Use these links to rapidly review the documentNMS COMMUNICATIONS CORPORATION ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 2007 TABLE OF CONTENTS



UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549

FORM 10-K

|(Mark One)                                                    |                                                                                         
|------------------------------------------------------------- | ----------------------------------------------------------------------------------------
|ý                                                             | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934    
|For the fiscal year ended December 31, 2007                  
|or                                                           
|o                                                             | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|For the transition period
from                             to

Commission file number: 0-23282

NMS COMMUNICATIONS CORPORATION(Exact name of registrant as specified in its charter)

|Delaware(State or other jurisdiction of incorporation or organization)        |  | 04-2814586(I.R.S. Employer Identification No.)
|----------------------------------------------------------------------------- |  | ----------------------------------------------
|100 Crossing Boulevard
Framingham, MA(Address of principal executive offices) |  | 01702(Zip Code)                               
|Registrant's telephone number, including area code:(508) 271-1000            

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class

Name of Exchange on Which RegisteredCommon Stock, $.01 par value

NASDAQ Global Select Market


Securities registered pursuant to Section 12(g) of the Act:None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o    No ý

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange
Act. Yes o    No ý

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes ý    No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. ý

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, or smaller reporting
company. See the definitions of "large accelerated filer", "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

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

Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act). Yes o    No ý

The aggregate market value of the registrant's common stock held by non-affiliates of the registrant was approximately $78.4 million based on
last reported sale price of the common stock on the NASDAQ Global Market System on June 29, 2007.

The
number of shares outstanding of each of the registrant's Common Stock, par value $0.01 per share, as of March 24, 2008: 45,733,730 shares.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant's definitive Proxy Statement on Schedule 14-A to be filed with the Securities and Exchange Commission within
120 days of the end of the fiscal year ended December 31, 2007 relating to the 2008 Annual Meeting of Stockholders of the registrant are incorporated by reference into Part III of
this Form 10-K.



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NMS COMMUNICATIONS CORPORATION        ANNUAL REPORT ON FORM 10-K        FOR THE FISCAL YEAR ENDED DECEMBER 31, 2007        TABLE OF CONTENTS



|PART I     |  |                                                                                                              |  |   
|---------- |  | ------------------------------------------------------------------------------------------------------------ |  | --
|Item 1.    |  | Business                                                                                                     |  | 1 
|Item 1A.   |  | Risk Factors                                                                                                 |  | 10
|Item 1B.   |  | Unresolved Staff Comments                                                                                    |  | 17
|Item 2.    |  | Properties                                                                                                   |  | 17
|Item 3.    |  | Legal Proceedings                                                                                            |  | 17
|Item 4.    |  | Submission of Matters to a Vote of Security Holders                                                          |  | 17
|PART II    |  |                                                                                                              |  |   
|Item 5.    |  | Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |  | 18
|Item 6.    |  | Selected Financial Data                                                                                      |  | 21
|Item 7.    |  | Management's Discussion and Analysis of Financial Condition and Results of Operations                        |  | 22
|Item 7A.   |  | Quantitative and Qualitative Disclosures About Market Risk                                                   |  | 40
|Item 8.    |  | Financial Statements and Supplementary Data                                                                  |  | 41
|Item 9.    |  | Changes in and Disagreements With Accountants on Accounting and Financial Disclosure                         |  | 81
|Item 9A.   |  | Controls and Procedures                                                                                      |  | 81
|Item 9B.   |  | Other Information                                                                                            |  | 81
|PART III   |  |                                                                                                              |  |   
|Item 10.   |  | Directors and Executive Officers and Corporate Governance                                                    |  | 82
|Item 11.   |  | Executive Compensation                                                                                       |  | 84
|Item 12.   |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters               |  | 84
|Item 13.   |  | Certain Relationships and Related Transactions, and Director Independence                                    |  | 84
|Item 14.   |  | Principal Accounting Fees and Services                                                                       |  | 84
|PART IV    |  |                                                                                                              |  |   
|Item 15.   |  | Exhibits and Financial Statement Schedules                                                                   |  | 85
|Signatures |  | 86                                                                                                          

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PART I

ITEM 1.    BUSINESS

This annual report on Form 10-K contains "forward-looking statements" within the meaning of Section 27A of the
Securities Exchange Act of 1933 and Section 21E of the Securities Exchange Act of 1934 that involve substantial risks and uncertainties. If any of the following risks and uncertainties actually
occur, our business, financial condition and operating results would likely suffer. You can identify these forward-looking statements by our use of the words "believes," "anticipates," "plans,"
"expects," "may," "will," "would," "intends," "estimates," "predicts," "potential," "continue" and similar expressions, whether in the negative or affirmative. We cannot guarantee that we actually
will achieve these plans, intentions and expectations disclosed in the forward-looking statements we make. Factors that could cause actual results to differ from the forward-looking statements
include, but are not limited to, those discussed in Item 1A. "Risk Factors" below, as well as other risks and uncertainties referenced in this annual report on Form 10-K. We
do not assume any obligations to update any of the forward-looking statements after the date of this Form 10-K to conform these statements to actual results.

NMS Communications, LiveWire Mobile, and MyCallerare registered trademarks of NMS Communications Corporation. OpenAccessis a trademark of NMS Communications
Corporations.NMSis a brand name of NMS Communications
Corporation. All other brand names or trademarks appearing in this annual report Form 10-K are the property of their respective holders.

References
in this Form 10-K to the "Company," the "registrant," "we," "our" and "us" refer to NMS Communications Corporation and its subsidiaries.

Overview

We are a leading provider of applications and platforms for value-added services in wireless and wireline communications. We are comprised of two main operating
divisions: NMS Communications (formerly Communications Platforms) and LiveWire Mobile (formerly Mobile Applications). A third operating division, Network Infrastructure ("NI"), was sold to Verso
Technologies, Inc., a Minnesota Corporation ("Verso"), on December 21, 2007. The NI division focused on solutions for the RAN portion of mobile operators' infrastructure. In accordance
with Statement of Financial Standards ("SFAS") No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"), the operating results of the NI
division have been reclassified as a discontinued operation in the consolidated statement of operations and related disclosures included in the notes to the consolidated financial statements and in
"Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this annual report on Form 10-K for all periods presented. Our description of the
business focuses on continuing operations.

In
January 2008, we formed a wholly-owned subsidiary, LiveWire Mobile, Inc. ("LiveWire Mobile"), a Delaware Corporation. In conjunction with creating LiveWire Mobile, we intend to
contribute or license the personnel, assets, liabilities and intellectual property rights of our LiveWire Mobile division. On March 17, 2008, LiveWire Mobile acquired Groove Mobile, Inc.
("Groove Mobile") for cash consideration of $14.5 million. Groove Mobile, whose operations are based in Bedford, Massachusetts, is a provider of mobile music solutions. The Company believes the
acquisition will enable LiveWire Mobile to expand its ability to offer a portfolio of managed services, including ringback tones, ringtones and full track music and video downloads delivered though an
integrated storefront.



Our NMS Communications division is a leading provider of embedded technology and platforms that enable the rapid creation and deployment of a broad range of
value-added services for mobile and

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converged
networks, ranging from voice mail and interactive voice response solutions, to video portals and mobile TV, and multi-media messaging systems. Our customers include major network equipment
providers, application developers and systems integrators. For over 20 years, our customers have been deploying systems based on our products in wireless and wireline networks and enterprises
around the world. Our key value proposition is helping our partners get to market quickly with innovative mobile voice, video and data services.

We
sell our products worldwide through our direct sales force as well as through channel partners. Our customers and channel partners include leading telecommunications operators,
network equipment
providers and application providers such as, Ericsson AB, Nokia-Siemens Networks, Avaya, Inc., Alcatel-Lucent, Comverse Technology, Inc., Huawei Technologies Co., Ltd., OnMobile Global Limited,
and Intervoice, Inc., as well as smaller regional value-added resellers.



