consolidated Financial Statements—an amendment of ARB No. 51*.This statement will change the accounting and reporting for minority interests,which will be recharacterized as noncontrolling interests and classified as acomponent of equity. This new consolidation method will significantly changethe accounting for transactions with minority interest holders. This statementwill be effective for the Company on January 1, 2009. The Company has notyet determined the impact, if any, of this statement on its consolidatedfinancial statements.

 

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**ITEM2.  MANAGEMENT’S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

**CautionaryStatement**

 

*ThisQuarterly Report on Form 10-Q, including the information incorporated byreference herein, contains, in addition to historical information,forward-looking statements within the meaning of Section 27A of theSecurities Act of 1933 and Section 21E of the Securities Exchange Act of1934. These forward-looking statements are based on our current expectations,assumptions, estimates and projections regarding our business and industry, andwe do not undertake an obligation to update our forward-looking statements toreflect future events or circumstances. We may, in some cases, use words suchas “project,” “believe,” “anticipate,” “plan,” “expect,” “estimate,” “intend,” “continue,”“should,” “would,” “could,” “potentially,” “will,” “may” or similar words andexpressions that convey uncertainty of future events or outcomes to identifythese forward-looking statements. Forward-looking statements in this QuarterlyReport on Form 10-Q may include statements about:*

 

·*our ability to attract and retain customers;*

 

·*our financial performance;*

 

·*our development activities;*

 

·*the advantages of our technology as compared to that ofothers;*

 

·*our ability to establish and maintain intellectual propertyrights;*

 

·*our ability to retain and hire necessary employees andappropriately staff our operations;*

 

·*the spending of our proceeds from public offerings of ourcommon stock; and*

 

·*our cash needs.*

 

*Theoutcome of the events described in these forward-looking statements is subjectto known and unknown risks, uncertainties and other factors, including thefactors set forth in Part II Item 1A “Risk Factors” in this QuarterlyReport on Form 10-Q, that could cause actual results to differ materiallyfrom the results anticipated by these forward-looking statements. You shouldread these factors and the risks described in other documents that we file fromtime to time with the SEC in conjunction with the unaudited condensedconsolidated financial statements and related notes included elsewhere in thisQuarterly Report on Form 10-Q and in our Annual Report on Form 10-Kfor the year ended December 31, 2007.*

 

**Overview**

 

Starent Networks is aleading provider of infrastructure hardware and software products and servicesthat enable mobile operators to deliver multimedia services to theirsubscribers. We have created hardware and software products that providenetwork functions and services, including access from a wide range of radionetworks to the operator’s packet core network. Our products and services alsoprovide management of subscriber sessions moving between networks andapplication of billing and other session policies. Our products and servicesprovide high performance and system intelligence by combining significantcomputing power, memory and traffic handling capabilities with a flexible, highavailability operating system and other proprietary software. Our productsintegrate multiple network functions and services needed for the delivery ofadvanced multimedia services, such as video, Internet access, voice-over-IP,e-mail, mobile TV, photo sharing and gaming.

 

Our products consist ofboth hardware and software and can be configured to meet a number of customerneeds. We sell our products and services to mobile operators around the worldboth directly and indirectly through our relationships with original equipment manufacturers,or OEMs, system integrators and distributors.

 

In June 2007, wecompleted an initial public offering of our common stock in which we sold andissued 10,580,226 shares of our common stock at a price of $12.00 per share. Weraised a total of $127.0 million in gross proceeds from the initial publicoffering, or $116.0 million in net proceeds after deducting underwritingdiscounts and commissions of $8.9 million and other offering expenses ofapproximately $2.1 million. In connection with the initial publicoffering, all outstanding shares of our convertible preferred stockautomatically converted into an aggregate of 44,287,985 shares of our commonstock.

 

In November 2007, wecompleted an underwritten public offering of 8,000,000 shares of our commonstock at a price to the 

 

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public of $24.00 pershare. We received total net proceeds from the November 2007 publicoffering of approximately $88.1 million, after deducting underwritingdiscounts and commissions and estimated offering expenses.

 

We maintain our corporateheadquarters in Tewksbury, Massachusetts, and have sales and developmentoffices in various locations worldwide. We conduct our research and developmentactivities at two locations in India and two locations in the United States. Asof June 30, 2008, we had 676 employees worldwide. Our revenues for theyear ended December 31, 2007 were $145.8 million, and$61.2 million and $117.4 million for the three and six months ended June 30,2008, respectively. Our net income for the year ended December 31, 2007was $11.5 million, and $13.8 million and $23.4 million for the three andsix months ended June 30, 2008, respectively.

 

***Revenues***

 

Our revenues consist ofboth product revenues and service revenues. We derive product revenues from thesale of our hardware products and the licensing of our software. Servicerevenues are generated from:

 

· maintenanceand technical support associated with our software;

 

· hardwarerepair and maintenance services; and

 

·implementation, training and professional services.

 

We recognize revenue inaccordance with Statement of Position, or SOP, 97-2, *Software Revenue Recognition* and SOP 98-9, *Modification of SOP 97-2, Software RevenueRecognition, With Respect to Certain Transactions*. Accordingly,revenue is recognized when persuasive evidence of an arrangement exists,delivery has occurred, the price is fixed or determinable and collection isprobable.

 

Mobile operators canpurchase our products and license our software in various configurations,depending on their requirements for capacity, features and protocols.Typically, a mobile operator purchases a small amount of equipment for testingand trial purposes and, once testing is complete, purchases the necessaryproducts to meet their initial capacity and feature requirements. As theircapacity requirements increase, operators may purchase additional hardware orlicense additional software. The level of our sales is significantly influencedby the extent to which mobile operators make capital investments to enhance andexpand their networks to provide multimedia services. Mobile operators’ capitalinvestments will be influenced by the demand for multimedia services by theircustomers.

 

We offer our products andservices through our direct sales force to mobile operators and indirectlythrough relationships with OEMs, system integrators and distributors. The OEMs,system integrators and distributors generally purchase our products after theyhave received a purchase order from their customers and do not maintain aninventory of our products in anticipation of sales to their customers.

 

In 2004, we entered intoOEM agreements with Nortel Networks relating to the CDMA and GSM/UMTS markets.Sales to Nortel Networks, all of which were made under the CDMA agreement,accounted for more than 40% of our revenues in 2006. In December 2006, weterminated both OEM agreements. Under the terms of the CDMA agreement, NortelNetworks has a right to continue to purchase our CDMA products for deliverythrough December 2008. Although the termination of the CDMA agreementcould disrupt our relationships with CDMA mobile operators formerly serviced byNortel Networks, we have established and will continue to seek to establishadditional direct sales relationships with some of the CDMA operators formerlyserviced by Nortel Networks. In addition, in May 2008, we established anew reseller relationship with Nortel Networks. As a result, we do not believethat the termination of the Nortel Networks OEM agreements will significantlyimpact our revenues.

 

We believe our revenueswill vary significantly from period-to-period as a result of the following:

 

·*Fluctuations in thetiming of customer orders.*  Mobile operators require significant leadtimes to incorporate changes and enhancements into their networks to ensure thevarious network components are interoperable. These lead times andinteroperability testing requirements result in an extended sales cycle and canlead to uneven purchasing patterns. In addition, our reliance on a relativelysmall number of customers contributes to the variability of our revenues.

 

·*The timing of revenuerecognition in relation to the shipment of products.*  Our products contain softwarewhich is not incidental to our products. Therefore, we recognize revenuepursuant to the requirements of SOP 97-2.  Those requirements often causeus to defer recognition of revenue for a significant period of time aftershipment, as a consequence of certain features of our customer arrangements(such as customer acceptance provisions) as well as the requirement that weestablish company-specific evidence of the fair values of our products andservices.

 

The variability of ourrevenues directly impacts our operating performance in any particular periodsince a significant portion of 

 

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our operating costs, suchas personnel costs, depreciation expense and sales commissions, are eitherfixed in the short-term or may not vary proportionately with recorded revenues.

 

***Cost of Revenues***

 

Cost of revenues consistsof costs of products sold and services provided. Cost of products consistsprimarily of payments to a third party manufacturer for purchased materials andservices and internal costs, such as salaries and benefits related topersonnel, provision for inventory obsolescence and related overhead. The useof an outsourced manufacturer enables us to conserve working capital, adjust tofluctuations in demand and provide for timely delivery to our customers. Costof services consists primarily of salaries and benefits related to professionalservices and technical support personnel, product repair costs, depreciationand related overhead.

 

***Gross Profit***

 

Our gross profit hasbeen, and will be, affected by many factors, including the demand for ourproducts and services, the average selling price of our products, which in turndepends on the mix of product configurations sold, new product introductions,the region of the world in which our customers are located and the volume andcosts of manufacturing our hardware products.

 

***Operating Expenses***

 

Our operating expensesconsist primarily of personnel costs, including salaries, commissions, bonuses,share-based compensation and related benefits and taxes; prototype costsrelated to the design and development of new products and enhancement ofexisting products; and consulting, travel and depreciation expenses. Theexpenses are classified into the following categories for reporting purposes:research and development, sales and marketing and general and administrative.The following is a brief description of the key types of expenses in each ofthese categories:

 

· Researchand development expense consists primarily of personnel costs, prototype costs,consulting services and depreciation. Research and development activities,including hardware and software development and quality assurance testing,primarily occur at two locations in the United States and two locations inIndia.

 

· Sales andmarketing expense consists primarily of personnel costs, travel and marketingprograms such as trade shows. Commissions are a significant component of oursales personnel costs and are recorded as expense when earned, which is notnecessarily directly proportionate to the amount of revenues recorded.

 

· General andadministrative expense consists primarily of personnel costs related to ourexecutive, finance, human resource and information technology organizations,professional fees, insurance and other related overhead.

 

***Other Income (Expense)***

 

Other income (expense)primarily consists of interest income earned on cash and short-terminvestments. We have historically invested our cash in money market funds andother short-term, high-grade investments.

 

Other income (expense)also includes gains (losses) from foreign currency transactions of our foreignsubsidiaries. The functional currency of our foreign operations is the U.S.dollar. Accordingly, all assets and liabilities, except certain long-termassets, of these international subsidiaries are remeasured into U.S. dollarsusing the exchange rates in effect at the balance sheet date. Revenues andexpenses of these international subsidiaries are generally remeasured into U.S.dollars at the average rates in effect during the year.

 

**Applicationof Critical Accounting Policies and Use of Estimates**

 

Our financial statementsare prepared in accordance with accounting principles generally accepted in theUnited States of America. The preparation of these financial statements andrelated disclosures require us to make estimates, assumptions and judgmentsthat affect the reported amounts of assets and liabilities and disclosure ofcontingent assets and liabilities at the date of the financial statements andthe reported amounts of revenues and expenses during the reporting period. Webase our estimates on historical experience and on various other assumptionsthat we believe to be reasonable under the circumstances. We evaluate ourestimates and assumptions on an ongoing basis. Our actual results may differsignificantly from these estimates under different assumptions or conditions.

 

We believe that of oursignificant accounting policies, which are described in note 2 to theconsolidated financial statements included in our Annual Report on Form 10-Kfor the year ended December 31, 2007, the following accounting policiesinvolve a greater degree of judgment and complexity. Accordingly, we believethese are the most critical to fully understand and evaluate our financialcondition and results of operations.

 

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***Revenue Recognition***

 

Generally, our revenuesare generated through fulfillment of contractual arrangements that containmultiple elements, including equipment with embedded software and services,such as installation, training, consulting and maintenance and support, orM&S. We recognize revenue in accordance with SOP 97-2 andSOP 98-9. Accordingly, revenue is recognized when persuasive evidence ofan arrangement exists, delivery has occurred, the price is fixed ordeterminable and collection is probable. Certain of these requirements, mostnotably the customer acceptance terms generally included in our contracts andour need to establish fair values of our products and services based on factsspecific to our operations, are critical to the timing and extent of ourrevenue recognition. As a result of these factors, a significant majority ofour contractual arrangements result in the deferral of revenue and the timeperiod for deferral may be significant. In addition, in certain circumstances,pricing considerations must be assessed to determine whether the price is fixedor determinable.

 

Product revenues consistof revenues from sales of our hardware and licensing of our software. Productsales generally include a perpetual license to our software. Product revenuesare generally recognized at shipment or upon customer acceptance, ifcontractually required, assuming all other revenue recognition criteria aremet. Substantially all of our products have been sold in conjunction withproduct support services, which consist of software updates and productsupport. Software updates provide customers with rights to unspecified softwareproduct upgrades and to maintenance releases and patches released during theterm of the support period. Revenues for support services are recognized on astraight-line basis over the service contract term, which is generally 12 to15 months.

 

Pursuant toSOP 97-2, revenue is allocated to deliverables based on vendor specificobjective evidence of fair value, or VSOE, when VSOE exists. Generally, allrevenue for an arrangement is initially deferred when VSOE does not exist forany undelivered element and is subsequently recognized ratably over thecontractual M&S period when M&S is the only undelivered element. IfVSOE exists for the undelivered elements, but not the delivered elements,revenue is recognized under the residual method set forth in SOP 98-9,which provides that revenue is recognized based on the difference between thetotal arrangement fee and the VSOE of the undelivered elements. Revenue for theundelivered elements is then recorded as those elements are delivered. When wedefer revenue in an arrangement, the related product costs are also deferred,subject to their realizability, and recognized in or over the same period asthe related revenue.

 

The determination of VSOEis highly judgmental and is a key factor in determining whether revenue may berecognized or must be deferred and the extent to which it may be recognizedonce the various elements of an arrangement are delivered. We assess VSOE basedon previous sales of products and services, the type and size of customer,renewal rates in contracts and the geographic location of the customer. Wemonitor VSOE on an ongoing basis. As noted above, most of our arrangementsinclude multiple elements, some of which are delivered in or over futureperiods. Therefore, a change in our assessment of, or our inability to establish,VSOE for products or services may result in significant variation in ourrevenues and operating results.

 

In arrangements wherecash consideration is paid to a customer, the payments are recorded inaccordance with Emerging Issues Task Force, or EITF, 01-9,*Accounting for Consideration Given by a Vendor to aCustomer (Including a Reseller of the Vendor’s Products)*, whichgenerally requires the consideration be recorded as a reduction of revenues.

 

***Share-Based Compensation***

 

Prior to January 1,2006, we accounted for our stock-based awards to employees using the intrinsicvalue method prescribed in Accounting Principles Board, or APB, Opinion 25,*Accounting for Stock Issued to Employees*,and related interpretations. Under the intrinsic value method, compensationexpense is measured on the date of the grant as the difference between thedeemed fair value of our common stock and the exercise or purchase pricemultiplied by the number of stock options or restricted stock awards granted.In addition, through December 31, 2005, we accounted for share-basedcompensation expense for non-employees using the fair value method prescribedby Statement of Financial Accounting Standards, or SFAS, 123,*Accounting for Stock-Based Compensation,*  applying the Black-Scholes option-pricingmodel, and recorded the fair value, for financial reporting purposes, ofnon-employee stock options as an expense over either the vesting term of theoption or the service period.