Our LiveWire Mobile division is a leading global provider of personalization services for mobile network operators. These services allow subscribers to use music,
audio and video content to personalize their mobile service by creating unique ringback tones. LiveWire Mobile achieves this by infusing powerful personalization capabilities into traditional mobile
communications that are easy to use for subscribers and lucrative for network operators.

We
sell these solutions for purchase primarily through channel partners and more recently, as a managed service. Mobile network operators add LiveWire Mobile offerings to drive
subscriptions, content consumption and advertising revenue, thereby growing average revenue per user ("ARPU"), reducing turnover and growing their revenue.

LiveWire
Mobile sells its products worldwide through our direct sales force as well as through channel partners. Our customers and channel partners include Vodafone, "3" (Hutchison
Telecom), Virgin Mobile USA, Inc., Cricket Communications, Inc., Ericsson AB, and Nokia-Siemens Networks. LiveWire Mobile's ringback service is deployed in approximately 30 operators
around the world with seven million active subscribers.

Industry Overview

Telecommunications is a large, complex and rapidly evolving market that includes wireless and traditional wireline communications services, and the related
applications, equipment and infrastructure needed to deliver voice, video and data over circuit, packet and broadband networks. Various forces are enabling growth, including:



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Despite
the opportunities for growth in segments of the telecommunications market, these opportunities are not without challenges for market participants, such as telecommunications
operators and network equipment and application providers.



Telecommunications operators, who provide wireless and wireline services, face a highly competitive and capital-intensive environment. Key challenges and
initiatives in the industry include:





Network equipment providers, as well as application providers, who include systems integrators, original equipment manufacturers and independent software vendors,
provide network systems, applications and a broad range of value-added services to telecommunications operators and enterprises. These offerings include interactive voice response systems, customer
self-service and contact center solutions, signaling and media services, conferencing over Public Switched Telephone Network ("PSTN"), IP and mobile networks, unified communications,
multimedia messaging, short message systems, call personalization applications, mobile video applications and services, and content-based
applications like ringback tones. These offerings enable telecommunications operators and enterprises to rapidly deploy premium services for their customers.

Network
equipment and application providers operate in a market dictated largely by rapid changes in technologies and customer requirements. Key challenges they face include:



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Our Solutions

We believe our products and services provide solutions that address the needs of telecommunications operators, network equipment providers and application
providers.



Our NMS Communications division offerings address a wide range of our customers' needs as they seek to develop and deploy enhanced voice and data services and
applications, and improve the quality
and efficiency of communications networks. We believe that our offerings provide one or more of the following benefits to our customers:

Speed time to market for network equipment and application providers.Network equipment and application providers leverage
our offerings to provide lower cost, higher quality telecommunications systems more quickly to meet the demands of their service provider and enterprise customers. Our offerings are designed for
flexibility in various development and network environments, utilizing open interfaces and industry standards. We believe that with our offerings, our network equipment and application provider
customers are able to reduce product lifecycle costs, increase competitive value and remain focused on their core competencies and technologies.

Enable cost-effective and timely deployment of communications applications and services.Our media servers and
system building block boards and software provide a comprehensive set of enabling technologies for developing and deploying next-generation applications.

Provide flexible, interoperable, scalable and low cost of ownership solutions.Our products are designed to provide maximum
flexibility in designing and upgrading applications, by utilizing open interfaces, industry standards and network flexibility for PSTN, signaling system 7 ("SS7"), IP and IP multimedia subsystem
("IMS") based networks. Our products are also highly scalable and can address needs ranging from a handful of users to millions of subscribers. Additionally, our servers, building block boards and
applications leverage mass-market components and custom silicon, with the objective of price/performance leadership. Our products have lower acquisition costs than many competitive
products, are space-efficient, consume minimal power, and integrate with operators' existing network infrastructures, resulting in low cost of ownership.



Our LiveWire Mobile division offerings enable cutting-edge personalization services, such as ringback tones, for mobile operators.

Our
LiveWire Mobile division delivers end-to-end subscriber personalization solutions that integrate with existing operator networks and deliver music content,
subscriber profiles and preference capabilities used by service providers for revenue producing services such as ringback tones. We sell these solutions both as a bundled product and services
(including installation, maintenance support and training) purchase (which we refer to as a "cap-ex" arrangement) and also as a recurring managed service.

Products and Services



Our NMS Communications division offers a comprehensive line of products and services that enable our partners to more quickly and efficiently develop and deploy
enhanced voice, video and data value added services and applications in wireline and wireless networks and enterprises. These products encompass core enabling technologies, provided by our Open Access
family; servers and application

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platforms,
offered within our Vision family; application components, which deliver largely-complete pre-developed applications for selected mobile video applications and Voice Quality
Systems ("VQS").

Open Access.Open Access is a family of boards and software that enable developers to create innovative and profitable voice,
video and data applications. The Open Access products are open, scalable, high-density building blocks that give developers the processing power and capacity needed to rapidly develop an
ever-increasing array of current and next-generation capabilities such as live, streaming two-way video, speech-enabled call centers, VoIP conferencing, voice and
video SMS and prepaid call processing. Open Access products are flexible, supporting a variety of networks including time division multiplexing, IP and 3G, enabling developers to meet the needs of
large carrier-grade networks and IMS technologies.

Open
Access products include: software-based or printed-circuit board-based media processing that offers a variety of video, voice and data services; network signaling boards and
software to handle a variety of signal protocols such as session initiation protocol, integrated services digital network/channel associated signaling and SS7, so operators can scale their services to
meet growing demand; and a powerful, flexible development environment that enables users to develop custom applications using one set of unified tools. Board based products are available in a variety
of form factors, including peripheral component interconnect ("PCI"), PCI express, compact PCI, and advanced telecommunications architecture.

Vision Family.The Vision family of media servers and gateways is a broad line of application-optimized communication servers
designed to help OEMs and application providers rapidly develop and deploy converged multimedia applications for 2G and 3G wireless, VoIP, fixed-mobile convergence networks. Vision provides the
broadest and most capable set of off-the-shelf,
system-level media solutions for creating a broad range of converged multimedia applications including ringback, prepaid calling, network conferencing, mobile centrex and video-enabled applications.
All Vision products are IMS-ready (IP Multimedia Subsystem, the emerging generation of carrier network infrastructure) and SIP-enabled, providing a future safe way to create
applications that will last.

Application Components.In conjunction with our development partners, we offer selected partner-developed
pre-programmed mobile video applications created by our development partners for sale through local system integrators and OEM partners. These pre-created "application
components" provide largely complete application frameworks that can be quickly customized for a particular carrier or OEM's need, designed to provide absolutely the fastest time to market. Solutions
are integrated with all required NMS Communications third party products, and are ready for deployment.

Voice Quality Systems.The VQS product line is built on technology that we acquired from Lucent Technologies, Inc. in
2005. These products incorporate electrical echo cancellation and acoustic echo control technology to reduce or eliminate the echo inherent in long distance, wireless and VoIP networks. Prior to 2007,
VQS consisted of both chip-level product sales to network equipment manufacturers and system-level product sales sold to network operators. Since 2007, the product line has consisted
primarily of chip-level sales to network equipment manufacturers, although we realize revenues from maintenance services and upgrades sales to network operators.



Mobile network operators add LiveWire Mobile applications and services to drive subscriptions, content consumption and advertising revenue, thereby growing ARPU,
reducing turnover, and growing their revenue.

MyCaller Ringback Platform.MyCallerallows mobile subscribers to select
original recordings of popular or other commercial music, sounds and voices for callers to hear in place of the conventional ringback ("ring, ring") tone until the call is answered. MyCallerruns on an
open, scalable, ready-to-deploy service delivery system that makes it possible for mobile operators
worldwide to offer multiple services, including market-specific and content-based, on the same system.

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In 2006, we acquired Openera Technologies Inc. ("Openera"). Openera has developed a set of client handset applications aimed at IMS and peer-to-peer
communications services. These applications include peer-to-peer video, active phonebook, and location-based services. We believe this set of applications complements our
existing application offerings. We did not recognize any revenues from such products in 2007, but anticipate revenue in 2008.



We offer a complete range of technical and professional services to support our customers throughout the product lifecycle including planning and design,
evaluation, development, deployment and maintenance. Our service offerings span basic customer service and support to advanced architecture and system design, custom programming, installation and
support, based on the needs of our customers. Service resources are distributed worldwide in our facilities to provide fast and accurate response to customer needs. Our services include:



Growth Strategy



Our NMS Communications division's primary focus is on mobility and next generation video-enabled services. Our strategies for growth include the following
elements:



Our LiveWire Mobile division's strategies for growth include the following elements:



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Business Segments and Geographic Information

We operate in two business segments: the NMS Communications division and the LiveWire Mobile division. For the years ended December 31, 2007, 2006 and
2005, 60%, 58% and 62%, respectively, of our total revenues were derived from operations outside North America and South America, collectively, of which 35%, 31% and 40% of overall revenues,
respectively, were derived from Asia and 25%, 27% and 22% of overall revenues, respectively, were derived from Europe, Middle East and Africa, collectively. For more segment and geographic
information, including revenue by segment and geographic area, operating income (loss) from continuing operations by segment for each of the three last fiscal years, and long-lived assets
by segment and geographic area for each of the
two last fiscal years, see our consolidated financial statements included in this annual report on Form 10-K, including Note 17 "Segment and Geographic Information."

Customers

We sell our products and services through our direct sales force and through channel partners, which include value-added resellers, distributors, systems
integrators and network equipment providers. For the years ended December 31, 2007, one customer represented 10% of our revenues. For the years ended December 31, 2006 and 2005, one
customer represented 15% and 24%, respectively, of our total revenues. At December 31, 2007, we did not have a significant backlog of unfilled orders. The table below sets forth a
representative list of significant customers by division:

NMS Communications Division

LiveWire Mobile DivisionAlcatel-Lucent

Cricket Communications, Inc.Avaya

Ericsson ABCisco Systems, Inc.

Nokia-Siemens NetworksComverse Technology, Inc.

Virgin Mobile USA, Inc.HCOM Pte. Ltd.

VodafoneHuawei Technologies Co., Ltd.


Sales and Marketing

We sell our products on a direct basis as well as through channel partners, which include value-added resellers, distributors, systems integrators and network
equipment providers, to telecommunications operators and application providers. As of December 31, 2007, our sales and marketing organization consisted of 86 employees in 12 offices worldwide,
including 35 employees in Asia, 32 employees in
North America and 19 employees in Europe. A portion of our direct sales force has been focused on selling our NMS Communications division products to network equipment and application providers.
Another segment of our direct sales force is focused on selling LiveWire Mobile applications and related managed services to network operators. Prior to the sale of the NI division on
December 21, 2007, a portion of our direct sales force was focused on selling our wireless backhaul optimization products to network operators.

At
the same time, we have recruited additional channel partners to expand the reach and improve coverage for our products and to enhance geographic coverage for our mobile applications
offerings. In addition to performing sales and some level of marketing support, these channel partners provide all or some of the following: pre- and post-sales support,
systems integration, and fulfillment and credit services. For the year ended December 31, 2007, 51% of our total revenues were generated by direct sales, and 49% was derived through channel
partners. Our marketing strategy consists of three primary methods to increase awareness and create demand for our offerings: public and analyst relations, direct marketing and trade show events. Our
public relations efforts are focused on communications industry-related and general business media relationships, which increase general awareness of our business and products, and on industry
analysts who can act as independent references and provide opinions on our

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technologies.
With our direct marketing effort, we target specific audiences with a variety of promotional materials consisting of mostly web-based communications. We also participate in
selected industry trade shows around the world.

Manufacturing

We utilize third-party contract manufacturing partners to assemble, test and ship all of our hardware product offerings. Through a supply agreement, we outsource
the manufacturing and order fulfillment of all printed circuit board products and subassemblies to Plexus Corporation ("Plexus"), a provider of advanced electronics design, testing and manufacturing
services. Arrow Electronics, Inc., a provider of manufacturing services, manufactures our Vision family and LiveWire Mobile products.

We
seek to use industry-standard components for our products. Many of these components are generally available from multiple suppliers. We also rely on sole source suppliers for certain
custom integrated circuits and other devices that are components of one or more of our products. In particular, Texas Instruments, Inc. is our sole source for the digital signal processors
("DSPs") used in many of our products. In addition, Agere Systems, Inc. ("Agere") is a sole supplier for certain integrated circuits used in our products. Although we believe we could develop other
sources for each of these custom devices, the process to qualify new suppliers could take several months. The manufacturing processes for our products are designed to comply with Federal
Communications Commission, Canadian Standards Association and Underwriters Laboratories safety requirements, and to IPC-610 standards of assembly workmanship. Additionally, we maintain a
formal product-specific structure for all required international regulatory and compliance testing. Consistent
with our commitment to provide the highest quality products and services to our customers, in 2002 and 2005 we received ISO 9001:2000 certification. This certification includes all design and
development activities. In 2005, we also received ISO 14001 certification. With the exception of our VQS products, our products are ROHS 5/6 compliant.

Research and Product Development

We believe that the extension and enhancement of existing products, the development of new products and the development of open technologies, are critical to our
future success. Therefore, we undertake direct research and development, engage in joint product development with selected partners and participate in the development of industry standards where
appropriate. Our research and development activities consist of the design, development, testing and enhancement of our products. During the years ended December 31, 2007, 2006 and 2005, we
spent $18.2 million, $21.8 million and $22.0 million, or 22%, 23%, and 20%, respectively, of our revenue on research and development. As of December 31, 2007, our current
product development is conducted by 148 employees located at our headquarters in Framingham, Massachusetts, and at our offices in, Schaumburg, Illinois, St.-Hubert, Quebec and Bangalore, India.

Intellectual Property

Our success depends in part on proprietary technology and know-how. We rely primarily on a combination of trade secret and copyright laws and
restrictions on access to protect our trade secrets and proprietary rights. We hold 34 issued patents and have filed an additional 17 patent applications. We distribute our software products under
license agreements, which grant customers a non-exclusive license to use the software and contain certain terms and conditions prohibiting its unauthorized reproduction or transfer. We
enter into confidentiality agreements with our suppliers and customers when we disclose proprietary information to them. In addition, we enter into confidentiality agreements and assignment of
invention agreements with our employees and consultants. Despite these precautions, unauthorized third parties may copy aspects of our products or obtain information that we regard as

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proprietary.
We believe that our products and technology do not infringe on any existing proprietary rights of others.

We
depend on development, supply, marketing, licensing and other relationships with companies for complementary technologies necessary for us to offer a broad range of products. These
relationships are generally non-exclusive and run for a finite term.

We
believe that, due to the rapid pace of innovation within the industry in which we participate, factors such as the technological and creative skills of our personnel, and ongoing
reliable product maintenance and support, are more important in establishing and maintaining a leadership position within the industry than are the legal protections for technologies conferred by
intellectual property laws.

Competition

Competition in the markets that we target for our products is intense and diverse. There is always the potential for new competitors to enter the markets we serve
in the future. A significant number of our target customers, both telecommunications operators and network equipment and application providers, currently use in-house development to
provide products and solutions similar to our offerings. While we must compete against these companies' in-house efforts, we believe that a trend towards outsourcing this type of
development will continue to broaden our market opportunity. We also believe that the key competitive differentiators in these markets include product quality and functionality,
ease-of-use, integration capabilities, price performance, cost of ownership, speed of deployment, technical support and integration and professional services. Current third
party competitors for our product areas include:



Open Access and Vision FamilyAudioCodes Ltd., Dialogic Corporation, Hewlett Packard, Inc.



MyCaller Ringback PlatformHuawei Technologies Co., Ltd., Comverse Technology, Inc., WiderThan Co., Ltd. (acquired by Real
Networks, Inc.)