 

In December 2004,the Financial Accounting Standards Board, or FASB, issued SFAS 123R, *Share-Based Payment*, which requirescompanies to expense the fair value of employee stock options and other formsof share-based compensation. We adopted SFAS 123R effective January 1,2006. SFAS 123R requires nonpublic companies that used the minimum valuemethod in SFAS 123 for either recognition or pro forma disclosures toapply SFAS 123R using the prospective-transition method. As such, we willcontinue to apply APB Opinion 25 in future periods to equity awards outstandingprior to the date of our adoption of SFAS 123R. In accordance withSFAS 123R, we will recognize the compensation cost of share-based awardson a graded-vesting basis over the vesting period of the award. Effective withthe adoption of SFAS 123R, we elected to use the Black-Scholes optionpricing model to determine the weighted average fair value of stock optionsgranted or modified.

 

Since January 1,2006, we account for equity instruments issued to nonemployees in accordancewith the provisions of SFAS 123R (the requirements of which are consistentwith those previously utilized under SFAS 123) and EITF Issue 96-18,**

 

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*Accountingfor Equity Instruments That Are Issued to Other Than Employees for Acquiring,or in Conjunction with Selling, Goods or Services* .

 

Several key assumptionsare made in determining the grant date fair value of our stock options,including: the grant date market value of our common stock, the rate ofvolatility, the risk-free interest rate and the rate of expected forfeitures.As there was no public market for our common stock prior to our initial publicoffering, the determination of the fair market value of our common stock wasdetermined by our board of directors. Due to the limited trading history of ourcommon stock, we have determined the volatility for options granted after January 1,2006 based on an analysis of reported data for a peer group of companies thatissued options with substantially similar terms. The expected volatility ofoptions granted has been determined using an average of the historicalvolatility measures of this peer group of companies. The expected life ofoptions has been determined utilizing the “simplified” method as prescribed bythe SEC’s Staff Accounting Bulletin No. 110,*Share-Based Payment*, resulting in an expected life for thethree and six months ended June 30, 2008 and 2007 of 6.25 years. Therisk-free interest rate is based on a U.S. treasury instrument whose term isconsistent with the expected life of the stock options. We have not paid, anddo not anticipate paying, cash dividends on our shares of common stock;therefore, the expected dividend yield was assumed to be zero. In addition,SFAS 123R requires companies to utilize an estimated forfeiture rate whencalculating the expense for the period. As a result, we applied an estimatedforfeiture rate of 3%, based on a review of our historical forfeitures, to determinethe expense recorded in our consolidated statements of operations. Significantchanges in these assumptions, especially the expected life of options,forfeiture rate and volatility could have a significant impact on our resultsof operations.

 

For the three and sixmonths ended June 30, 2008, we recorded expense of $4.5 million and $7.9million in connection with share-based awards. As of June 30, 2008, we had$24.3 million of unrecognized expense related to non-vested options thatis expected to be recognized over a weighted average period of 1.6 years.

 

***Inventory***

 

We carry our inventory atthe lower of historical cost or net realizable value assuming inventory itemsare consumed on a first-in, first-out basis. We recognize inventory lossesbased on obsolescence and levels in excess of forecasted demand. In thesecases, inventory is written down to estimated realizable value based onhistorical usage and expected demand. Inherent in our estimates of market valuein determining inventory valuation are estimates related to economic trends,future demand for our products and technical obsolescence of our products. Iffuture demand or market conditions are less favorable than our projections,additional inventory write-downs could be required and would be reflected inthe cost of revenues in the period the revision is made. To date, we have notbeen required to revise any of our assumptions or estimates used to determineour inventory valuations.

 

When products have beendelivered, but the product revenues associated with the arrangement have beendeferred as a result of not meeting the revenue recognition criteria requiredby SOP 97-2, we defer the related inventory costs for the delivered items.

 

***Income Taxes***

 

We are subject to incometaxes in both the United States and foreign jurisdictions and we use estimatesin determining our provisions for income taxes. We account for income taxes inaccordance with SFAS 109,*Accountingfor Income Taxes*, which is the asset and liability method foraccounting and reporting for income taxes. Under SFAS 109, deferred taxassets and liabilities are recognized based on temporary differences betweenthe financial reporting and income tax bases of assets and liabilities usingstatutory rates.  We provide for incometaxes during interim periods based on the estimated effective tax rate for thefull fiscal year, and record a cumulative adjustment to the tax provision in aninterim period in which a change in the estimated annual effective tax rate isdetermined.

 

For the three and sixmonths ended June 30, 2008, our effective tax rates were 8.9% and 7.1%,respectively. For the three and six months ended June 30, 2007, oureffective tax rates were 4.6% and 6.7%, respectively. Those effective tax rateswere lower than the statutory federal income tax rate of 35% due primarily toour use of net operating loss carryforwards, or NOLs, to offset our U.S.taxable income (which reduced the valuation allowance we had previouslyrecorded against those NOLs), partially offset by the impact of taxes owed inrelation to the income generated by our foreign subsidiaries.

 

As of June 30, 2008,a full valuation allowance was recorded against our net deferred tax assets inthe U.S. As of December 31, 2007, we had U.S. federal NOL carryforwards of$27.6 million, state NOL carryforwards of $28.0 million, U.S. federaltax credits of $4.4 million, and state research and development credits of$0.6 million. Management judgment is required to determine when the realizationof our deferred tax assets in the future is considered more likely than not.While we have realized operating profits over the past three years and in thefirst six months of 2008, those profits of the prior years have been marginalin relation to the size of our total deferred tax assets, which could increasein size based upon future stock option exercises by our employees. Accordingly,we have not yet concluded that realization of our U.S. deferred tax assets inthe future is more likely than not. For the remainder of 2008, we will continueto review our operating results to determine if it becomes more likely than notthat our deferred tax assets will be realized in the future, at which time wewould reduce some or all of the valuation allowance. It is reasonably possiblethat this 

 

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determination could occurlater in 2008 or early 2009. Any reduction in our valuation allowance in thefuture would result in an income tax benefit and higher stockholders’ equity inthe period such determination is made and could have a negative impact on ourreported net income in future fiscal years as we would expect to beginrecording a higher provision for income taxes. Any reduction in our valuationallowance would not impact our cash flows.

 

Income tax expenserelated to our international subsidiaries generally results from taxable incomegenerated by the subsidiary pursuant to intercompany service agreements. Webelieve the compensation associated with these service agreements is reasonablein light of the level and nature of services performed by our subsidiaries.However, if a foreign tax jurisdiction or the Internal Revenue Service were tochallenge these arrangements, we could be subject to additional income taxexpense either in the United States or the foreign jurisdiction.

 

On January 1, 2007,we adopted the provisions of FASB Interpretation, or FIN, No. 48, *Accounting for Uncertainty in Income Taxes*,*an interpretation of SFAS 109*.The new standard defines the threshold for recognizing the benefits of taxreturn positions in the financial statements as “more-likely-than-not” to besustained by the taxing authorities based solely on the technical merits of theposition. If the recognition threshold is met, the tax benefit is measured andrecognized as the largest amount of tax benefit, in our judgment, which isgreater than 50% likely to be realized. We did not recognize any change in ourreserves for uncertain tax positions as a result of the adoption of thisstandard. At the adoption date of January 1, 2007, we had approximately$0.1 million of unrecognized tax benefits, the benefit of which, if recognized,would favorably affect the income tax rate in future periods. At June 30,2008, we had a liability of approximately $0.3 million related to unrecognizedtax benefits.

 

We recognize interest andpenalties related to uncertain tax positions in income tax expense. Upon ouradoption of FIN 48 and at June 30, 2008, we had an immaterial amountof accrued interest and penalties associated with our uncertain tax positions.

 

We have accumulatedsignificant losses from our inception in August 2000. Since the netoperating losses may potentially be utilized in future years to reduce taxableincome, all of our tax years remain open to examination by the major taxingjurisdictions to which we are subject.

 

***Research and Development Expense***

 

Research and developmentexpense includes costs incurred to develop intellectual property. Research anddevelopment costs are charged to operations as incurred. The costs to developnew software and substantial enhancements to existing software are expensed asincurred until technological feasibility has been established, at which timeany additional costs would be capitalized. We have determined technologicalfeasibility is established at the time a working model of software iscompleted. The time period during which costs could be capitalized, from thepoint of reaching technological feasibility until the time of general productrelease, is short. Consequently, the amounts that could be capitalized are notmaterial to our financial position or results of operations and therefore havebeen charged to expense as incurred.

 

**Resultsof Operations**

 

*Revenues*

 

The following table setsforth our revenues by type and geographic location of our customers.

 
| ** **                      | ** ** | **Three Months Ended June 30,** | ** ** | ** **    | ** ** |
|---------------------------------|------------|-----------------------------------------------------|------------|---------------|------------|
| ** **                      | ** ** | **2008**                                            | ** ** | **2007**      | ** ** | **Period-to-Period** | ** ** |
| ** **                      | ** ** | ** **                                          | ** ** | **% of** | ** ** | ** ** | ** ** | **% of** | ** ** | **Change** | ** ** |
| ** **                      | ** ** | **Amount**                                          | ** ** | **Revenues**  | ** ** | **Amount** | ** ** | **Revenues** | ** ** | **Amount** | ** ** | **Percentage** | ** ** |
| ** **                      | ** ** | **(dollars in thousands)**                | ** ** |
| **Revenues:**                   |       |                                                |       |          |       |   |   |   |   |   |   |   |   |   |   |
| Product                         |       | $                                                   | 52,160     |          | 85         | % |   | $ | 25,121 |   | 81 | % |   | $ | 27,039 |   | 108 | % |   |
| Service                         |       | 9,008                                               |       | 15            |       |   | 5,733 |   | 19 |   |   | 3,275 |   | 57 |   |   |
| Total revenues                  |       | $                                                   | 61,168     |          | 100        | % |   | $ | 30,854 |   | 100 | % |   | $ | 30,314 |   | 98 | % |   |
|                            |       |                                                |       |          |       |   |   |   |   |   |   |   |   |   |   |   |
| **Revenues  by Customer Type:** |       |                                                |       |          |       |   |   |   |   |   |   |   |   |   |   |   |
| Direct                          |       | $                                                   | 55,604     |          | 91         | % |   | $ | 11,111 |   | 36 | % |   | $ | 44,493 |   | 400 | % |   |
| Indirect                        |       | 5,564                                               |       | 9             |       |   | 19,743 |   | 64 |   |   | (14,179 | ) | (72 | ) |   |
| Total revenues                  |       | $                                                   | 61,168     |          | 100        | % |   | $ | 30,854 |   | 100 | % |   | $ | 30,314 |   | 98 | % |   |
|                            |       |                                                |       |          |       |   |   |   |   |   |   |   |   |   |   |   |
| **Revenues  by Geography:**     |       |                                                |       |          |       |   |   |   |   |   |   |   |   |   |   |   |
| United States  and Canada       |       | $                                                   | 55,707     |          | 91         | % |   | $ | 16,317 |   | 53 | % |   | $ | 39,390 |   | 241 | % |   |
| Japan                           |       | 3,999                                               |       | 7             |       |   | 12,828 |   | 42 |   |   | (8,829 | ) | (69 | ) |   |
| Korea                           |       | 1,111                                               |       | 2             |       |   | 539 |   | 2 |   |   | 572 |   | 106 |   |   |
| Rest of world                   |       | 351                                                 |       | —        |       |   | 1,170 |   | 3 |   |   | (819 | ) | (70 | ) |   |
| Total revenues                  |       | $                                                   | 61,168     |          | 100        | % |   | $ | 30,854 |   | 100 | % |   | $ | 30,314 |   | 98 | % |   |

 

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Revenues increased$30.3 million, or 98%, in the quarter ended June 30, 2008 compared tothe same quarter in 2007, primarily due to increased product revenues of $27.0million. Product revenues increased primarily due to product shipments in the UnitedStates and Canada for which we received customer acceptances and recognizedrevenue in the second quarter of 2008 versus the same period of 2007 and to alesser extent due to the higher sales price of our ST40 platform as compared toour ST16 platform. Japan revenues decreased $8.8 million, or 69%, in thequarter ended June 30, 2008 compared to the same quarter in 2007,primarily due to lower acceptances received in the current quarter due to thetiming of product and software delivery.

 

The $3.3 millionincrease in service revenues in the second quarter of 2008 compared to the sameperiod in 2007 was due to an increased amount of our products installed atmobile operators, which is generally the basis of maintenance and service fees,as compared to the same period in 2007.

 

Indirect revenuedecreased in the second quarter of 2008 compared to the second quarter of 2007due primarily to the conversion of indirect customers formerly serviced byNortel Networks to direct sales relationships.

 
| ** **                  | ** ** | **Six Months Ended June 30,** | ** ** | ** **    | ** ** |
|-----------------------------|------------|---------------------------------------------------|------------|---------------|------------|
| ** **                  | ** ** | **2008**                                          | ** ** | **2007**      | ** ** | **Period-to-Period** | ** ** |
| ** **                  | ** ** | ** **                                        | ** ** | **% of** | ** ** | ** ** | ** ** | **% of** | ** ** | **Change** | ** ** |
| ** **                  | ** ** | **Amount**                                        | ** ** | **Revenues**  | ** ** | **Amount** | ** ** | **Revenues** | ** ** | **Amount** | ** ** | **Percentage** | ** ** |
| ** **                  | ** ** | **(dollars in thousands)**              | ** ** |
| **Revenues:**               |       |                                              |       |          |       |   |   |   |   |   |   |   |   |   |   |   |
| Product                     |       | $                                                 | 101,047    |          | 86         | % |   | $ | 49,573 |   | 85 | % |   | $ | 51,474 |   | 104 | % |   |
| Service                     |       | 16,349                                            |       | 14            |       |   | 8,923 |   | 15 |   |   | 7,426 |   | 83 |   |   |
| Total revenues              |       | $                                                 | 117,396    |          | 100        | % |   | $ | 58,496 |   | 100 | % |   | $ | 58,900 |   | 101 | % |   |
|                        |       |                                              |       |          |       |   |   |   |   |   |   |   |   |   |   |   |
| **Revenues  by Type:**      |       |                                              |       |          |       |   |   |   |   |   |   |   |   |   |   |   |
| Direct                      |       | $                                                 | 109,322    |          | 93         | % |   | $ | 29,094 |   | 50 | % |   | $ | 80,228 |   | 276 | % |   |
| Indirect                    |       | 8,074                                             |       | 7             |       |   | 29,402 |   | 50 |   |   | (21,328 | ) | (73 | ) |   |
| Total revenues              |       | $                                                 | 117,396    |          | 100        | % |   | $ | 58,496 |   | 100 | % |   | $ | 58,900 |   | 101 | % |   |
|                        |       |                                              |       |          |       |   |   |   |   |   |   |   |   |   |   |   |
| **Revenues  by Geography:** |       |                                              |       |          |       |   |   |   |   |   |   |   |   |   |   |   |
| United States  and Canada   |       | $                                                 | 109,642    |          | 93         | % |   | $ | 36,936 |   | 63 | % |   | $ | 72,706 |   | 197 | % |   |
| Japan                       |       | 5,139                                             |       | 4             |       |   | 13,524 |   | 23 |   |   | (8,385 | ) | (62 | ) |   |
| Korea                       |       | 2,074                                             |       | 2             |       |   | 6,273 |   | 11 |   |   | (4,199 | ) | (67 | ) |   |
| Rest of world               |       | 541                                               |       | —        |       |   | 1,763 |   | 3 |   |   | (1,222 | ) | (69 | ) |   |
| Total revenues              |       | $                                                 | 117,396    |          | 100        | % |   | $ | 58,496 |   | 100 | % |   | $ | 58,900 |   | 101 | % |   |

 

Revenues increased$58.9 million, or 101%, in the six months ended June 30, 2008 ascompared to the same period in 2007, primarily due to increased product salesto existing customers. Product revenues, which include hardware and softwaresales, increased $51.5 million in the first half of 2008 as compared tothe same period in 2007 due primarily to increased sales to major mobileoperators in the United States and Canada. The increase in revenues waspartially offset by the decrease in revenues in Korea, related primarily to therecognition of approximately $5.5 million due to the delivery of specificsoftware functionality during the first quarter of 2007 and decreased revenuesin Japan, as discussed above.