Employees

As of December 31, 2007, we had 347 full-time employees, consisting of 148 in research and development, 63 in sales, 61 in administration and
finance, 37 in services, 23 in marketing and business development and 15 in operations. None of our employees are represented by a labor union. We have never experienced a work stoppage and consider
our relations with our employees to be good.

Discontinued Operations

On December 21, 2007, we entered into an Asset Purchase Agreement (the "Agreement") with Verso, dated December 20, 2007, to sell our NI division to
Verso (the "Transaction"). The closing of the Transaction occurred on December 21, 2007 (the "Closing Date"). Under the terms of the Agreement, we sold the NI division and certain assets and
liabilities of the NI division for consideration of $850,000 of cash and 5,374,033 shares of Verso common stock. The Agreement contains customary representations, warranties, covenants and agreements
of the Company and Verso and the terms of the Transaction provide registration rights of the Company with respect to the Verso common stock issued in the Transaction. We recorded a gain of
$1.6 million (net of income tax expense of $6 thousand) upon the sale of the NI division in the fourth quarter of 2007. The operating results of the NI division

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have
been reclassified as a discontinued operation in the accompanying consolidated financial statements for all historical reporting periods.

Additional Information

We were incorporated in Delaware in 1983. Our common stock has been publicly traded since our initial public offering in 1994. Our principal executive offices are
located at 100 Crossing Boulevard, Framingham, Massachusetts, 01702, and our main telephone number is 508-271-1000. We maintain a website with the address www.nmss.com.
We are not including the information contained on our website as a part of, or incorporating it by reference into, this annual report on Form 10-K. We make available, free of charge
through our website, our proxy statements, registration statements, annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on
Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(d) or 15(d) at the Securities and Exchange Act of 1934, as amended, as soon as reasonably
practicable after we electronically file such material with, or furnish such material to, the Securities and Exchange Commission ("SEC"). Our SEC filings are also available over the Internet at the
SEC's website at www.sec.gov. You may also read and copy any document we file by visiting the SEC's public reference room in Washington, D.C. at 100 F Street NE, Washington, DC 20549.
Please call the SEC at
1-800-SEC-0330 for further information about the public reference room.

ITEM 1A.    RISK FACTORS

The risks presented below may not be all of the risks that we may face. These are the factors that we believe could cause actual results to be different from
expected and historical results. Other sections of this report include additional factors that could have an effect on our business and financial performance. The industry in which we compete is very
competitive and changes rapidly. Sometimes new risks emerge, and management may not be able to predict all of them, or be able to predict how they may cause actual results to be different from those
contained in any forward-looking statements. You should not rely upon forward-looking statements as a prediction of future results.

We experienced losses in 2007 and 2006. We are not assured of profitability.

We experienced losses in 2007 and 2006. Past operating losses have adversely affected our working capital, total assets and stockholders' equity. Our current
operating plan for 2008 has established a cost structure, that the goal of which, based on expected revenue, will contribute to our profitability. If revenues do not improve, or if expenses are
greater than we anticipate, we may continue to experience losses, which could cause us to take actions to reduce operating costs.

Our operating results fluctuate and are difficult to predict, which could cause our stock price to decline.

Our revenues and net income, if any, in any particular period may be lower than revenues and net income, if any, in a preceding or comparable period. Factors
contributing to fluctuations, some of which are beyond our control, include:



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In
addition, we have historically operated with no significant backlog and a customer order pattern that is skewed toward the later weeks of the quarter. Any significant deferral of
orders for our products would cause a shortfall in revenues for the quarter. If our quarterly revenue or operating results fall below the expectations of investors or public market analysts, our
common stock price may decline substantially.

Higher
average selling prices and installation obligations for our products stemming from our offering of systems may result in sharper fluctuations in our financial results in any
particular quarter as the delay of any given sale or installation will have a greater impact on our revenues from period to period. We may receive one or more large orders in one quarter from a
customer and then receive no orders from that customer in the next quarter. As a result, our revenues may vary significantly from quarter to quarter.

Our growth strategy for our LiveWire Mobile division strategy relies on managed services offerings that may not generate revenues and may negatively affect our financial
performance.

The growth strategy of our LiveWire Mobile division relies on transitioning from a product and services sell-through model to one by which revenue is
derived from recurring monthly subscription and content fees from customers of our managed service offering. In the managed services model, we receive payment from our customers based on subscriber
counts and subscriber usage of our solutions. This business model may prove to be unsuccessful, adversely affecting our revenue streams. If we cannot achieve expected revenue streams, we will likely
need to accelerate the depreciation of assets capitalized for managed services, further negatively affecting our financial performance.

The markets we target may not develop in the manner or at the growth rate that we anticipate, which could limit our future revenues.

Our focus is on delivering or enabling mobile applications, particularly in the areas of next-generation voice messaging and video. Although we expect
growth in these areas, they are at times characterized by rapid technological change. As a result of these uncertainties, we may fail to generate demand for our products at the levels we anticipate,
which could limit our future revenues and harm our business.

We have launched significant initiatives involving new markets, products and sales and marketing strategies. We may not be successful with these initiatives, which could result
in reduced revenues and/or increased expenses.

Historically, our direct sales force has been focused on selling systems building blocks offered by our NMS Communications division to network equipment and
application providers. Over the past four years, we have evolved to selling more complex system-level products and applications to telecommunications operators and network equipment and application
providers. At the same time, we have recruited additional channel partners to expand the reach and improve coverage for all of our product lines. In addition to performing sales and some level of
marketing support, these channel partners provide all or some of the following: pre- and post-sales support, systems integration, and fulfillment and credit services. These
system level product sales and application product sales are more complex and have longer sales cycle. In order to succeed in this initiative, we must be successful in selling to our customers'
laboratories for evaluation and field trial, to their purchasing decision-makers, to their new services decision-makers, and to the appropriate network operations staff in order to

11

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achieve
customer acceptance of our systems products. Repeated customer acceptance is required to achieve market acceptance of our systems offerings. There can be no assurance that we will be
successful at implementing our initiatives, and if we fail, our revenues could be reduced and/or our expenses increased. Our channel partners may not perform as agreed or expected. There can be no
assurance that this model will be successful. Additionally, both our NMS Communications division and our LiveWire Mobile division have recently adopted a managed services offering pursuant to which
our revenue is a portion of the revenue achieved by our customers. There can be no assurance that this model will be successful.

We are dependent on channel partners to sell a substantial portion of our revenues and on other third parties to perform other functions important to our business.

In concert with our greater emphasis on systems offerings, we shifted the primary sales method of our systems building blocks to indirect sales through channel
partners. These channel partners are companies in the business of reselling communications products like those we produce to application developers, systems integrators and others. In the past, we
have sold the vast majority of these products directly with our own sales force. As a result, we are increasingly reliant on the effectiveness of channel partners' sales, marketing, and distribution
capabilities to generate and fulfill demand for our products. For the year ended December 31, 2007, 49% of our revenues were attributable to channel partners.

We
are also increasingly reliant on strategic alliances with hardware, software, technology, application, and content and system integration partners to bring our offerings to market and
to reach targeted customers.

Similarly,
we permit and train certain channel partners to provide first line maintenance and technical support of our systems building blocks products to external customers. Therefore,
we are increasingly reliant on these channel partners to maintain the quality of our systems building blocks products and to provide timely and effective technical support to a segment of our customer
base. Moreover, we do not control the amount of resources that these channel partners commit to marketing our products or products incorporating our technologies or performing these other functions.
If they do not commit sufficient resources to these activities, our revenues could suffer.

Our revenue growth depends significantly on the timely development and launch of new products, product enhancements and new services, and we cannot be sure that our new
products and services will gain wide market acceptance.