 

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*Cost ofRevenues and Gross Profit*

 
| ** **              | ** ** | **Three Months Ended June 30,** | ** ** | ** **    | ** ** |
|-------------------------|------------|-----------------------------------------------------|------------|---------------|------------|
| ** **              | ** ** | **2008**                                            | ** ** | **2007**      | ** ** | ** ** | ** ** |
| ** **              | ** ** | ** **                                          | ** ** | **% of** | ** ** | ** ** | ** ** | **% of** | ** ** | **Period-to-Period** | ** ** |
| ** **              | ** ** | ** **                                          | ** ** | **Related**   | ** ** | ** ** | ** ** | **Related** | ** ** | **Change** | ** ** |
| ** **              | ** ** | **Amount**                                          | ** ** | **Revenues**  | ** ** | **Amount** | ** ** | **Revenues** | ** ** | **Amount** | ** ** | **Percentage** | ** ** |
| ** **              | ** ** | **(dollars in thousands)**                | ** ** |
| **Cost of  revenues:**  |       |                                                |       |          |       |   |   |   |   |   |   |   |   |   |   |   |
| Product                 |       | $                                                   | 9,497      |          | 18         | % |   | $ | 6,316 |   | 25 | % |   | $ | 3,181 |   | 50 | % |   |
| Services                |       | 3,806                                               |       | 42            |       |   | 1,942 |   | 34 |   |   | 1,864 |   | 96 |   |   |
| Total cost of  revenues |       | $                                                   | 13,303     |          | 22         | % |   | $ | 8,258 |   | 27 | % |   | $ | 5,045 |   | 61 | % |   |
| **Gross  Profit:**      |       |                                                |       |          |       |   |   |   |   |   |   |   |   |   |   |   |
| Product                 |       | $                                                   | 42,663     |          | 82         | % |   | $ | 18,805 |   | 75 | % |   | $ | 23,858 |   | 127 | % |   |
| Services                |       | 5,202                                               |       | 58            |       |   | 3,791 |   | 66 |   |   | 1,411 |   | 37 |   |   |
| Total gross  profit     |       | $                                                   | 47,865     |          | 78         | % |   | $ | 22,596 |   | 73 | % |   | $ | 25,269 |   | 112 | % |   |

 

Product gross marginincreased 7 percentage points to 82% in the second quarter of 2008 as comparedto the same period in 2007. Both periods included higher levels ofsoftware-only transactions, resulting in gross margins higher than our historicalamounts. We anticipate that our gross margins will decrease somewhat insubsequent quarters of 2008 based on the anticipated mix of products sold.

 

During the second quarterof 2008, the $1.9 million increase in cost of services was primarily dueto higher personnel and overhead costs associated with additional customersupport and training personnel that were added since the second quarter of 2007.We anticipate cost of services will increase in future periods as we continueto expand our customer support organization geographically during the remainderof 2008.

 
| ** **              | ** ** | **Six Months Ended June 30,** | ** ** | ** **    | ** ** |
|-------------------------|------------|---------------------------------------------------|------------|---------------|------------|
| ** **              | ** ** | **2008**                                          | ** ** | **2007**      | ** ** | ** ** | ** ** |
| ** **              | ** ** | ** **                                        | ** ** | **% of** | ** ** | ** ** | ** ** | **% of** | ** ** | **Period-to-Period** | ** ** |
| ** **              | ** ** | ** **                                        | ** ** | **Related**   | ** ** | ** ** | ** ** | **Related** | ** ** | **Change** | ** ** |
| ** **              | ** ** | **Amount**                                        | ** ** | **Revenues**  | ** ** | **Amount** | ** ** | **Revenues** | ** ** | **Amount** | ** ** | **Percentage** | ** ** |
| ** **              | ** ** | **(dollars in thousands)**              | ** ** |
| **Cost of  revenues:**  |       |                                              |       |          |       |   |   |   |   |   |   |   |   |   |   |   |
| Product                 |       | $                                                 | 18,546     |          | 18         | % |   | $ | 10,754 |   | 22 | % |   | $ | 7,792 |   | 72 | % |   |
| Services                |       | 7,716                                             |       | 47            |       |   | 3,329 |   | 37 |   |   | 4,387 |   | 132 |   |   |
| Total cost of  revenues |       | $                                                 | 26,262     |          | 22         | % |   | $ | 14,083 |   | 24 | % |   | $ | 12,179 |   | 86 | % |   |
| **Gross  Profit:**      |       |                                              |       |          |       |   |   |   |   |   |   |   |   |   |   |   |
| Product                 |       | $                                                 | 82,501     |          | 82         | % |   | $ | 38,819 |   | 78 | % |   | $ | 43,682 |   | 113 | % |   |
| Services                |       | 8,633                                             |       | 53            |       |   | 5,594 |   | 63 |   |   | 3,039 |   | 54 |   |   |
| Total gross  profit     |       | $                                                 | 91,134     |          | 78         | % |   | $ | 44,413 |   | 76 | % |   | $ | 46,721 |   | 105 | % |   |

 

Product grossmargin increased 4 percentage points as a percentage of revenue in the firstsix months of 2008 as compared to the same period in 2007 due primarily to ahigher proportion of software revenue and to a lesser extent the higher averagesales price of our ST40.

 

The$4.4 million increase in cost of services was primarily due to higherpersonnel costs, depreciation expense and overhead costs associated withadditional customer support and training personnel that were added during 2008and in the second half of 2007. We anticipate cost of services will increase infuture periods as we continue to increase the number of customer supportpersonnel we employ and continue to expand our customer support testingfacilities.

 

Gross profit onservices increased 54% during the first six months of 2008 as a result of theincrease in our installed base though the increase was at a lower rate than thegrowth in service revenue due to the increased costs of services describedabove.

 

We believe ouroverall gross margin for the remainder of 2008 will decrease somewhat from the78% achieved in the first half of 2008, as we expect to incur implementationcosts related to installations of our solutions at new customers during thesecond half of 2008.

 

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*OperatingExpenses*

* *
| ** **                  | ** ** | **Three Months Ended June 30,** | ** ** | ** **    | ** ** |
|-----------------------------|------------|-----------------------------------------------------|------------|---------------|------------|
| ** **                  | ** ** | **2008**                                            | ** ** | **2007**      | ** ** | **Period-to-Period** | ** ** |
| ** **                  | ** ** | ** **                                          | ** ** | **% of** | ** ** | ** ** | ** ** | **% of** | ** ** | **Change** | ** ** |
| ** **                  | ** ** | **Amount**                                          | ** ** | **Revenues**  | ** ** | **Amount** | ** ** | **Revenues** | ** ** | **Amount** | ** ** | **Percentage** | ** ** |
| ** **                  | ** ** | **(dollars in thousands)**                | ** ** |
| Research and  development   |       | $                                                   | 12,500     |          | 20         | % |   | $ | 7,585 |   | 25 | % |   | $ | 4,915 |   | 65 | % |   |
| Sales and  marketing        |       | 16,173                                              |       | 26            |       |   | 8,867 |   | 29 |   |   | 7,306 |   | 82 |   |   |
| General and  administrative |       | 5,931                                               |       | 10            |       |   | 3,398 |   | 11 |   |   | 2,533 |   | 75 |   |   |
| Total operating  expenses   |       | $                                                   | 34,604     |          | 57         | % |   | $ | 19,850 |   | 64 | % |   | $ | 14,754 |   | 74 | % |   |

* *
| ** **                  | ** ** | **Six Months Ended June 30,** | ** ** | ** **    | ** ** |
|-----------------------------|------------|---------------------------------------------------|------------|---------------|------------|
| ** **                  | ** ** | **2008**                                          | ** ** | **2007**      | ** ** | **Period-to-Period ** | ** ** |
| ** **                  | ** ** | ** **                                        | ** ** | **% of** | ** ** | ** ** | ** ** | **% of** | ** ** | **Change** | ** ** |
| ** **                  | ** ** | **Amount**                                        | ** ** | **Revenues**  | ** ** | **Amount** | ** ** | **Revenues** | ** ** | **Amount** | ** ** | **Percentage** | ** ** |
| ** **                  | ** ** | **(dollars in thousands)**              | ** ** |
| Research and  development   |       | $                                                 | 24,843     |          | 21         | % |   | $ | 17,651 |   | 30 | % |   | $ | 7,192 |   | 41 | % |   |
| Sales and  marketing        |       | 35,024                                            |       | 30            |       |   | 15,936 |   | 27 |   |   | 19,088 |   | 120 |   |   |
| General and  administrative |       | 11,087                                            |       | 9             |       |   | 6,242 |   | 11 |   |   | 4,845 |   | 78 |   |   |
| Total operating  expenses   |       | $                                                 | 70,954     |          | 60         | % |   | $ | 39,829 |   | 68 | % |   | $ | 31,125 |   | 78 | % |   |

* *

*PersonnelCosts.*    Personnel costs are our largestexpense, representing 62% and 64% of our total operating expenses for the threeand six months ended June 30, 2008. These costs consist of cash and stockcomponents. The cash component of compensation included in each expensecategory is set forth below.

 
| ** **                                           | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                           | ** ** | **2008**                                        | ** ** | **2007**                                      | ** ** | **Change** | ** ** | **2008** | ** ** | **2007** | ** ** | **Change** | ** ** |
| ** **                                           | ** ** | **(dollars in thousands)**            | ** ** |
| Research and development                   |       | $                                               | 6,053      |                                          | $          | 4,890 |   | $ | 1,163 |   | $ | 12,584 |   | $ | 9,468 |   | $ | 3,116 |   |
| Sales and  marketing                                 |       | 9,507                                           |       | 5,471                                         |       | 4,036 |   | 22,045 |   | 9,535 |   | 12,510 |   |
| General and  administrative                          |       | 1,799                                           |       | 1,305                                         |       | 494 |   | 3,664 |   | 2,266 |   | 1,398 |   |
| Total cash-based  compensation in operating expenses |       | $                                               | 17,359     |                                          | $          | 11,666 |   | $ | 5,693 |   | $ | 38,293 |   | $ | 21,269 |   | $ | 17,024 |   |

 

The increase in personnelcosts above were due primarily to a higher number of employees and higher salescommissions in the three and six months ended June 30, 2008 compared tothe same periods of 2007. We added 175 employees since June 30, 2007, 106in research and development, 15 in sales and marketing, 30 in support, 18 ingeneral and administrative and the remainder in operations, resulting in totalemployees of 676 at June 30, 2008. The increase in commissions was due toour high sales volume in the latter half of 2007 for which commissions wereearned during the first half of 2008 and those commissions being at a higherrate in 2008 than in 2007. We anticipate sales commissions as a percentage ofrevenues to decrease in subsequent periods of 2008.

 

In addition to cashcompensation, we grant equity instruments to our employees, resulting in therecognition of share-based compensation in accordance with SFAS 123R,which is a significant portion of our personnel costs. The share-basedcompensation included in each expense category is set forth below.

 
| ** **                                            | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                            | ** ** | **2008**                                        | ** ** | **2007**                                      | ** ** | **Change** | ** ** | **2008** | ** ** | **2007** | ** ** | **Change** | ** ** |
| ** **                                            | ** ** | **(dollars in thousands)**            | ** ** |
| Research and  development                             |       | $                                               | 1,803      |                                          | $          | 1,660 |   | $ | 143 |   | $ | 3,107 |   | $ | 2,141 |   | $ | 966 |   |
| Sales and  marketing                                  |       | 1,366                                           |       | 644                                           |       | 722 |   | 2,293 |   | 993 |   | 1,300 |   |
| General and  administrative                           |       | 968                                             |       | 847                                           |       | 121 |   | 1,794 |   | 1,422 |   | 372 |   |
| Total  share-based compensation in operating expenses |       | $                                               | 4,137      |                                          | $          | 3,151 |   | $ | 986 |   | $ | 7,194 |   | $ | 4,556 |   | $ | 2,638 |   |

 

These charges amounted to7% and 6% of revenues for the three and six months ended June 30, 2008,respectively. The increase in the share-based compensation expense in the 2008period as compared to the same period of 2007 was due primarily to the increasein the fair value of our common stock at the time the share-based awards weregranted and our higher number of employees.

 

*Researchand development.*    Research anddevelopment expenses increased $4.9 million, or 65%, in the second quarterof 2008 

 

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compared to the samequarter in 2007. The increase was due to increases in cash and share-basedcompensation of $1.2 million and $0.1 million, respectively, higher depreciationexpense of $1.4 million, higher consulting expense of $0.6 million and a$1.2 million decrease related to reimbursements for non-recurring engineeringprojects which are recorded as a reduction of operating expense, partiallyoffset by lower prototype and related equipment expenses of $0.1 million.Research and development expenses increased $7.2 million, or 41%, for thesix months ended June 30, 2008 compared to the same period in 2007. Theincrease was due to increases in cash and share-based compensation of$3.1 million and $1.0 million, respectively, higher depreciation expenseof $2.5 million, higher consulting expense of $1.0 million and a $1.2million decrease related to reimbursements for non-recurring engineeringprojects referred to above, partially offset by lower prototype and relatedequipment expenses of $2.6 million.

 

We intend to continue toinvest significantly in our research and development efforts, which we believeare essential to maintaining our competitive position. Accordingly, weanticipate personnel costs and depreciation expense will increase during theremainder of 2008 as we continue to add product development and qualityassurance personnel and to increase our test lab facilities.

 

*Salesand marketing.*    Sales and marketingexpenses increased $7.3 million, or 82%, in the second quarter of 2008 ascompared to the same period in 2007 and decreased as a percentage of revenues.This increase was due primarily to higher cash compensation of$4.0 million and share-based compensation of $0.7 million, discussedabove, consulting expense of $1.0 million and travel expenses of $0.3million. Sales and marketing expenses increased $19.1 million, or 120%,for the six months ended June 30, 2008 as compared to the same period in2007 and increased as a percentage of revenues. This increase was due primarilyto higher cash compensation of $12.5 million and share-based compensationof $1.3 million, discussed above, consulting expense of $2.1 million andtravel expenses of $0.7 million. Consulting expenses increased due toarrangements we have with third party consultants whose fees are earned as wereceive orders from specific customers, and the increase in travel expense wasdue primarily to our employee additions.

 

We anticipate continuingto increase the number of sales and marketing personnel we employ in futureperiods to expand our geographic presence, to address specific customeropportunities and to increase our revenues. The commission portion of salespersonnel costs may vary significantly if our customer orders differ materiallyfrom the quotas established for our sales personnel. In addition, we expect tocontinue to incur additional expenses such as demonstration andinteroperability testing associated with our ST40 platform in existing and newmarkets.

 

*Generaland administrative.*    General andadministrative expenses increased $2.5 million, or 75%, in the secondquarter of 2008 as compared to the same period in 2007 due primarily to highercash compensation of $0.5 million and share-based compensation of $0.1 million,discussed above, and professional fees of $1.7 million. General andadministrative expenses increased $4.8 million, or 78%, for the six monthsended June 30, 2008 as compared to the same period in 2007 due primarilyto higher cash compensation of $1.4 million and share-based compensation of$0.4 million, discussed above, and professional fees of $2.6 million. Theincrease in professional fees was due primarily to costs associated with ourdefense in the UTStarcom litigation.

 

We expect general andadministrative expense to increase in future periods as we invest ininfrastructure to support continued growth and incur additional costs relatedto operating as a publicly traded company, including increased audit and legalfees, costs of compliance with securities and other regulations, investorrelations and higher insurance premiums. In addition, we expect to continue toincur costs associated with patent litigation discussed in Part II—Item 1“Legal Proceedings”.

 

*Interestincome.*    Interest income consisted ofincome generated from the investment of our cash balances and short-terminvestments. Interest income increased $1.1 million and $2.7 million forthe three and six months ended June 30, 2008, respectively, due to higheraverage cash and investment balances in the first half of 2008 partially offsetby lower rates of return as compared to the same periods in 2007. The increasein our cash and short-term investment balances was due primarily to the receiptof approximately $204.1 million of net proceeds from public offerings ofour common stock in 2007 and cash generated from operations.

 

*Incometax expense.*    For the three and sixmonths ended June 30, 2008, we recorded income tax expense of $1.3 millionand $1.8 million, respectively, compared to $0.2 million and $0.4 million inthe same periods of 2007. The increase in the 2008 period was due primarily toour higher level of income. We anticipate that we will be subject to state andforeign income taxes and federal alternative minimum tax for 2008. We havesignificant net operating loss carryforwards and other deferred tax assets, buthave applied a full valuation allowance to them due to the uncertaintysurrounding the timing and extent of realization of these tax attributes. Wecontinually assess the level of valuation allowance required and should morepositive than negative evidence regarding the realizability of these taxattributes exist at a future point in time, the valuation allowance may bereduced or eliminated altogether. Reduction of the valuation allowance, inwhole or in part, would result in a non-cash reduction in income tax expenseduring the period of reduction. It is reasonably possible that thisdetermination could occur later in 2008 or early 2009.

 

*ForeignCurrency Exchange Gain (Losses).*    Forthe three months ended June 30, 2008, we recorded foreign currency lossesof $148,000, compared to a foreign currency loss of $91,000 in the same periodof 2007.  For the six months ended June 30,2008, we recorded foreign currency gains of $751,000, compared to a foreigncurrency loss of $89,000 in the same period of 2007. The difference in the 2008period was due to an increase in the amount of our assets, primarily cash andaccounts receivable, denominated in foreign currencies, primarily Euros, whichare translated at the end of the reporting period and to the weakening of theUS dollar that occurred in the three and six months ended June 30, 2008.

 

*Netincome.*    Net income increasedapproximately $10.4 million and $17.7 million for the three and six monthsended June 30, 

 

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2008, respectively,compared to the same period of 2007 due to the items discussed above.

 

**Liquidityand Capital Resources**

 

***Resources***

 

We funded our operationsfrom 2000 through 2004 primarily with net proceeds of issuances of convertiblepreferred stock of approximately $100.0 million. Since 2005, we havefunded our operations principally with cash provided by operating activities,which was driven mainly by our revenue growth.

 

In June and November 2007,we completed public offerings of our common stock which raised approximately$204.1 million in net proceeds.

 

*Cash,cash equivalents and short-term investments.*    Ourcash and cash equivalents at June 30, 2008 of $321.1 million wereheld for working capital purposes and were invested primarily in money marketfunds. We do not enter into investments for trading or speculative purposes.Restricted cash, which totaled $0.8 million at June 30, 2008 and $0.7million at December 31, 2007, was not included in cash and cashequivalents and was held as collateral for letters of credit related to vendorand lease agreements.

 

Our net cash flows fromoperating, investing and financing activities for the periods indicated in thetable below were as follows (in thousands):

 
| ** **                                           | ** ** | **Six Months Ended  June 30,** | ** ** |
|------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                           | ** ** | **2008**                                      | ** ** | **2007** | ** ** |
| Net cash  provided by (used in) operating activities |       | $                                             | 96,116     |   | $ | (12,640 | ) |
| Net cash  provided by (used in) investing activities |       | $                                             | (1,735     | ) | $ | 7,350 |   |
| Net cash  provided by financing activities           |       | $                                             | 2,214      |   | $ | 117,592 |   |

 

*Operatingactivities.*    Cash from operatingactivities consists of significant components of the statements of operationsadjusted for changes in various working capital items including deferredrevenues, accounts receivable, inventories, accounts payable, prepaid expensesand various accrued expenses.

 

*Sixmonths ended June 30, 2008 compared to six months ended June 30,2007.*

 

For the six months ended June 30,2008, net cash provided by operating activities was $96.1 million ascompared to cash used in operating activities of $12.6 million for thesame period in 2007. Cash received from customers increased $154.8 million inthe first six months of 2008 to $189.2 million from $34.4 million inthe same period of 2007. This increase was due primarily to the timing ofbilling and collections of the higher level of customer orders that werereceived in the latter half of 2007 and in early 2008. This increase waspartially offset by an increase in cash paid for payroll and related expensesof $25.9 million, which totaled $47.4 million in the first six months of2008 compared to $21.5 million for the same period in 2007, and higher cashpaid for inventories of $23.5 million, which totaled $37.3 million inthe first six months of 2008 compared to $13.8 million for the same period in2007. The increase in payroll and related expenses was due primarily to ourincreased headcount and sales commissions, as discussed above. The increase incash paid for inventories was due primarily to our purchases to meet our higherlevel of customer orders.

 

*Investingactivities.*    Cash from investingactivities consisted primarily of capital expenditures and purchases and salesof short-term investments associated with our investment balances. The $1.7million of cash used in investing activities during the first six months of2008 consisted primarily of capital expenditures of $11.2 million partiallyoffset by maturities of short-term investments of $9.6 million. The$7.4 million of cash provided by investing activities in the six monthsended June 30, 2007 was due primarily to proceeds from maturities ofshort-term investments of $26.6 million partially offset by capitalexpenditures of $8.5 million and $11.2 million of net purchases ofshort-term investments.

 

*Financingactivities.*    Cash from financingactivities for the six months ended June 30, 2008 consisted primarily of$2.3 million of cash received from the exercise of stock options. The$117.6 million of cash from financing activities for the six months ended June 30,2007 was due primarily to the net proceeds from our initial public offering of$116.0 million.

 

At June 30, 2008 andDecember 31, 2007, we had no long-term debt outstanding and our restrictedcash was our only asset pledged as collateral.

 

We believe our existingcash and cash equivalents, and cash flows from operating activities will besufficient to finance our planned growth, enhance our products and fundanticipated capital expenditures for the foreseeable future.

 

We may use the netproceeds from our public offerings for working capital and other generalcorporate purposes, to finance 

 

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accelerated growth,develop new product lines and fund acquisitions and strategic investments.These future working capital requirements will depend on many factors,including the rate of our revenues growth, our introduction of new products andenhancements and our expansion of sales and marketing and product developmentactivities. To the extent our existing resources are insufficient to fund theseactivities we may need to raise additional funds through bank creditarrangements or public or private equity or debt financings. We also may needto raise additional funds in the event we determine in the future to effect oneor more acquisitions of businesses, technologies and products that complementour existing operations. In the event additional funding is required, we maynot be able to obtain bank credit arrangements or complete an equity or debtfinancing on terms acceptable to us or at all.

 

***Requirements***

 

*Capitalexpenditures.*    We have made capitalexpenditures primarily for testing and evaluation systems and equipment tosupport product development and customer service, as well as for leaseholdimprovements and other general purposes to support our growth. Our capitalexpenditures totaled $11.2 million in the six months ended June 30,2008. We expect capital expenditures to be approximately $20-25 millionfor the full year of 2008, primarily related to purchases of test equipment,equipment to support product development and customer service, leaseholdimprovements and other general purposes to support our growth.

 

*Contractualobligations and requirements.*    As of June 30,2008, our commitments under operating leases and purchase obligations were asset forth below. For purposes of the table below, purchase obligations aredefined as agreements to purchase goods or services that are enforceable andlegally binding and that specify all significant terms, including fixed orminimum quantities to be purchased, fixed, minimum or variable pricingprovisions, and the approximate timing of transactions.

 
| ** **            | ** ** | **Total**                            | ** ** | **Remainder of  2008** | ** ** | **1-3  Years** | ** ** | **4-5  Years** | ** ** | **More than  5 Years** | ** ** |
|-----------------------|------------|--------------------------------------|------------|-----------------------------|------------|----------------|------------|----------------|------------|----------------------------------|------------|
| ** **            | ** ** | **(dollars in thousands)** | ** ** |
| Operating leases      |       | $                                    | 6,141      |                        | $          | 1,356          |       | $              | 4,454      |                             | $          | 331 |   | $ | — |   |
| Purchase  obligations |       | 15,438                               |       | 14,401                      |       | 1,037          |       | —         |       | —                           |       |
| Total                 |       | $                                    | 21,579     |                        | $          | 15,757         |       | $              | 5,491      |                             | $          | 331 |   | $ | — |   |

 

The table above does notreflect unrecognized tax benefits of $0.3 million, the timing of which isuncertain.

 

***Off-Balance-Sheet Arrangements***

 

We do not engage in anyoff balance sheet financing activities. We do not have any interest in entitiesreferred to as variable interest entities, which includes special purposeentities and other structured finance entities.

 

***Recent Accounting Pronouncements***

 

We have adopted theprovisions of SFAS 159, *The Fair ValueOption for Financial Assets and Financial Liabilities, including an amendmentof FASB Statement No. 115,* on January 1, 2008.SFAS 159 permits entities to choose, at specified election dates, tomeasure eligible items at fair value (the “fair value option”). Under thispronouncement, a business entity must report unrealized gains and losses onitems for which the fair value option has been elected in earnings at eachsubsequent reporting period. We have not elected the fair value option for anyitems on its balance sheet.

 

In June 2008, theFASB issued FASB Staff Position (FSP) EITF 03-6-1, *Determining Whether Instruments Granted in Share-Based PaymentTransactions Are Participating Securities.* This FSP provides thatunvested share-based payment awards that contain nonforfeitable rights todividends or dividend equivalents (whether paid or unpaid) are participatingsecurities and shall be included in the computation of earnings per sharepursuant to the two-class method. Upon adoption, a company is required toretrospectively adjust its earnings per share data (including any amountsrelated to interim periods, summaries of earnings and selected financial data)to conform with the provisions in this FSP. This FSP will be effective for uson January 1, 2009. We have not yet determined the impact, if any, of thisFSP on our consolidated financial statements.

 

In May 2008, theFASB released SFAS 162, *The Hierarchy of GenerallyAccepted Accounting Principles.* SFAS 162 establishes the GAAPhierarchy and identifies the sources of accounting principles and the frameworkfor selecting principles used in the preparation of financial statements. SFAS162 is effective 60 days following the Securities and Exchange Commission’sapproval of the Public Company Accounting Oversight Board amendments to AU Section 411,*The Meaning of Present Fairly in Conformity withGenerally Accepted Accounting Principles.*We have not yet determinedthe impact, if any, of this statement on our consolidated financial statements.

 

In December 2007,the FASB released SFAS 141 (revised 2007), *Business Combinations*. This statement will significantly 

 

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change the accounting forbusiness combinations in a number of areas including the treatment ofcontingent consideration, contingencies, acquisition costs, in process researchand development and restructuring costs. In addition, under this statement,changes in deferred tax asset valuation allowances and acquired income taxuncertainties in a business combination after the measurement period willimpact income tax expense. This statement will be effective for us on January 1,2009 and will change our accounting treatment for business combinations on aprospective basis.

 

In December 2007,the FASB released SFAS 160, *NoncontrollingInterests in Consolidated Financial Statements—an amendment of ARB No. 51*.This statement will change the accounting and reporting for minority interests,which will be recharacterized as noncontrolling interests and classified as acomponent of equity. This new consolidation method will significantly changethe accounting for transactions with minority interest holders. This statementwill be effective for us on January 1, 2009. We have not yet determinedthe impact, if any, of this statement on our consolidated financial statements.

 

**ITEM3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKETRISK**

 

Market risk representsthe risk of loss that may impact our financial position due to adverse changesin financial market prices and rates. Our market risk exposure is primarily aresult of fluctuations in foreign exchange rates and interest rates. We do nothold or issue financial instruments for trading purposes.