The telecommunications industry is characterized by rapid technological change, which requires continual development and introduction of new products, product
enhancements and services that respond to evolving market needs and industry standards on a timely and cost-effective basis. Successfully developing new products and services requires us
to accurately anticipate technological evolution in the communications industry as well as the technical and design needs of our customers. In addition, the development and launch of new products
requires significant commitments of capital and personnel well in advance of when they can be expected to result in revenue. We are continuing to invest significant research and development resources
into new product and service categories, including voice applications, IP infrastructure, managed services and supporting technologies. The market acceptance and commercial viability of these new
product and service categories have not been proven. Failure to successfully update and enhance current products and to develop and launch new products would harm our business.

12

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We have experienced, and may in the future experience, delays in developing and releasing new products and product enhancements. These delays have led to, and may in the future lead to,
delayed sales, increased expenses and lower quarterly revenues than anticipated. Our failure to timely introduce a new product or product enhancement could harm our reputation with our customers or
reduce demand for that product.

The markets we serve are highly competitive, and we may be unable to compete effectively, which could adversely affect demand for our products.

There are numerous companies currently marketing products that compete directly with our products. Moreover, our competitors and customers may be able to develop
products and services that are superior to our products and services that achieve greater customer acceptance or that have significantly improved functionality as compared to our existing and future
products and services. Moreover, many of our competitors have significantly greater financial resources than we do and therefore are better able to invest in the research and development activities
necessary to bring innovative new products to market. By focusing all of their efforts on a specific niche of the market, some of our competitors may succeed in introducing products that change the
competitive dynamic in that market niche and adversely affect demand for our products. Certain of our competitors may be able to negotiate alliances with strategic partners on more favorable terms
than we are able to negotiate. Many of our competitors have well-established relationships with our existing and prospective customers, including those on which we have focused significant
sales and marketing efforts. These competitive factors could render one or more of our products obsolete, which would adversely affect our revenues.

Internal development efforts by our customers may adversely affect demand for our products.

Many of our customers, including network equipment and application providers on which we focus a significant portion of our sales and marketing efforts, have the
technical and financial ability to design and produce components replicating or improving on the functionality of most of our products. These organizations often consider in-house
development of technologies and products as an alternative to doing business with us. We cannot be certain that these customers will resolve the make vs. buy decisions in favor of working with us,
rather than attempting to develop similar technology and products internally or obtaining them through acquisition. If our customers choose to produce internally rather than purchase from us, it will
decrease the size of the market for our products.

Offering to sell system-level products that compete with the products manufactured by our customers could negatively affect our business.

We have broadened our product offerings from systems building blocks to subsystems and platforms, as well as full systems. These products could compete with
products offered by some of our customers. These customers could decide to decrease purchases from us because of this competition. This could result in a material adverse effect on our results of
operations.

Our products typically have long sales cycles, causing us to expend significant resources before achieving agreements, "design wins" or "successful trials" and ultimately
recognizing revenue.

The length of our sales cycle typically ranges from six to eighteen months and varies substantially from customer to customer. Prospective customers generally
must commit significant resources to test and evaluate our products and integrate them into their operating environment or product offering. This evaluation period is often prolonged due to delays
associated with approval processes that typically accompany the design and testing of new communications equipment by our customers. In addition, the rapidly emerging and evolving nature of the
markets in which our customers and we compete may cause prospective customers to delay their purchase decisions as they evaluate new technologies and

13

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develop
and implement new systems. During the period in which our customers are evaluating whether to place an order with us, we often incur substantial sales and marketing expenses, without any
assurance of future orders or their timing. Even after we achieve an agreement, "design win" or "successful trial" and our product is expected to be utilized in a product or service offering being
developed by our customer, the timing of the development, introduction and implementation of the product is controlled by, and can vary significantly with the needs of our customers and may exceed
several months. This complicates our planning processes and reduces the predictability of our revenues. If sales forecasted from a specific customer for a particular quarter are not realized in that
quarter, we may fail to achieve our revenue goals.

We recently acquired a business and may acquire businesses or technologies in the future and we may be unable to integrate our new business, or businesses we acquire in the
future, with our business.

On March 17, 2008, LiveWire Mobile acquired Groove Mobile. The process of integrating Groove Mobile's business into the business of our wholly-owned
subsidiary may absorb significant management attention, produce unforeseen operating difficulties and expenditures and may not produce the favorable business and market opportunities the acquisition
was intended to provide. If we are
presented with appropriate opportunities, we may acquire other businesses or technologies. We may not be able to identify, negotiate, or finance any future acquisition successfully. If we engage in an
acquisition transaction, the process of integration may produce unforeseen operating difficulties and expenditures and may absorb significant attention of our management that would otherwise be
available for the ongoing development of our business. If we make future acquisitions, we may issue shares of stock that dilute other stockholders, incur debt, assume contingent liabilities, or create
additional expenses related to amortizing intangible assets, any of which might harm our financial results and cause our stock price to decline. Any financing that we might need for future
acquisitions may only be available to us on terms that restrict our business or that impose on us costs that reduce our net income.

We rely on third parties to assemble, and in certain cases, to ship, distribute and install our products. Failures or delays by such parties in executing their responsibilities
could subject us to product shortages or quality assurance problems, which, in turn, could lead to an increase in the cost of manufacturing or assembling our products.

We do not have in-house manufacturing capabilities and currently rely on third-party contract manufacturers to assemble our systems building blocks
and systems. Our manufacturing requirements are primarily fulfilled by Plexus. In addition, Plexus ships some of our products directly to our customers from its fabrication facility. Our supply
agreement with Plexus expires in October 2008 but automatically extends for consecutive one-year periods unless either party gives notice 120 days prior to the expiration date of
the then-current term. We cannot be certain Plexus will not give us notice to terminate this supply agreement. We also rely on other third parties to provide distribution and installation
services. This reliance could subject us to product shortages or quality assurance problems, which, in turn, could lead to an increase in the cost of manufacturing or assembling our products. Any
problems that occur and persist in connection with the manufacture, delivery, quality or cost of the assembly of our products could affect our ability to ship product and recognize revenue and harm
our relationship with our customers.

We depend on sole source suppliers for certain components used in our products; any interruption in our supplies could affect our ability to deliver products to our customers
and record associated revenue.

We rely on vendors to supply components for our products, and we rely on sole source suppliers for certain custom integrated circuits and other devices that are
components of one or more of our

14

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products.
In particular, Texas Instruments is our sole source for the DSPs used in many of our products and customarily requires order lead times of 12 to 14 weeks or more to ensure delivery in
desired quantities. In addition, Agere is a sole source supplier for certain integrated circuit components used in many of our products and customarily requires order lead times of 13 weeks or
more. Neither Texas Instruments nor Agere is under a contractual obligation to supply us with our needs for these devices. An interruption in supply from or a termination of the relationship with
either Texas Instruments or Agere would disrupt production, thereby adversely affecting our ability to deliver products to our customers and record associated revenues. Converting to an alternative
source for key components could require a large investment in capital and manpower resources and might cause significant delays in introducing replacement products. Although we believe we could
identify alternative sources for all of our components, the process to qualify our suppliers could take several months, and any interruption in our supplies could affect our ability to deliver
products to our customers and record associated revenue. Additionally, our agreement with Plexus specifies that if Plexus' inventory related to manufacture of our products is not turned eight times
per year, we are required to purchase enough inventory to bring Plexus up to eight turns. This is assessed on a quarterly basis.

We do not obtain binding purchase commitments from our customers and rely on projections prepared by our customers and channel partners in assessing future demand for our
products.

Our purchase agreements, pursuant to which we sell products, do not require our customers or channel partners to purchase any minimum number of products.
Therefore, there can be no assurance that these agreements will result in purchase orders for our products. After we begin receiving initial orders for a product from a customer, we rely heavily on
the customer's projections as to future needs for our product, without having any binding commitment from the customer as to future orders. Because our expenses are based on forecasting of future
orders, a substantial reduction or delay in orders for our products from our customers could negatively impact our operating results.

We may be unable to attract and retain management or key personnel we need to succeed.

The loss of any of our senior management or key technical, sales or marketing personnel, particularly if lost to competitors, could harm our business. Our future
success will depend in large part on our ability to attract, retain and motivate highly skilled employees.

We may not be able to adequately protect our intellectual property, which may facilitate the development of competing products by others.

We rely on a combination of trade secret and copyright laws, restrictions on disclosure, and patents to protect our intellectual property rights. Despite our
efforts to protect our proprietary rights, third parties may copy or otherwise obtain and use our products or technology. The laws of some foreign countries do not protect our proprietary rights to as
great an extent as the laws of the United States. If we fail to adequately protect our intellectual property rights, it will be easier for our competitors to sell competing products.

Our products may infringe on the intellectual property rights of third parties, which may result in lawsuits and prohibit us from selling our products.

There is a risk that third parties have filed or will file applications for, or have received or will receive, patents or obtain additional intellectual property
rights relating to materials or processes that we use or propose to use. As a result, from time to time, third parties may assert patent or other intellectual property rights to technologies that are
used in our products or are otherwise important to us. In addition, third parties may assert claims or initiate litigation against us or our manufacturers, suppliers or customers with respect to
existing or future products or other proprietary rights. We generally undertake to indemnify our customers against intellectual property infringement claims

15

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asserted
against them with respect to the products we sell to them. Any claims against us or customers that we indemnify against intellectual property claims, with or without merit, may be
time-consuming, result in costly litigation and diversion of technical and management personnel, or require us to develop non-infringing technology. If a claim is successful,
we may be required to obtain a license from the parties claiming the infringement. If we are unable to obtain a license, we may be unable to market our affected products. Limitations on our ability to
market our products and delays and costs associated with monetary damages and redesigns in compliance with an adverse judgment or settlement could harm our business.

Defects in our products or problems arising from the use of our products together with other vendors' products may result in lost revenues or customer relationships and could
be detrimental to our reputation.

Products as complex as ours may contain known or undetected errors or performance problems. Defects are frequently found during the period immediately following
introduction and initial implementation of new products or enhancements to existing products. Although we attempt to resolve errors before implementation, our products are not error-free.
These errors or performance problems could result in lost revenues or customer relationships and could be detrimental to our business and reputation generally. Additionally, reduced market acceptance
of our services due to errors or defects in our technology would harm our business by reducing our revenues and damaging our reputation. In some of our contracts, we have agreed to indemnify our
customers against certain liabilities arising from defects in our products. In addition, our customers generally use our products together with their own products and products from other vendors. As a
result, when a problem occurs in the network, it may be difficult to identify the source of the problem. These problems may cause us to incur significant warranty and repair costs, divert the
attention of our engineering personnel from our product development efforts, and cause significant customer relations problems. To date, defects in our products or those of other vendors' products
with which ours are used by our customers have not had a material negative effect on our business. However, we cannot be certain that a material negative effect will not occur in the future.

Because we derive a significant portion of our revenues from international sales, our business could be adversely affected by downturns in economic conditions in countries
outside North and South America, collectively, and other risks associated with international operations.

Sales to customers outside North America and South America, collectively, accounted for approximately 60% of our revenues for the year ended December 31,
2007, and we believe a material portion of our domestic sales results in the use of our products outside North America. Because of our dependence upon international sales, we are subject to a number
of risks, including volatility in currency exchange rates, political and economic instability in other countries, the imposition of trade and tariff regulations by foreign governments and the
difficulties in managing operations across disparate geographic areas. These or other factors may limit our ability to sell our products in other countries, which could result in lost revenues and
negatively impact our financial condition.

Future regulation or legislation could restrict our business or increase our costs.

We are unable to predict the impact, if any, that future legislation, legal decisions or regulations relating to our target markets may have on our business,
financial condition and results of operations. Regulation may focus on, among other things, assessing access or settlement charges, imposing tariffs or regulations based on the characteristics and
quality of products and services, or environmental concerns, any of which could restrict our business or increase our cost of doing business.

16

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Anti-takeover provisions in Delaware law and our corporate documents may affect the value of our common stock.

Provisions of Delaware law and our corporate documents may make it difficult and expensive for a third party to remove our board of directors or management or to
acquire us. For example, our certificate of incorporation provides for the election of members to our board of directors for staggered three-year terms and we have adopted a shareholder
rights plan. The existence of these anti-takeover provisions may substantially impede the ability of a third party to acquire control of us or accumulate large blocks of our common stock,
which may adversely affect our stock price.

ITEM 1B.    UNRESOLVED STAFF COMMENTS

None.

ITEM 2.    PROPERTIES

We lease two facilities totaling approximately 145,000 square feet for our corporate headquarters in Framingham, Massachusetts. The leases on these facilities
expire in May 2012. We sublease approximately 46,000 square feet of our corporate headquarters in Framingham Massachusetts to several third parties. We previously used the subleased office space as
supplementary conference, training and corporate office space. The subleases on these facilities expire in May 2012. We also lease approximately 30,000 square feet for our LiveWire Mobile, Inc.
headquarters in Littleton, Massachusetts.

We
lease facilities in Bangalore, India (primarily used for our research and development activities), St. Hubert, Quebec (used in connection with our NMS Communications division),
and Schaumburg,
Illinois, in which we conduct design and engineering operations. We also lease a facility in Reading, United Kingdom that serves as our European sales and service headquarters. In addition, we have
short-term leases for nine sales offices throughout North America, Europe and Asia.

We
believe our facilities are adequate for our current needs and that we will be able to secure suitable space as needed in the future on commercially reasonable terms. Unless specified
otherwise our facilities are used across all our business segments.

ITEM 3.    LEGAL PROCEEDINGS

From time to time, we are a party to various legal proceedings incidental to our business. However, we have no material legal proceedings currently pending.

ITEM 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS

None during the fourth quarter of 2007.

17

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PART II

ITEM 5.    MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Price Range of Common Stock

Our common stock is quoted on The NASDAQ Global Market under the symbol "NMSS." Prior to July 1, 2006, our common stock traded on the NASDAQ National
Market. The table below shows the high and low sale prices per share of our common stock, as reported on The NASDAQ Global Market, or the NASDAQ National Market, as applicable, for the periods
indicated.

Year Ended December 31, 2006

High

LowFirst Quarter

$
4.19

$
3.32Second Quarter


5.00


3.35Third Quarter


3.72


2.20Fourth Quarter


2.89


1.65


|
|

Year Ended December 31, 2007

High

LowFirst Quarter

$
2.21

$
1.63Second Quarter


1.95


1.64Third Quarter


1.83


1.23Fourth Quarter


1.71


1.32


As
of March 24, 2008, we had approximately 192 stockholders of record of our common stock.

Dividend Policy

We have never declared or paid any dividends on our common stock. We do not anticipate paying any cash dividends in the foreseeable future. We currently intend to
retain future earnings to fund the development and growth of our business.

18

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Comparison of Cumulative Stockholder Return

The following performance graph assumes an investment of $100 on December 31, 2002 and compares the change to December 31, 2007 in the market price
of the Common Stock with a broad market index (S&P 500) and an industry index (S&P Communications Equipment). The Company paid no dividends during the periods shown. The performance of the
indices is shown on a total return (dividend reinvestment basis). The graph lines merely connect the prices on the dates indicated and do not reflect fluctuations between those dates.

COMPARISON OF 5-YEAR CUMULATIVE TOTAL RETURN
AMONG NMS COMMUNICATIONS CORP.,
S&P 500 INDEX AND S&P GROUP INDEX

GRAPHIC

ASSUMES $100 INVESTED ON DEC. 31, 2002
ASSUMES DIVIDEND REINVESTED
FISCAL YEAR ENDING DEC. 31, 2007

|                             |  | Cumulative Total Return ($)
|---------------------------- |  | ---------------------------
|
|NMS COMMUNICATIONS CORP      |  | 100.00                     
|S&P 500 INDEX                |  | 100.00                     
|S&P COMMUNICATIONS EQUIPMENT |  | 100.00                     

THE COMPARISON OF CUMULATIVE TOTAL STOCKHOLDER RETURN ABOVE SHALL NOT BE DEEMED "SOLICITING MATERIAL" OR INCORPORATED BY REFERENCE INTO ANY OF THE
COMPANY'S FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION.