 

***Foreign Currency Exchange Risk***

 

Our internationalcustomer transactions are predominantly denominated in either U.S. dollars orEuro. Accordingly, we have exposure to changes between the U.S. Dollar and theEuro. We currently do not enter into foreign currency hedging transactions. Inaddition, the functional currency of our foreign operations in Europe, Asia andSouth America is the U.S. dollar. Accordingly, all assets and liabilities ofthese foreign subsidiaries are remeasured into U.S. dollars using the exchangerates in effect at the balance sheet date with the exception of certainnon-monetary items which are remeasured at historical rates. Revenues andexpenses of these foreign subsidiaries are remeasured into U.S. dollars at theaverage rates in effect during the year. Any differences resulting from theremeasurement of assets, liabilities and operations of these subsidiaries arerecorded within other income (expense) in our consolidated statements ofoperations. If the foreign currency exchange rates had fluctuated by 10% as of June 30,2008 and December 31, 2007, our foreign exchange gain or loss would havefluctuated by approximately $2.1 million and $0.2 million, respectively.

 

***Interest Rate Risk***

 

At June 30, 2008, wehad unrestricted cash and cash equivalents totaling $321.1 million. At December 31,2007, we had unrestricted cash and cash equivalents and short-term investmentstotaling $233.6 million. These amounts were invested primarily in moneymarket funds and high quality corporate and government securities. The unrestrictedcash and cash equivalents were held for working capital purposes. We do notenter into investments for trading or speculative purposes. Due to theshort-term nature of these investments, we believe that we do not have anymaterial exposure to changes in the fair value of our investment portfolio as aresult of changes in interest rates. Declines in interest rates, however, wouldreduce future investment income.

 

 

**ITEM4T.    CONTROLS AND PROCEDURES**

 

Our management, with theparticipation of our chief executive officer and chief financial officer,evaluated the effectiveness of our disclosure controls and procedures as of June 30,2008. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and15d-15(e) under the Exchange Act, means controls and other procedures of acompany that are designed to ensure that information required to be disclosedby a company in the reports that it files or submits under the Exchange Act isrecorded, processed, summarized and reported, within the time periods specifiedin the SEC’s rules and forms. Disclosure controls and procedures include,without limitation, controls and procedures designed to ensure that informationrequired to be disclosed by a company in the reports that it files or submitsunder the Exchange Act is accumulated and communicated to the company’smanagement, including its principal executive and principal financial officers,as appropriate to allow timely decisions regarding required disclosure.Management recognizes that any controls and procedures, no matter how welldesigned and operated, can provide only reasonable assurance of achieving theirobjectives and management necessarily applies its judgment in evaluating thecost-benefit relationship of possible controls and procedures. Based on theevaluation of our disclosure controls and procedures as of June 30, 2008,our chief executive officer and chief financial officer concluded that, as ofsuch date, our disclosure controls and procedures were effective at thereasonable assurance level.

 

No change in our internalcontrol over financial reporting (as defined in Rules 13a-15(f) and15d-15(f) under the Exchange Act) occurred during the fiscal quarter endedJune 30, 2008 that has materially affected, or is reasonably likely to materiallyaffect, our internal control over financial reporting.

 

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**PART II. OTHER INFORMATION**

 

**ITEM1.    LEGAL PROCEEDINGS**

 

We are presentlydefending two patent infringement lawsuits brought against us by UTStarcom, Inc.In February 2005, UTStarcom filed a complaint against us in the UnitedStates District Court for the Northern District of California seeking unspecifieddamages and injunctive relief. The complaint alleges infringement by us ofUTStarcom’s U.S. Patent No. 6,829,473, entitled “Roaming and Hand-OffSupport for Prepaid Billing for Wireless Data Networks,” which we refer to asthe ‘473 patent. In May 2005, we answered the complaint, denied theinfringement allegations contained in the complaint, and filed counterclaimsagainst UTStarcom seeking a declaratory judgment that we did not infringe the ‘473patent and that the ‘473 patent was invalid and unenforceable. In July 2005,we filed an amended answer and counterclaims to the ‘473 patent complaint. In December 2006,UTStarcom filed a reissue patent application relating to the ‘473 patent. In January 2007,by agreement of the parties, the District Court stayed the case pending theoutcome of UTStarcom’s reissue application relating to the ‘473 patent. In June 2007,we filed a request for*inter partes*  re-examination of all claims of the ‘473patent with the United States Patent and Trademark Office on sixteen differentgrounds. In August 2007, the Patent and Trademark Office granted ourrequest for*inter partes*  re-examination of all claims on all sixteengrounds. In November 2007, the Patent and Trademark Office merged thereissue and re-examination proceedings. A first office action has not yet beenissued. We believe that we have meritorious defenses against any resultingreissued patent, and we are prepared to vigorously defend the ‘473 patent casethrough trial.

 

In May 2007,UTStarcom filed an additional complaint against us and a number of ouremployees and former employees in the United States District Court for theNorthern District of Illinois alleging violations of the Illinois trade secretsact, infringement of five patents assigned to UTStarcom, intentionalinterference with UTStarcom’s business relations and declarations of ownershiprelating to one of our patents and three of our patent applications. Thecomplaint contains allegations, among others, that a number of former employeesof a business unit UTStarcom acquired, who subsequently worked for us, tookUTStarcom’s trade secrets with them and improperly used those trade secrets todevelop, manufacture and market our 3G wireless products, and that suchproducts incorporate various UTStarcom confidential technical information,including UTStarcom’s proprietary virtual private network and EV-DO features.UTStarcom further alleges that we have disclosed UTStarcom’s trade secrets inone of our patents and three of our patent applications, and that this patentand these patent applications legally belong to UTStarcom based on theinventors’ previous work at the business unit acquired by UTStarcom. In August 2007,we and the current and former employee defendants filed our answers to thecomplaint. We also filed counterclaims for tortious interference withprospective economic advantage, malicious prosecution, a declaration that thepatents-in-suit are invalid and not infringed, and a declaration that one ofthe patents-in-suit is unenforceable due to inequitable conduct. In December 2007,UTStarcom filed an amendment to the complaint, which added new claims fordeclaration of ownership of four more of our patent applications, copyrightinfringement, breach of restrictive covenants against the employee and formeremployee defendants, and aiding and abetting the employee and former employeedefendants’ breaches of the duty of loyalty and the employment agreements. Theamendment to the complaint also added another employee as a defendant. On January 4,2008, we filed a motion to dismiss, or in the alternative for a more definitestatement regarding, the trade secret, copyright, breaches of restrictivecovenants, and aiding and abetting claims of the amendment to the complaint.UTStarcom filed its opposition to our motion on January 22, 2008, and wefiled our reply on January 29, 2008. On May 20, 2008, the Courtgranted our motion, in-part, and ordered UTStarcom to provide a more definitestatement of its claims. On May 30, 2008, UTStarcom filed a Third AmendedComplaint.  On June 9, 2008, wemoved to dismiss the trade secret, copyright, breaches of restrictivecovenants, and aiding and abetting claims (Counts I, VI, and VIII-XV) of theThird Amended Complaint, for failure to comply with the Court’s Order to providea more definite statement of those claims. On July 23, 2008, the Courtgranted our motion and dismissed those claims all claims that were the subjectof the motion. On August 1, 2008, UTStarcom filed a “Motion for Leave to Amendthe Complaint to Provide a More Definite Statement and Clarification of the7/23 Order.” Following dismissal of the claims, UTStarcom’s patent infringementand declaration of ownership claims remain. Discovery is proceeding. No trialdate has been set. In this lawsuit, UTStarcom seeks unspecified monetarydamages, punitive damages, injunctive relief, declarations of ownershiprelating to the specified patent and patent applications owned by us, findingsof misappropriation of trade secrets, patent infringement and copyright infringement,costs and attorneys fees. We believe we have meritorious defenses to each ofUTStarcom’s claims in this lawsuit and we are prepared to vigorously defend thelawsuit.

 

In addition, we aresubject to other legal proceedings, claims and litigation arising in theordinary course of business. Defending lawsuits requires significant managementattention and financial resources and the outcome of any litigation, includingthe matters described above, is inherently uncertain. We do not, however,currently expect that the ultimate costs to resolve pending matters will have amaterial adverse effect on our consolidated financial position, results ofoperations or cash flows.

 

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**ITEM1A.    RISK FACTORS**

 

*Theseare risks and uncertainties that could cause actual results to differmaterially from the results contemplated by the forward-looking statementscontained in this Quarterly Report on Form 10-Q. Because of the thesefactors, as well as other variables affecting our operating results, pastfinancial performance should not be considered as a reliable indicator offuture performance and investors should not use historical trends to anticipateresults or trends in future periods. These risks are not the only ones facingthe Company. Please also see “Cautionary Statement” in Part I, Item 2of this Quarterly Report on Form 10-Q.*

 

**RisksRelated to Our Business and Industry**

 

***We compete in new and rapidly evolving markets and have alimited operating history, which makes it difficult to predict our futureoperating results.***

 

We were incorporated in August 2000,and deployed our first commercial product in the first quarter of 2003. We havea limited operating history in an industry characterized by rapid technologicalchange, changing customer needs, evolving industry standards and frequentintroductions of new products and services. We believe our limited operatinghistory and the characteristics of our industry make it difficult to forecastour future operating results. You should consider and evaluate our prospects inlight of risks faced by companies such as ours, which include challenges inaccurate financial planning as a result of limited historical data and theuncertainties resulting from a relatively limited time period in which toimplement and evaluate our business strategies, as compared to companies withlonger operating histories.

 

***Our past operating results have fluctuated significantly,and likely will continue to fluctuate significantly, which makes it difficultto predict our operating results and could cause our operating results to fallbelow expectations.***

 

Our operating resultshave historically fluctuated significantly from period to period and we expectour operating results to continue to fluctuate due to a variety of factors,many of which are outside of our control. As a result, comparing our operatingresults on a period-to-period basis may not be meaningful. You should not relyon our past results as an indication of our future performance. If our revenuesor operating results fall below the expectations of investors or securitiesanalysts or below any guidance we may provide to the market, the price of ourcommon stock could decline.

 

In addition to other riskfactors listed in this “Risk Factors” section, factors that may affect ouroperating results include:

 

· fluctuations in demand, sales cycles and prices for ourproducts and services;

 

· reductions in customers’ budgets for mobile networkinfrastructure purchases and delays in their purchasing decisions;

 

· the timing of recognizing revenue in any given periodas a result of software revenue recognition rules;

 

· the sale of our products in the timeframes weanticipate, including the number and size of orders in each period;

 

· the level of our customer concentration and our abilityto generate purchases in any particular period from large customers;

 

· our ability to develop, introduce and ship in a timelymanner new products and product enhancements that meet customer requirements;

 

· the timing of product releases or upgrades by us or byour competitors;

 

· any significant changes in the competitive dynamics ofour markets, including new entrants or substantial discounting of products;

 

· our ability to control costs, including our operatingexpenses and the costs of the components we purchase; and

 

· general economic conditions in our domestic andinternational markets.

 

***We depend on a limited number of customers for a substantialportion of our revenues. The loss of a key customer or any significant adversechange in the size or terms of orders from a key customer could significantlyreduce our revenues.***

 

We derive a substantialportion of our revenues from a limited number of customers partly due to thenature of the mobile communications industry. For example, in the six monthsended June 30, 2008 we had two customers that each accounted for more than 10%of our revenues and in the aggregate represented 83% of our revenues. Inaddition, we do not have long-term volume purchase contracts with our customersor other commitments that ensure future sales of our products to existingcustomers. The loss of any key customer, or our inability to generate anticipatedrevenue from them, would significantly and adversely affect our business,financial condition and results of operations. In addition, a 

 

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change in the timing orsize of a purchase by any one of our key customers can result in significantvariations in our revenue and operating results from period to period. Ouroperating results for the foreseeable future will continue to depend on ourability to effect sales to a small number of customers. Any revenue growth willdepend on our success selling additional products to our large customers andexpanding our customer base to include additional customers that deploy ourproducts in large-scale networks serving significant numbers of subscribers.

 

Moreover, many of our keycustomers are large mobile operators that have substantial purchasing power andleverage in negotiating contractual arrangements with us. These customers mayrequire us to agree to terms and conditions that could result in increasedcosts and decreased revenues that could adversely affect our operating results.

 

***We rely on a single line of products focused on a singlemarket. If the market for those products does not develop as we anticipate, ourrevenues may decline or fail to grow, which would adversely affect ouroperating results.***

 

We derive, and expect tocontinue to derive, all of our revenues from a single line of products thatprovide network functions and services to mobile operators’ packet corenetworks. The market for our products is relatively new and still evolving, andit is uncertain whether our products will achieve and sustain high levels ofdemand and market acceptance. Our success will depend to a substantial extenton the willingness of mobile operators to continue to implement packet-based,multimedia network infrastructure. Factors that could impair the rate of growthof multimedia networks include:

 

· lower than anticipated demand by subscribers formultimedia services;

 

· budgetary constraints of mobile operators;

 

· uncertainties on the part of mobile operators as to theparticular 3G or 4G access technologies they select for deployment in theirnetworks; and

 

· delays in the development or availability of all thenetwork elements necessary for the mobile operator to deploy itsnext-generation multimedia network.

 

If mobile operators donot continue to implement packet core networks, the market for our products maynot continue to develop or may develop more slowly than we expect, either ofwhich would significantly adversely affect our revenues and profitability.

 

***The market in which we compete is highly competitive andcompetitive pressures from existing and new companies may have a materialadverse effect on our business, revenues, growth rates and market share.***

 

We compete in a highlycompetitive industry that is influenced by many factors, including customerdemands for:

 

· reliable, high performance products;

 

· system ability to handle increasing amounts of networktraffic and service integration capabilities;

 

· system intelligence;

 

· breadth of network interoperability, accessindependence and standards support;

 

· high levels of customer support and customer interaction;and

 

· competitive pricing.

 

We expect competition inthe mobile network infrastructure industry to intensify significantly in thefuture. Other companies may introduce new products in the markets we serve orintend to enter. This competition could result in increased pricing pressure,reduced profit margins, increased sales and marketing expenses and failure toincrease, or the loss of, market share, any of which would likely seriouslyharm our business, operating results or financial condition.

 

Competitive products mayin the future have better performance, lower prices and broader acceptance thanour products. Our primary competitors include Cisco Systems, Inc., HuaweiTechnologies Co., Ltd., LM Ericsson Telephone Co., Nokia SiemensNetworks B.V. and UTStarcom, Inc., each of which has a longeroperating history, greater name recognition, a larger customer base andsignificantly greater financial, technical, sales, marketing and otherresources than we do. Potential customers may prefer to purchase from their existingsuppliers rather than a new supplier regardless of product performance orfeatures. In addition, many of our competitors have a broader range of productsand may be able to offer concessions to potential customers on bundledpurchases that we are not able to match because we currently offer only asingle line of products. We also face competition from a number of companieswith more limited market share either generally or by geography and newermarket entrants.