19

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Issuance of Unregistered Securities

We acquired Inno Media Logic Company (IML) of St.-Hubert, Quebec in July 2000 (the "Closing") for a combination of cash and stock. At the time of the Closing, we
and our wholly-owned Canadian subsidiaries issued to the stockholders of IML 982,296 shares of our common stock. In addition, the stockholders of IML had the right to exchange an additional 1,653,004
shares of our common stock that were not exchanged at the Closing. For the year ended December 31, 2007, we issued 177,534 shares of our common stock in exchange for such exchangeable shares.
As of December 31, 2007, an aggregate of 1,555,034 shares of our common stock had been issued in exchange for these exchangeable shares. The shares of our common stock and the exchangeable
shares were issued, as to acquirers in the United States, in reliance on the exemption set forth in Section 4(2) of the Securities Act of 1933 (the "Act") and, as to acquirers outside the
United States, pursuant to Regulation S under the Act. We registered on Form S-3 under the Act, effective August 25, 2000, for public sale in the United States, all
the shares of our common stock which were or are to be issued to the former shareholders of IML.

Equity Compensation Plans

The following table sets forth information about the shares of our common stock that may be issued upon the exercise of options and other rights under all of the
Company's existing equity compensation plans as of December 31, 2007.

|Plan Category                      |                                               | Number of Shares
to be issued upon
Exercise of
Outstanding
Options |           | Weighted Average
Per Share
Exercise Price
of Outstanding
Options |      | Number of Shares
Remaining Available for
Future Issuance
under Equity
Compensation Plans
(excluding shares
reflected in
first column)
|---------------------------------- | --------------------------------------------- | ------------------------------------------------------------------ | --------- | ---------------------------------------------------------------- | ---- | -------------------------------------------------------------------------------------------------------------------------------------
|Plans approved by stockholders     |                                               |                                                                    |           |                                                                  |      |                                                                                                                                      
|                                   | 1993 Stock Option Plan                        |                                                                    | 334,000   |                                                                  | $    | 6.84                                                                                                                                 
|                                   | 1993 Non-Employee Directors Stock Option Plan |                                                                    | 37,000    |                                                                  | $    | 11.43                                                                                                                                
|                                   | 2000 Equity Incentive Plan                    |                                                                    | 6,468,068 |                                                                  | $    | 2.54                                                                                                                                 
|                                   | 2005 Openera Incentive Plan                   |                                                                    | 299,769   |                                                                  | $    | 1.90                                                                                                                                 
|                                   | 2006 India Incentive Plan                     |                                                                    | 53,475    |                                                                  | $    | 1.94                                                                                                                                 
|                                   | 2003 Employee Stock Purchase Plan             |                                                                    |           |                                                                  |      |                                                                                                                                      
|Plans not approved by stockholders |                                               |                                                                    |           |                                                                  |      |                                                                                                                                      
|                                   | 1995 Non-Statutory Stock Option Plan(1)       |                                                                    | 1,065,509 |                                                                  | $    | 5.22                                                                                                                                 
|                                   |                                               |                                                                    |           |                                                                  |      |                                                                                                                                      
|Total                              |                                               | 8,257,821                                                          |           | $                                                                | 3.13 |                                                                                                                                      
|                                   |                                               |                                                                    |           |                                                                  |      |                                                                                                                                      

---

Issuer Repurchase of Equity Securities

None during the fourth quarter of 2007.

20

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ITEM 6.    SELECTED FINANCIAL DATA

The following selected consolidated financial data should be read in conjunction with our consolidated financial statements, the related notes and with
"Management's Discussion and Analysis of Financial Condition and Results of Operations" and other financial data included elsewhere in this annual report on Form 10-K. The selected
consolidated statement of operations data and balance sheet data for 2007, 2006 and 2005 is derived from audited consolidated financial statements included elsewhere in this annual report on
Form 10-K for prior years on file with the SEC.

Consolidated
Statement of Operations Data(1)

|                                                                      |  | Year Ended December 31, |       
|--------------------------------------------------------------------- |  | ----------------------- | ------
|
|
|Revenues                                                              |  | $                       | 82,452
|Gross profit                                                          |  |                         | 51,007
|Impairment charges                                                    |  |                         |      
|Restructuring and other related charges                               |  |                         |      
|Operating income (loss)                                               |  |                         | (8,813
|Income (loss) from continuing operations before income taxes          |  |                         | (8,269
|Income (loss) from continuing operations                              |  |                         | (8,575
|Net income (loss)                                                     |  |                         | (9,310
|Net income (loss) per common share from continuing operationsbasic   |  | $                       | (0.20 
|Net income (loss) per common share from continuing operationsdiluted |  | $                       | (0.20 
|Net income (loss) per common sharebasic                              |  | $                       | (0.21 
|Net income (loss) per common sharediluted                            |  | $                       | (0.21 

Consolidated
Balance Sheet Data(2)

|               |  | December 31,
|-------------- |  | ------------
|
|
|Total assets   |  | $           
|Long-term debt |  |             

---

On
January 1, 2006, we adopted the provisions of Statement of Financial Accounting Standards No. 123R, "Share-Based Payment", which
requires us to record compensation expense for employee stock awards at fair value at time of grant. As a result, our stock-based compensation expense increased in 2006, causing our net income to
decrease. For the years ended December 31, 2007 and 2006, stock-based compensation was $5.1 million and $4.8 million, respectively.

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ITEM 7.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

Overview

We operate in the large and rapidly evolving telecommunications industry. Our products include system building blocks, media processing, signaling and service
delivery systems, personalized mobile communications applications, and voice quality systems. We sell our products through our direct sales force and channel partners. We have established businesses
in North and South America (the "Americas"), Europe, the Middle East, Africa (collectively, "EMEA") and Asia. The majority of our products are manufactured by third party manufacturers. Our research
and development activities focus primarily on opportunities relating to emerging wireless applications, next generation voice and video applications, and emerging IP-based services,
including VoIP.

Effective
January 1, 2007, we consolidated two of our former reportable segments (Platform Solutions and Mobile Applications) into a single segment (Technology and Mobile
Applications), and re-organized our business primarily according to functional business area.

Effective
July 2, 2007, we reorganized our previously reported Technology and Mobile Applications segment into two separate business divisions: Communications Platforms and Mobile
Applications. The change in organization was the result of our efforts to organize product development, sales, services and marketing teams to better align to serve each of these divisions' distinct
markets. During the fourth quarter of 2007, these divisions were renamed as the NMS Communications divisions (formerly Communications Platforms) and the LiveWire Mobile division (formerly Mobile
Applications). Our Network Infrastructure ("NI") division remained unchanged and continued to focus on solutions for the radio access network portion of mobile operators' infrastructure. Corporate and
unallocated costs include general and administrative functions and restructuring charges.

Prior
to 2007, the Company had organized into three business units, which constituted our reportable segments (Platforms Solutions, Mobile Applications, and NI). Accordingly, segment
revenue and operating income (loss) have been reclassified to conform to current period presentation.

On
December 21, 2007, we entered into an Asset Purchase Agreement (the "Agreement"), dated December 20, 2007, with Verso Technologies, Inc. a Minnesota Corporation
("Verso"), to sell our NI division. The closing of the transaction occurred on December 21, 2007. Net loss from the discontinued operations was $2.4 million (net of income tax benefit of
$0.1 million), $7.7 million (net of income tax
benefit of $0.1 million) and $9.5 million (net of income tax benefit of $0.2 million) for the years ended December 31, 2007, 2006 and 2005, respectively. In the fourth
quarter of 2007, we recorded a gain on the sale of the transaction of $1.6 million (net of income tax expense of $6 thousand).