 

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If our market continuesto develop and expand, we could face increased competition from otherestablished companies, as well as emerging companies. For example, OEMs, systemintegrators and distributors currently selling our products could marketproducts and services that compete with our products and services. In addition,some of our competitors have made acquisitions or entered into partnerships orother strategic relationships with one another to offer a more comprehensivesolution than they individually had offered. We expect this trend to continueas companies attempt to strengthen or maintain their market positions in anevolving industry and as companies enter into partnerships, or are acquired.Many of the companies driving this consolidation trend have significantlygreater financial, technical and other resources than we do and are betterpositioned to acquire and offer complementary products and technologies. Thecompanies resulting from these possible consolidations may create morecompelling product offerings and be able to offer greater pricing flexibility,making it more difficult for us to compete effectively, including on the basisof price, sales and marketing programs, technology or product functionality.Continued industry consolidation may adversely impact customers’ perceptions ofthe viability of smaller and even medium-sized technology companies andconsequently customers’ willingness to purchase from such companies. Thesepressures could materially adversely affect our business, operating results andfinancial condition.

 

***Our sales cycles can be long and unpredictable, and oursales efforts require considerable time and expense.***

 

Our sales cyclestypically are long and unpredictable, and our sales efforts requireconsiderable time and expense. Our sales efforts involve educating ourcustomers about the use and benefit of our products, including their technicalcapabilities and potential cost savings. Customers typically undertake asignificant evaluation process before making a purchase, in some cases overtwelve months. We spend substantial time and resources in our sales effortswithout any assurance that our efforts will produce any sales. In addition,product purchases are frequently subject to budget constraints, multipleapprovals, and unplanned administrative, processing and other delays. Our longsales cycle may cause our revenues and operating results to fluctuatesignificantly.

 

***Demand for our products depends on the rate that mobileoperators expand and enhance their mobile networks in order to providemultimedia services.***

 

Our future success as aprovider of network infrastructure products and services for mobile operatorsultimately depends on the continued growth of the mobile communicationsindustry and, in particular, the continued deployment and expansion of mobilemultimedia services. Increased demand by mobile subscribers for voicecommunications and multimedia services delivered over mobile network systemswill be necessary to justify capital expenditure commitments by mobileoperators to invest in the improvement and expansion of their networks. Demandfor multimedia services might not continue to increase if there is limited availabilityor market acceptance of mobile devices designed for such services, themultimedia content offered through mobile networks does not attract widespreadinterest or the quality of service available through mobile networks does notmeet customer expectations. If long-term expectations for mobile multimediaservices are not realized or do not support a sustainable business model,operators may not commit significant capital expenditures to upgrade theirnetworks to provide these services, the demand for our products and serviceswill decrease, and we may not be able to sustain or increase our levels ofrevenues or profitability in the future.

 

***A significant portion of our future revenues depends on ourability to further penetrate the GSM/UMTS market and our failure to do so couldsignificantly interfere with our future growth.***

 

The two principal radioaccess interfaces in use today for mobile communications are Code DivisionMultiple Access, or CDMA, and Global System for Mobile Communications/UniversalMobile Telecommunications System, or GSM/UMTS. To date, we have achieved ourhighest number of deployments in the CDMA market, which has transitioned fasterto high-bandwidth networks. However, significantly more operators worldwidecurrently utilize GSM/UMTS than CDMA technologies. In order to continue ourgrowth, we believe it is important that we continue to expand into the GSM/UMTSmarket. To date, we have established a relationship with a major GSM/UMTSoperator, and we intend to devote significant sales and marketing resources tofurther penetrate the GSM/UMTS market. If GSM/UMTS operators do not transitionor delay their transition to high-bandwidth networks, or if we are unable toestablish relationships with additional GSM/UMTS operators, we may not be ableto grow our business as expected and our results of operations will beadversely affected.

 

***We rely on OEMs, system integrators and distributors to sellsome of our products, and our failure to develop and manage our distributionchannels could adversely affect our business.***

 

For our sales to mobileoperators, we rely in part on establishing and maintaining successfulrelationships with original equipment manufacturers, or OEMs, systemintegrators and distributors. A significant amount of our revenues is derivedthrough these indirect sales. Accordingly, our revenues depend in part on theeffective performance of these distribution relationships. By utilizing theseindirect sales channels we may have less contact with the end users of ourproducts, thereby potentially making it more difficult for us to establishbrand awareness, ensure proper delivery and installation of our products,service ongoing customer requirements and respond to evolving customer needs.Developing relationships with qualified OEMs, system integrators anddistributors and training them in our technology and product offerings requiressignificant time and resources. In order to develop and expand our distributionchannels, we must continue to scale and improve our processes and proceduresthat support our OEM, system integrator 

 

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and distributorrelationships, including investment in systems and training. We have no minimumpurchase commitments with any of our OEMs, system integrators or distributors,and our contracts with them do not prohibit them from offering products orservices that compete with ours. Our competitors may be effective in providingincentives to existing and potential OEMs, system integrators and distributorsto favor their products or to prevent or reduce sales of our products. OurOEMs, system integrators and distributors may choose not to offer our products exclusivelyor at all. Our failure to establish and maintain successful relationships withour OEMs, system integrators and distributors would likely materially adverselyaffect our business, operating results and financial condition.

 

***We have a significant accumulated deficit, and we may not beable to maintain profitability.***

 

As a result of our netlosses in years prior to 2005 we had an accumulated deficit of$70.6 million as of June 30, 2008. We will need to generatesignificant revenues and control our operating expenses and other expendituresto maintain profitability. If we are unable to remain profitable, the marketprice of our common stock could decline.

 

***If network functions and services similar to those offeredby our products are incorporated into existing or new mobile networkinfrastructure products, demand by mobile operators for our products maydiminish.***

 

Mobile networkinfrastructures are continually evolving with changing industry standards andthe introduction of new technologies and network elements. Network functionsand services provided by our products located on the packet core network may beprovided by different network elements within these networks. Other providersof mobile network infrastructure products may add network functions andservices provided by our products to their existing products or offer newproducts with similar characteristics for different parts of the networkinfrastructure.

 

The inclusion of, or theannouncement of an intent to include, functionality and services perceived tobe similar to those offered by our products in competitor products within oroutside the packet core network could have an adverse effect on our ability tomarket and sell our products. Furthermore, even if the network functions andservices offered by our competitors are more limited than those provided by ourproducts, a significant number of customers may elect to accept limitedfunctionality or services in lieu of adding our products to their network. Theadoption of these competitive products or different approaches to their networkinfrastructure by mobile operators could have an adverse effect on ourbusiness, operating results and financial condition.

 

***The applications of existing or future accounting standardscould result in significant fluctuations in our operating results.***

 

We recognize our productsoftware license revenue in accordance with AICPA Statement of Position, orSOP, 97-2, *Software Revenue Recognition*,and related amendments and interpretations and SOP 98-9,*Modification of SOP 97-2, Software RevenueRecognition with Respect to Certain Transactions*. Under theseaccounting standards, even if we deliver products to, and collect cash from, acustomer in a given fiscal period, we may be required to defer recognizingrevenue from the sale of such product until a future period when all theconditions necessary for revenue recognition have been satisfied. Conditionsthat can cause delays in revenue recognition include software arrangements thathave undelivered elements for which we have not yet established vendor specificobjective evidence of fair value; requirements that we deliver services forsignificant enhancements or modifications to customize our software for aparticular customer; or material customer acceptance criteria. Our customercontracts typically include one or more of these types of conditions.Therefore, we often must defer revenue recognition for a period of time afterour products are delivered and billed to a customer, and such deferral mayextend over one or more fiscal quarters. The period of deferral, if any,depends on the specific terms and conditions of each customer contract, andtherefore it is difficult for us to predict with accuracy at the beginning ofany fiscal period the amount of revenues that we will be able to recognize fromanticipated customer shipments in that period. Moreover, any changes ininterpretations and guidance as to SOP 97-2 could have a significanteffect on our reported financial results.

 

***We may have difficulty acquiring new customers due to thehigh costs of switching mobile network infrastructure providers or equipment.***

 

Mobile network operatorstypically make substantial investments when deploying a mobile networkinfrastructure. Once a mobile network operator has deployed a mobile networkinfrastructure for a particular portion of their network, it is often difficultand costly to switch to another vendor’s infrastructure. Unless we are able topersuasively demonstrate that our products offer performance, functionality orcost advantages that materially outweigh a customer’s expense of switching froma competitor’s product, it will be difficult for us to generate sales once thatcompetitor’s equipment has been deployed. Accordingly, if a customer hasalready deployed a competitor’s product for their network infrastructure, itmay be difficult for us to sell our products to that customer.

 

***Our ability to sell our products is highly dependent on thequality of our support and services offerings, and our failure to offer highquality support and services would have a material adverse effect on our salesand results of operations.***

 

Once our products aredeployed within our customers’ networks, our customers depend on our supportorganization to resolve issues relating to our products. A high level ofsupport is critical for the successful marketing and sale of our products andfuture enhancements. If we, or our OEMs, system integrators or distributors, donot effectively assist our customers in deploying our products, help our customersquickly resolve post-deployment issues, and provide effective ongoing support,it would adversely affect 

 

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our ability to sell ourproducts to existing customers and could harm our reputation with potentialcustomers. In addition, as we expand our operations internationally, oursupport organization will face additional challenges, including thoseassociated with delivering support, training and documentation in languagesother than English. As a result, our failure to maintain high quality supportand services could have a material adverse effect on our business, operatingresults and financial condition.

 

***The mobile network infrastructure industry is, and likelywill continue to be, characterized by rapid technological changes in networksand standards, which will require us to develop new products and productenhancements, and could render our existing products obsolete.***

 

Mobile operators havebeen aggressively upgrading their networks, and new industry standards foraccess technologies, such as third generation, or 3G, and more advanced fourthgeneration, or 4G, technologies continue to evolve. Continuing technologicalchanges in the mobile communications industry and in the mobile networkinfrastructure industry could undermine our competitive position or make ourproducts obsolete, either generally or for particular types of services. Ourfuture success will depend upon our ability to accurately predict and respondto new technology standards. We must develop and introduce a variety of newcapabilities and enhancements to our existing product offerings, as well asintroduce new product offerings, to address the changing standards andtechnological needs of the network infrastructure market. A failure toaccurately predict and respond to evolving technologies, to introduce on atimely basis new products and enhancements in response to evolving technologiesand standards, or to address changing needs in our current markets or expandinto new markets may cause existing and potential customers to forego purchasesof our products or purchase from our competitors. The introduction of newproducts embodying new technologies or the emergence of new industry standardscould render our existing products uncompetitive from a pricing standpoint,obsolete or unmarketable.

 

***Our products are complex and may take longer to develop thananticipated and we may not recognize revenues from new products or productenhancements until after we have incurred significant development costs.***

 

Some of our products mustbe tailored to meet customer specifications. As a result, we often develop newfeatures and enhancements to our products. These product enhancements oftentake substantial time to develop because of their complexity and becausecustomer specifications sometimes change during the development cycle. We oftendo not recognize revenue from our new products or enhancements until we haveincurred significant development costs, and our operating results will sufferif sales of new products or enhancements fail to meet our expectations.

 

***There is no assurance that our research and developmentinvestments will lead to successful new products or enhancements.***

 

We will continue toinvest in research and development for the introduction of new products andenhancements to existing products designed to improve the capacity, dataprocessing rates and features of our products and services. We must alsocontinue to develop new features and functionality for our products based onspecific customer requests and anticipated market needs. However, research anddevelopment in the mobile network infrastructure industry is complex, expensiveand subject to uncertainty. We believe that we must continue to dedicate asignificant amount of resources to our research and development efforts tomaintain our competitive position. If we continue to expend a significantamount of resources on research and development and our efforts do not lead tothe successful introduction of products or product enhancements that arecompetitive in the marketplace, there could be a material adverse effect on ourbusiness, operating results, financial condition and market share. We may notbe able to anticipate market needs and develop products and productenhancements that meet those needs, and any new products or productenhancements that we introduce may not achieve any significant degree of marketacceptance.

 

***If our products do not interoperate with our customers’networks, installations will be delayed or cancelled, which would harm ourbusiness.***

 

Our products mustinteroperate with our customers’ existing networks, which often have differentspecifications, utilize multiple protocol standards and products from multiplevendors and contain multiple generations of products that have been added overtime. If we find errors in the existing software or defects in the hardwareused in our customers’ networks or problematic network configurations orsettings, as we have in the past, we may have to modify our software orhardware so that our products will interoperate with our customers’ networks.This could cause longer installation times for our products or ordercancellations and could harm our relationship with existing and futurecustomers, any of which would adversely affect our business, operating resultsand financial condition.

 

In addition, ourcustomers may require that we demonstrate that our products interoperate withnetwork elements offered by our competitors, and we may need our competitors’cooperation to conduct such testing and validation. Any unwillingness of ourcompetitors to cooperate with us in performing these interoperability tests orour inability to demonstrate interoperability would likely have an adverseeffect on our ability to market our products.

 

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***Our products are highly technical and may contain undetectedsoftware or hardware errors, which could cause harm to our reputation andadversely affect our business.***

 

Our products are highlytechnical and complex. When deployed, they are critical to the mobile operatornetworks. Our products have contained and may contain undetected errors,defects or security vulnerabilities. Some errors in our products may only bediscovered after a product has been installed and used by mobile operators. Anyerrors, defects or security vulnerabilities discovered in our products aftercommercial release could result in loss of revenues or delay in revenuerecognition, loss of customers and increased service cost, any of which couldadversely affect our business, operating results and financial condition. Inaddition, we could face claims for product liability, tort or breach ofwarranty, including claims relating to changes to our products made by ourOEMs, system integrators or distributors. Our contracts with customersgenerally contain provisions relating to warranty disclaimers and liabilitylimitations, which may be ineffective. Defending a lawsuit, regardless of itsmerit, is costly and may divert management’s attention away from the businessand adversely affect the market’s perception of us and our products. Inaddition, if our business liability insurance coverage is inadequate or futurecoverage is unavailable on acceptable terms or at all, our operating resultsand financial condition could be adversely impacted.

 

***We are susceptible to shortages or price fluctuations in oursupply chain. Any shortages or price fluctuations in components used in ourproducts could delay shipment of our products, which could materially adverselyaffect our business.***

 

Shortages in componentsthat we use in our products are possible and our ability to predict theavailability of such components may be limited. Some of these components areavailable only from single or limited sources of supply. The process ofqualifying alternate sources for components, if available at all, may be timeconsuming, difficult and costly. In addition, the lead times associated withcertain components are lengthy and preclude rapid changes in quantityrequirements and delivery schedules. Any growth in our business or the economyis likely to create greater pressures on us and our suppliers to projectoverall component demand accurately and to establish appropriate componentinventory levels. In addition, increased demand by third parties for thecomponents we use in our products may lead to decreased availability and higherprices for those components. We carry very little inventory of our products andproduct components, and we rely on our suppliers to deliver necessarycomponents to our contract manufacturer in a timely manner based on forecastswe provide. We generally rely on purchase orders rather than long-termcontracts with our suppliers. As a result, even if available, we may not beable to secure sufficient components at reasonable prices or of acceptablequality to build products in a timely manner, which would seriously impact ourability to deliver products to our customers, and our business, operatingresults and financial condition would be adversely affected.

 

***We depend on a single contract manufacturer with whom we donot have a long-term supply contract, and changes to this relationship mayresult in delays or disruptions that could harm our business.***

 

We depend on PlexusCorp., an independent contract manufacturer, to manufacture and assemble ourproducts. We rely on purchase orders with our contract manufacturer and do nothave long-term supply arrangements in place. As a result, our contractmanufacturer is not obligated to supply products to us for any specific period,quantity or price. Our orders may represent a relatively small percentage ofthe overall orders received by our contract manufacturer from its customers. Asa result, fulfilling our orders may not be considered a priority by ourcontract manufacturer in the event the contract manufacturer is constrained inits ability to fulfill all of its customer obligations in a timely manner.

 

It is time consuming andcostly to qualify and implement a contract manufacturer relationship.Therefore, if our contract manufacturer suffers an interruption in its business,or experiences delays, disruptions or quality control problems in itsmanufacturing operations, or we have to change or add additional contractmanufacturers, our ability to ship products to our customers would be delayedand our business, operating results and financial condition would be adverselyaffected.

 

***If we fail to predict accurately our manufacturingrequirements, we could incur additional costs or experience manufacturingdelays that could harm our business.***

 

We provide demandforecasts to our contract manufacturer. If we overestimate our requirements,our contract manufacturer may assess charges or we may have liabilities forexcess inventory, each of which could negatively affect our gross margins.Conversely, because lead times for required materials and components varysignificantly and depend on factors such as the specific supplier, contractterms and the demand for each component at a given time, if we underestimateour requirements, our contract manufacturer may have inadequate materials andcomponents required to produce our products, which could interruptmanufacturing of our products and result in delays in shipments and deferral orloss of revenues.

 

***If we fail to retain our key personnel, we may not be ableto achieve our anticipated level of growth and our business could suffer.***

 

Our future depends, inpart, on our ability to attract and retain key personnel, including thecontinued contributions of our executive officers and other key technicalpersonnel, each of whom would be difficult to replace. In particular, Ashraf M.Dahod, our president, chief executive officer and chairman is critical to themanagement of our business and operations, as well as the development of ourstrategic direction. The loss of services of Mr. Dahod or other executiveofficers or key personnel or the inability to continue to attract qualifiedpersonnel could have a material adverse effect on our business. Mr. Dahodis not a party to an employment agreement with us and, therefore, may terminatehis employment with us at any time, with no advance notice. The replacement of Mr. Dahodwould involve significant time and expense and may significantly delay orprevent the achievement of our 

 

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business objectives.

 

***Competition for our employees is intense, and we may not beable to attract and retain the highly skilled employees that we need to supportour business.***

 

Competition for highlyskilled technical personnel is extremely intense and we continue to facedifficulty identifying and hiring qualified personnel in many areas of ourbusiness. In particular, we face significant challenges hiring and retainingpersonnel in India for research and development activities because the marketfor such personnel is increasingly competitive. We may not be able to hire andretain such personnel at compensation levels consistent with our existingcompensation and salary structure. Many of the companies with which we competefor hiring experienced employees have greater resources than we have and may beable to offer more attractive terms of employment. In addition, we investsignificant time and expense in training our employees, which increases theirvalue to competitors who may seek to recruit them. If we fail to retain ouremployees, we could incur significant expenses replacing employees and thequality of our products and services and our ability to provide such productsand services could diminish, resulting in a material adverse affect on ourbusiness. Furthermore, in making employment decisions, particularly inhigh-technology industries, candidates often consider the value of the equitythey are to receive in connection with their employment. Therefore, significantvolatility in the price of our stock may adversely affect our ability toattract or retain personnel.

 

***Our international sales and operations subject us toadditional risks that may adversely affect our operating results.***

 

Over the last severalyears, we derived a significant portion of our revenues from customers outsidethe United States, and we continue to expand our international operations. Asof June 30, 2008, approximately 61% of our employees were located outsideof the United States, including 358 employees located in India. In addition, wehave sales and technical support personnel in numerous countries worldwide. Weexpect to continue to add personnel in additional countries. Any continuedexpansion into international markets will require significant resources andmanagement attention and will subject us to new regulatory, economic andpolitical risks, and we cannot be sure that any further international expansionwill be successful. Among the risks we believe are most likely to affect uswith respect to our international operations are:

 

· thedifficulty of managing and staffing international offices and the increasedtravel, infrastructure and legal compliance costs associated with multipleinternational locations;

 

·difficulties in enforcing contracts and collecting accounts receivable andlonger payment cycles, especially in emerging markets;

 

· our abilityto comply with differing technical standards and certification requirementsoutside North America;

 

· unexpectedchanges in regulatory requirements;

 

· reducedprotection for intellectual property rights in some countries;

 

· new anddifferent sources of competition;

 

·fluctuations in exchange rates; and

 

· tariffs andtrade barriers, import/export controls and other regulatory or contractuallimitations on our ability to sell or develop our products in certain foreignmarkets.

 

As we continue to expandour business globally, our success will depend, in large part, on our abilityto anticipate and effectively manage these and other risks associated with ourinternational operations. Our failure to manage any of these risks successfullycould harm our international operations and reduce our international sales,adversely affecting our business, operating results and financial condition.

 

***We may need additional capital in the future, which may notbe available to us on favorable terms, or at all, and may dilute your ownershipof our common stock.***

 

We have historicallyrelied on outside financing and cash from operations to fund our operations,capital expenditures and expansion. We may require additional capital fromequity or debt financing in the future to:

 

· takeadvantage of strategic opportunities including more rapid expansion of ourbusiness or the acquisition of complementary products, technologies orbusinesses; and

 

· develop newproducts or enhancements to existing products.

 

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We may not be able tosecure timely additional financing on favorable terms, or at all. The terms ofany additional financing may place limits on our financial and operatingflexibility. If we raise additional funds through further issuances of equity,convertible debt securities or other securities convertible into equity, ourexisting stockholders could suffer significant dilution in their percentageownership of our company, and any new securities we issue could have rights,preferences and privileges senior to those of holders of our common stock. Ifwe are unable to obtain adequate financing or financing on terms satisfactoryto us, if and when we require it, our ability to grow or support our businessand to respond to business challenges could be significantly limited.

 

***We may engage in future acquisitions that could disrupt ourbusiness, cause dilution to our stockholders and harm our business, operatingresults or financial condition.***

 

While we currently haveno acquisitions of other businesses pending or planned, we have, from time totime, evaluated acquisition opportunities and may pursue acquisitionopportunities in the future. We have very little experience consummatingacquisitions, and therefore our ability as an organization to make acquisitionsis unproven. We may not be able to find suitable acquisition candidates and wemay not be able to complete acquisitions on favorable terms, if at all. If wedo complete acquisitions, we may not ultimately strengthen our competitiveposition or achieve our goals, or such acquisitions may be viewed negatively bycustomers, financial markets or investors. In addition, any acquisitions thatwe make could lead to difficulties in integrating personnel and operations fromthe acquired businesses and in retaining and motivating key personnel fromthese businesses. Acquisitions may disrupt our ongoing operations, divertmanagement from day-to-day responsibilities, increase our expenses or adverselyimpact our business, operating results and financial condition. Futureacquisitions may reduce our cash available for operations and other uses andcould result in an increase in amortization expense related to identifiableassets acquired, potentially dilutive issuances of equity securities or theincurrence of debt, which could harm our business, operating results andfinancial condition.

 

***If we fail to manage future growth effectively, our businesscould be harmed.***

 

We have expanded ouroperations significantly since inception and anticipate that furthersignificant expansion will be required. For example, our revenues increasedfrom $59.7 million in 2005 to $145.8 million in 2007, and $117.4million for the six months ended June 30, 2008, and the number of our employeesincreased from 200 at the beginning of 2005 to 676 as of June 30, 2008.This growth has placed significant demands on our management, as well as ourfinancial and operational resources. If we do not effectively manage our futuregrowth, the efficiency of our operations and the quality of our products couldsuffer, which could adversely affect our business and operating results. Toeffectively manage this growth, we will need to continue to:

 

· implementappropriate operational, financial and management controls, systems andprocedures, including continued implementation of our enterprise-wide financialsystem;

 

· expand ourmanufacturing capacity and scale of production;

 

· expand oursales, marketing and distribution infrastructure and capabilities; and

 

· provideadequate training and supervision to maintain high quality standards.

 

***We have incurred, and will continue to incur, significantincreased costs as a result of operating as a public company, and ourmanagement will be required to devote substantial time to new complianceinitiatives.***

 

As a public company, wehave incurred, and will continue to incur, significant legal, accounting andother expenses that we did not incur as a private company. In addition, theSarbanes-Oxley Act of 2002, and rules subsequently implemented by theSecurities and Exchange Commission and the NASDAQ Stock Market, imposeadditional requirements on public companies, including requiring changes incorporate governance practices. Our management and other personnel will need todevote a substantial amount of time to these compliance initiatives. Moreover,these rules and regulations will increase our legal and financialcompliance costs and will make some activities more time-consuming and costly.For example, we expect these rules and regulations to make it moredifficult and more expensive for us to obtain director and officer liabilityinsurance, and we may be required to accept reduced policy limits and coverageor incur substantial additional costs to maintain the same or similar coverage.These rules and regulations could also make it more difficult for us toattract and retain qualified persons to serve on our board of directors, ourboard committees or as executive officers.

 

In addition, theSarbanes-Oxley Act requires, among other things, that we maintain effectiveinternal control over financial reporting and disclosure controls andprocedures. In particular, for the year ending December 31, 2008, we mustperform system and process evaluation and testing of our internal control overfinancial reporting to allow management and our independent registered publicaccounting firm to report on the effectiveness of our internal control overfinancial reporting, as required by Section 404 of the Sarbanes-Oxley Act.Our testing, or the subsequent testing by our independent registered publicaccounting firm, may reveal deficiencies in our internal control over financialreporting that are deemed to be material weaknesses. Our compliance with Section 404will require that we incur substantial expense and expend significantmanagement time on compliance-related issues. We will need to hire additionalaccounting and financial staff with appropriate public company experience andtechnical accounting 

 

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knowledge. Moreover, ifwe are not able to comply with the requirements of Section 404 in a timelymanner, or if we or our independent registered public accounting firm identifydeficiencies in our internal control over financial reporting that are deemedto be material weaknesses, the market price of our stock could decline and wecould be subject to sanctions or investigations by the NASDAQ Stock Market, theSecurities and Exchange Commission or other regulatory authorities, which wouldrequire additional financial and management resources.

 

***We are subject to governmental export and import controlsthat could subject us to liability or impair our ability to compete ininternational markets.***

 

Our products are subjectto United States export controls and may be exported outside the United Statesonly with the required level of export license or through an export licenseexception, because we incorporate encryption technology into our products. Inaddition, various countries regulate the import of certain encryptiontechnology and have enacted laws that could limit our ability to distribute ourproducts or could limit our customers’ ability to implement our products inthose countries. Changes in our products or changes in export and importregulations may create delays in the introduction of our products ininternational markets, prevent our customers with international operations fromdeploying our products throughout their networks or, in some cases, prevent theexport or import of our products to certain countries altogether. Any change inexport or import laws and regulations, shifts in approach to the enforcement orscope of existing laws and regulations, or change in the countries, persons ortechnologies targeted by such regulations, could result in decreased use of ourproducts by, or in our decreased ability to export or sell our products to,existing or potential customers with international operations. Any decreaseduse of our products or limitation on our ability to export or sell our productswould likely adversely affect our business, operating results and financialcondition.

 

***Compliance with environmental matters and worker health andsafety laws could be costly, and noncompliance with these laws could have amaterial adverse effect on our results of operations, expenses and financialcondition.***

 

Some of our operationsuse substances regulated under various federal, state, local and internationallaws governing the environment and worker health and safety, including thosegoverning the discharge of pollutants into the ground, air and water, themanagement and disposal of hazardous substances and wastes, and the cleanup ofcontaminated sites. Some of our products are subject to various federal, state,local and international laws governing chemical substances in electronicproducts. We could be subject to increased costs, fines, civil or criminalsanctions, third-party property damage or personal injury claims if we violateor become liable under environmental and/or worker health and safety laws.

 

In January 2003, theEuropean Union, or EU, issued two directives relating to chemical substances inelectronic products. The Waste Electrical and Electronic Equipment Directive,referred to as WEEE, requires producers of electrical goods to pay forspecified collection, recycling, treatment and disposal of past and futurecovered products. The deadline for enacting and implementing the WEEE directivewas August 13, 2004, although extensions were granted in some countries.Producers became financially responsible under WEEE related legislationbeginning in August 2005. The other directive, the Restriction on the useof certain Hazardous Substances, referred to as RoHS, restricts lead and otherhazardous substances in electronic equipment placed on the EU market after July 1,2006. If we fail to comply with these directives, we may suffer a loss ofrevenues, be unable to sell our products in certain markets and countries, besubject to penalties and fines or suffer a competitive disadvantage. Similarlegislation could be enacted in other jurisdictions, including in China, Japanor the United States, and the scope of new legislation with respect tocurrently unregulated substances is uncertain. Costs to comply with WEEE orRoHS related legislation or similar future legislation, if applicable, couldinclude costs associated with modifying our products, recycling and other wasteprocessing costs, legal and regulatory costs and insurance costs. We arecurrently in compliance with these directives; however, we have incurredsignificant costs related to compliance with current requirements. The costs tocomply with current and future environmental and worker health and safety lawsmay have a material adverse effect on our results of operations, expenses andfinancial condition.

 

**RisksRelated to Our Intellectual Property**

 

***Our ability to compete and the success of our business couldbe jeopardized if we are unable to rely on our patent rights.***

 

Our success and abilityto compete depends in part upon our ability to obtain protection in the UnitedStates and other countries for our products by establishing and maintainingintellectual property rights relating to or incorporated into our technologyand products. We own a variety of patents and patent applications in the UnitedStates and corresponding patents and patent applications in foreignjurisdictions. However, we have not obtained patent protection in each marketin which we plan to compete. To date, our patent portfolio has not preventedother companies from competing against us, and we do not know how successful wewould be if we sought to enforce our patent rights against suspectedinfringers. Our pending and future patent applications may not issue as patentsor, if issued, may not issue in a form that will be advantageous to us. Even ifissued, patents may be challenged, narrowed, invalidated or circumvented, whichcould limit our ability to stop competitors from marketing similar products orlimit the length of term of patent protection we may have for our products.Changes in either patent laws or in interpretations of patent laws in theUnited States and other countries may diminish the value of our intellectualproperty or narrow the scope of our patent protection. Any circumstance orchange that results in patent protection not being available for our productscould adversely affect our business, financial condition and results ofoperations.

 

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***If we are unable to protect the confidentiality of ourunpatented proprietary information and know-how, the value of our technologyand products could be adversely affected.***

 

In addition to patentedtechnology, we rely upon unpatented proprietary technology, processes andknow-how. We generally seek to protect this information in part byconfidentiality agreements with our employees, consultants and third parties.These agreements may be breached, and we may not have adequate remedies for anysuch breach. In addition, our trade secrets may otherwise become known or beindependently developed by competitors. If we are unable to protect theconfidentiality of our proprietary information and know-how, the value of ourtechnology and products could be adversely affected, which could in turnadversely affect our business, financial condition and results of operations.

 

***Claims by others that we infringe their proprietarytechnology could force us to incur significant costs.***

 

Third parties haveasserted, and may assert in the future, claims that our products infringepatents or patent applications under which we do not hold licenses or otherrights. Third parties may own or control these patents and patent applicationsin the United States and abroad. These third parties have brought, and could inthe future bring, claims against us that would cause us to incur substantialexpenses and, if successfully asserted against us, could cause us to paysubstantial damages. Further, if a patent infringement suit were broughtagainst us, we could be forced to stop or delay manufacturing or sales of theproduct that is the subject of the suit. In addition, we could be forced toredesign the product that uses any allegedly infringing technology.

 

We are presentlydefending two patent infringement lawsuits brought by UTStarcom, Inc. In February 2005,UTStarcom filed a lawsuit asserting infringement of a patent in the UnitedStates District Court for the Northern District of California relating to aprepaid billing function we provided to one of our customers. This patentlawsuit by UTStarcom has been stayed pending a reissue proceeding of the patentasserted in the case. Such a reissue proceeding may take a year or longer tocomplete. After the reissue proceeding, the stay of the lawsuit likely will belifted and the lawsuit may proceed. If this occurs, we will continue to defendourselves in this litigation, which will require a significant investment oftime and financial resources. A finding that we have infringed this patent mayrequire us to pay damages based on our past sale of the prepaid billingfunction and, in addition, may force us to limit or cease development,manufacturing and sales of the prepaid billing function. This could adverselyaffect our business, financial condition and results of operations.

 

In May 2007,UTStarcom filed a lawsuit against us and a number of our employees and formeremployees in the United States District Court for the Northern District ofIllinois alleging violations of the Illinois trade secrets act, infringement offive patents assigned to UTStarcom, intentional interference with UTStarcom’sbusiness relations and declarations of ownership relating to one of our patentsand three of our patent applications. The complaint contains allegations, amongothers, that a number of former employees of a business unit UTStarcomacquired, who subsequently worked for us, took UTStarcom’s trade secrets withthem and improperly used those trade secrets to develop, manufacture and marketour 3G wireless products, and that such products incorporate UTStarcomconfidential technical information, including UTStarcom’s proprietary virtualprivate network and EV-DO features. UTStarcom further alleges that we havedisclosed UTStarcom’s trade secrets in one of our patents and three of ourpatent applications, and that this patent and these patent applications legallybelong to UTStarcom based on the inventors’ previous work at the business unitacquired by UTStarcom. In December 2007, UTStarcom filed an amendment tothe complaint, which added new claims for declaration of ownership of four moreof our patent applications, copyright infringement, breach of restrictivecovenants against the employee and former employee defendants, and aiding andabetting the employee and former employee defendants’ breaches of the duty ofloyalty and the employment agreements. The amendment to the complaint alsoadded another employee as a defendant. In January 2008, we filed a motionto dismiss, or in the alternative for a more definite statement regarding, thetrade secret, copyright, breaches of restrictive covenants, and aiding andabetting claims of the amendment to the complaint. In May 2008, the Courtgranted our motion, in-part, and ordered UTStarcom to provide a more definitestatement of its claims. Also in May 2008, UTStarcom filed a Third AmendedComplaint. In June 2008, we moved to dismiss the trade secret, copyright,breaches of restrictive covenants, and aiding and abetting claims (Counts I,VI, and VIII-XV) of the Third Amended Complaint, for failure to comply with theCourt’s Order to provide a more definite statement of those claims. In July 2008,the Court granted our motion and dismissed those claims. On August 1, 2008,UTStarcom filed a “Motion for Leave to Amend the Complaint to Provide a MoreDefinite Statement and Clarification of the 7/23 Order.” Following dismissal ofthe claims, UTStarcom’s patent infringement and declaration of ownership claimsremain. In this lawsuit, UTStarcom seeks unspecified monetary damages, punitivedamages, injunctive relief, declarations of ownership relating to the specifiedpatent and patent applications owned by us, findings of misappropriation oftrade secrets, patent infringement and copyright infringement, costs andattorneys fees. We will vigorously defend ourselves in this litigation and we havefiled counterclaims. The defense of this lawsuit and the prosecution of ourcounterclaims will require significant investment of time and financialresources. A finding in UTStarcom’s favor in this lawsuit may require us to paysubstantial damages based on the past sales of our ST16 product, may force usto pay royalties on past or future sales of our ST16 or ST40 products, mayforce us to limit or cease development, manufacturing and sales of the ST16 andST40, which are our only product platforms, may require that key employees betransferred to other positions or functions, or temporarily prohibited fromworking for us, and may result in the loss or assignment of ownership of aspecified patent and seven patent applications owned by us. This could adverselyaffect our business, financial condition and results of operations.

 

As a result of patentinfringement claims, or in order to avoid potential claims, we may choose or berequired to seek a license from the third party and be required to pay licensefees or royalties or both. These licenses may not be available on acceptableterms, 

 

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or at all. Even if wewere able to obtain a license, the rights may be nonexclusive, which couldresult in our competitors gaining access to the same intellectual property.Ultimately, we could be forced to cease some aspect of our business operationsif, as a result of actual or threatened patent infringement claims, we areunable to enter into licenses on acceptable terms. This could significantly andadversely affect our business, financial condition and results of operations.

 

In addition toinfringement claims against us, we may become a party to other types of patentlitigation and other proceedings, including interference proceedings declaredby the United States Patent and Trademark Office and opposition proceedings inthe European Patent Office, regarding intellectual property rights with respectto our products and technology. The cost to us of any patent litigation orother proceeding, even if resolved in our favor, could be substantial. Some ofour competitors may be able to sustain the costs of such litigation or proceedingsmore effectively than we can because of their greater financial resources.Uncertainties resulting from the initiation and continuation of patentlitigation or other proceedings could have a material adverse effect on ourability to compete in the marketplace. Patent litigation and other proceedingsmay also require significant commitments of time by our management.

 

***Our use of open source could impose limitations on ourability to commercialize our products.***

 

We incorporate opensource software into our products. Although we monitor our use of open sourcesoftware closely, the terms of many open source licenses to which we aresubject have not been interpreted by United States or foreign courts, and thereis a risk that such licenses could be construed in a manner that imposesunanticipated conditions or restrictions on our ability to commercialize ourproducts. In such event, we could be required to seek licenses from thirdparties in order to continue offering our products, to re-engineer our productsor to discontinue sales of our products, any of which could materiallyadversely affect our business.

 

***We rely on the availability of licenses for intellectualproperty from third parties, and if these licenses are not available to us oncommercially reasonable terms, product sales and development may be delayed.***

 

We incorporate certainthird-party technologies, including software programs, into our products andmay need to utilize additional third-party technologies in the future. However,licenses to relevant third-party technology may not continue to be available tous on commercially reasonable terms, or at all. Therefore, we could face delaysin product releases until alternative technology can be identified, licensed ordeveloped, and integrated into our current products. These delays, if theyoccur, could materially adversely affect our business.

 

**ITEM2.    UNREGISTERED SALES OF EQUITY SECURITIES AND USE OFPROCEEDS**

 

*(b) Useof Proceeds from Public Offerings of Common Stock*

 

In June 2007, wecompleted an initial public offering of common stock pursuant to a RegistrationStatement on Form S-1 (Registration No. 333-141092) which the SECdeclared effective on June 5, 2007. Pursuant to the registrationstatement, we registered the offering and sale of an aggregate of 12,115,067shares of our common stock, of which 10,580,226 shares were sold by usincluding 1,580,226 shares sold in connection with the underwriters’ optiondescribed below, and 1,534,841 shares were sold by certain stockholders, at aprice of $12.00 per share. The underwriters exercised their option to purchasethe additional 1,580,226 shares of our common stock at the initial publicoffering price of $12.00 per share on June 8, 2007 and the offering closedon June 11, 2007. The underwriters for the offering were Goldman, Sachs &Co., Lehman Brothers, JPMorgan and Thomas Weisel Partners LLC.

 

We raised a total of$127.0 million in gross proceeds from the initial public offering, orapproximately $116.0 million in net proceeds after deducting underwritingdiscounts and commissions of $8.9 million and other estimated offeringcosts of approximately $2.1 million. The selling stockholders received atotal of approximately $18.4 million in gross proceeds from the initialpublic offering or approximately $17.1 million of net proceeds afterdeducting the underwriting discounts. We have invested the remaining netproceeds in cash and cash equivalents, primarily money-market mutual funds.None of the remaining net proceeds were paid, directly or indirectly, todirectors, officers, persons owning ten percent or more of our equitysecurities, or any of our other affiliates.

 

In October 2007, wecompleted a public offering of common stock pursuant to a RegistrationStatement on Form S-1 (Registration No. 333-146717) which the SECdeclared effective on October 31, 2007. Pursuant to the registrationstatement, we registered the offering and sale of an aggregate of 8,000,000shares of our common stock, of which 3,880,000 shares were sold by us and4,120,000 shares were sold by certain stockholders, at a price of $24.00 pershare. The underwriters for the offering were Goldman, Sachs & Co.,Lehman Brothers, JPMorgan and Thomas Weisel Partners LLC.

 

We raised a total of$93.1 million in gross proceeds from the public offering, or approximately$88.1 million in net proceeds after deducting underwriting discounts andcommissions of $4.4 million and other estimated offering costs. Theselling stockholders received a total of approximately $98.9 million ingross proceeds from the public offering or approximately $94.2 million ofnet proceeds after deducting the underwriting discounts. We have invested theremaining net proceeds in cash and cash equivalents, primarily money-marketmutual funds. None of the remaining net proceeds were paid, directly orindirectly, to directors, officers, persons owning ten percent or more of ourequity securities, or any of our other affiliates.

 

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**ITEM4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**

 

We held our 2008 AnnualMeeting of Stockholders on May 22, 2008. At the 2008 Annual Meeting, our stockholders elected two directornominees and ratified the appointment of PricewaterhouseCoopers LLP as ourindependent registered public accounting firm for the fiscal year ending December 31,2008.

 

At the 2008 Annual Meeting, our stockholders electedSean M. Dalton and Matthew J. Desch to serve as Class I directors untilour 2011 annual meeting of stockholders and until their successors are electedand qualified.  In addition to theelection of Mr. Dalton and Mr. Desch, our directors James A. Dolce, Jr.and Kenneth A. Goldman continue in office for terms ending in 2009 and ourdirectors Edward T. Anderson, Timothy A. Barrows and Ashraf A. Dahod continuein office for terms ending in 2010, in each case, until his successor iselected and qualified.

 

The matters acted upon at the 2008 Annual Meeting, andthe voting tabulation for each matter, are as follows:

 

(1)  To elect two Class I directors to ourboard of directors, each to serve for a term ending in 2011, or until hisrespective successor has been duly elected and qualified:

 
| **Nominees for Election as a Class I Director:** | ** ** | **Votes For** | ** ** | **Votes Withheld** | ** ** |
|-------------------------------------------------------------------------------------|------------|--------------------|------------|-------------------------|------------|
| Sean M. Dalton                                                                      |       | 53,172,175         |       | 87,604                  |       |
| Matthew J. Desch                                                                    |       | 52,648,313         |       | 611,466                 |       |

 

(2)  To ratify theselection of PricewaterhouseCoopers LLP as our independent registered publicaccounting firm for the fiscal year ending December 31, 2008, which matterwas approved by a vote of 53,209,242 shares voting for, 6,492 shares votingagainst and 44,045 shares abstaining.

 

**ITEM6.    EXHIBITS**

 

The following in an indexof the exhibits included in this report:

 
| **Exhibit No.** | ** ** | **Description**                                                                                                                                                                                      |
|----------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **           | ** ** | ** **                                                                                                                                                                                           |
| 31.1                 |       | Certification of Chief  Executive Officer, pursuant to Securities Exchange Act  Rules 13a-14(a) and 15d-14(a), as adopted pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002. |
|                 |       |                                                                                                                                                                                                 |
| 31.2                 |       | Certification of Chief  Financial Officer, pursuant to Securities Exchange Act  Rules 13a-14(a) and 15d-14(a), as adopted pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002. |
|                 |       |                                                                                                                                                                                                 |
| 32.1                 |       | Certification of Chief  Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350,  as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.           |

 

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Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 
|                 | **STARENT NETWORKS, CORP.** |
|----------------------|-----------------------------|
|                 | *(Registrant)*              |
| Date: August 8, 2008 |                        |   |
|                 |                        |   |
|                 | By:                         | /s/ ASHRAF M.  DAHOD |
|                 |                        | Ashraf M. Dahod |
|                 |                        | *President  and Chief Executive Officer* |
|                 |                        | *(Principal  Executive Officer)* |
| Date: August 8, 2008 |                        |   |
|                 |                        |   |
|                 | By:                         | /s/ PAUL J.  MILBURY |
|                 |                        | Paul J. Milbury |
|                 |                        | *Vice  President, Operations and* |
|                 |                        | *Chief  Financial Officer* |
|                 |                        | *(Principal  Financial Officer)* |
| Date: August 8, 2008 |                        |   |
|                 |                        |   |
|                 | By:                         | /s/ GEORGE W.  HALE |
|                 |                        | George W. Hale |
|                 |                        | *Vice  President, Finance and* |
|                 |                        | *Corporate  Controller* |
|                 |                        | *(Principal  Accounting Officer)* |

 

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**EXHIBITINDEX**

 
| **Exhibit No.** | ** ** | **Description**                                                                                                                                                                                      |
|----------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **           | ** ** | ** **                                                                                                                                                                                           |
| 31.1                 |       | Certification of Chief  Executive Officer, pursuant to Securities Exchange Act  Rules 13a-14(a) and 15d-14(a), as adopted pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002. |
|                 |       |                                                                                                                                                                                                 |
| 31.2                 |       | Certification of Chief  Financial Officer, pursuant to Securities Exchange Act  Rules 13a-14(a) and 15d-14(a), as adopted pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002. |
|                 |       |                                                                                                                                                                                                 |
| 32.1                 |       | Certification of Chief  Executive Officer and Chief Financial Officer pursuant to 18 U.S.C.  Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002.          |

 

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