For
the year ended December 31, 2007, we incurred a net loss from continuing operations. Our net loss from continuing operations increased $0.5 million from
$8.1 million for the year ended December 31, 2006 to $8.6 million for the year ended December 31, 2007. Our net loss is attributable to decreases in our NMS Communications
division revenues of $17.9 million partially offset by growth in our LiveWire Mobile division revenues of $4.3 million.

In
response to weak market conditions, in the second half of 2006, management took restructuring actions to reduce our cost structure. These actions included the closure of our New
Jersey facility, workforce reductions and the sublease of a portion of our corporate headquarters office space. Management continually monitors the activities of our competitors and analyzes the
future of our industry to appropriately align our business focus.

For
the year ended December 31, 2007, we generated $0.1 million of cash from operations. We have used, and may continue to use, our cash for general corporate purposes,
which may include working capital, capital expenditures and potential acquisitions. As of December 31, 2007, we had

22

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$30.2 million
in cash, cash equivalents and marketable securities, including $1.8 million of Verso common stock.

In
January 2008, to contribute to our growth strategy of the LiveWire Mobile division, we created a wholly-owned subsidiary, LiveWire Mobile, Inc., with which we acquired Groove
Mobile, Inc. ("Groove Mobile") on March 17, 2008 for cash consideration of $14.5 million. Groove Mobile, whose operations are based in Bedford, Massachusetts, is a provider of
mobile music solutions. We believe the acquisition will enable LiveWire Mobile to expand its ability to offer a portfolio of managed services, including ringback tones, ringtones, and full track music
and video downloads delivered through an integrated storefront.

We
believe the Company has sufficient cash available to execute on its business objectives for at least the next twelve months.

Critical Accounting Policies

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including
those related to stock-based compensation, revenue recognition, allowances for doubtful accounts, write-downs for excess and obsolete inventories, possible impairment of long-lived assets
and goodwill, income taxes, restructuring and other related charges, and accounting for acquisitions. We base our estimates on historical experience and on various other assumptions that we believe to
be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. We
have noted that our estimates used in the past have been consistent with actual results. Actual results may differ from these estimates under different assumptions or conditions. For a discussion of
how these estimates and other factors may affect our business, see also our discussion under the heading "Risk Factors" in this annual report on Form 10-K.

We
believe the following critical accounting policies involve our more significant judgments and estimates used in the preparation of our consolidated financial statements:

Revenue Recognition.We derive revenues from two sources: (i) sales of products, including hardware and software
licenses, and (ii) services, including maintenance and support services, professional services and managed services. Maintenance and support services consist of on-site support,
telephone and online support, and training. Professional services projects may consist of multiple elements including hardware and/or software installation, configuration, integration and
customization services provided to customers. Managed services consist of supplying, outsourcing and/or maintaining systems for the benefit of customers. These systems may be Company owned pursuant to
a managed services arrangement or customer owned pursuant to a cap-ex arrangement.

We
sell our products and services through our direct sales force and through channel partners, which include resellers, distributors and systems integrators. When the software is more
than incidental and is essential to the functionality of the hardware, we recognize revenue in accordance with the provisions of the American Institute of Certified Public Accountants ("AICPA")
Statement of Position ("SOP") 97-2,Software Revenue Recognition("SOP 97-2"), and related interpretations. We recognize
revenue from the sale of products when persuasive evidence of an arrangement exists; delivery has occurred; the fee is fixed or determinable; and collection is considered probable. For all sales, we
use a binding contract and/or a purchase order as evidence of an arrangement with the customer or channel partner. Sales to our channel partners are evidenced by a master agreement governing the
relationship, together with binding purchase orders for individual transactions. We consider delivery to occur when

23

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we
ship the product, so long as title and risk of loss have passed to the customer. At the time of a transaction, we assess whether the sale amount is fixed or determinable based upon the terms of the
documented agreement. If we determine the fee is not fixed or determinable, we recognize revenue when the fee is fixed. We assess if collection is probable based on a number of factors, including past
transaction history and the creditworthiness of the customer. If we determine that collection is not probable, we do not record revenue until such time as collection becomes probable, which is
generally upon the receipt of cash or when payments become due.

For
arrangements with customers that include acceptance provisions, we recognize revenue upon the customer's acceptance of the product, which occurs upon the earlier of receipt of a
written customer acceptance or expiration of the acceptance period. In accordance with SOP 97-2, in some circumstances we recognize revenue on arrangements that contain certain
acceptance provisions when we have historical experience that the acceptance provision is perfunctory.

When
an arrangement involves multiple elements, such as hardware and software products, maintenance and/or professional services, we allocate the entire sale price to each respective
element based on vendor specific objective evidence ("VSOE") of fair value for each undelivered element. When arrangements contain multiple elements and VSOE of fair value exists only for all
undelivered elements, we recognize revenue for the delivered elements using the residual method in accordance with the provisions of the AICPA SOP 98-9, Modification of SOP 97-2, Software Revenue Recognition, With
Respect to Certain Transactions("SOP 98-9"). The
residual method requires that the portion of the total arrangement fee attributable to undelivered elements, as indicated by VSOE of fair value, be deferred and subsequently recognized when delivered.
We establish VSOE of fair value for undelivered elements based on either substantial renewal rates of maintenance and support agreements, the price we charge when the same element is sold separately
or the price established by management who have the relevant authority to set prices for an element not yet sold separately. For arrangements containing multiple elements where VSOE of fair value does
not exist for all undelivered elements, we defer revenue for the delivered and undelivered elements until VSOE of fair value exists for all undelivered elements or all elements have been delivered.

We
reduce revenue by provisions for estimated sales returns associated with rights offered to a limited number of channel partners. These rights allow the channel partner to exchange a
percentage of its inventory based on the volume of its prior purchases. We provide for these return rights each quarter
in an amount equal to estimated returns. On a quarterly basis, we review our estimates and compare to our actual returns experience. Our actual results have been in line with our expectations. An
increase in our allowance for sales returns would reduce our revenue in the period for which the increase is recorded.

We
evaluate our revenue recognition policies based on the specific facts and circumstances related to each of our channel partners. When selling to resellers and distributors, we
generally do not recognize revenue upon shipment, unless a credit history has been established, since many of these customers are thinly capitalized and their ability to pay is, in substance,
contingent upon their resale of our product. In these cases, we defer revenue until collection is deemed probable. When revenue is deferred, if reliable reporting from the reseller or distributor
exists, we will recognize revenue when the reseller or distributor sells the product to an end-user ("sell through"). When reliable reporting does not exist, revenue will be recognized
upon our receipt of payment, or in limited circumstances upon receipt of a letter of credit or similar arrangement. We further monitor the payment history of our resellers and distributors and overall
days sales outstanding ("DSO"). We believe this revenue recognition policy minimizes the risk that product is shipped in excess of end-user demand and allows us to reasonably and reliably
estimate any sales returns.

Services
revenue is primarily comprised of professional services, maintenance and support services and managed services. We recognize revenue from professional services as the services
are performed.

24

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Service
revenue represented less than 10% of revenue for each of the years ended December 31, 2007, 2006 and 2005. Maintenance and support services, which are typically sold separately from
products, consist of on-site support, telephone and on-line support and training. We defer maintenance and support services revenue, whether sold separately or as part of a
multiple element arrangement, and recognize it ratably over the term of the maintenance contract, generally twelve months. We provide managed services under long term arrangements, typically two to
three years. The arrangements may contain provisions requiring customer acceptance of the set-up activities, including installation and implementation activities, prior to the commencement
of the ongoing services arrangement. We recognize maintenance and support and managed services revenue in accordance with SAB No. 101,Revenue Recognition in Financial
Statements, as amended by SAB No. 104,Revenue Recognition. Accordingly, amounts are earned when all of the following
conditions are satisfied: there is persuasive evidence of an arrangement; the service has been provided to the customer; the amount of fees to be paid by the customer is fixed or determinable; and the
collection of fees from the customer is reasonably assured.

When
there are shipping and handling fees, we invoice customers for such fees. We recognize the invoiced amounts as revenue and the related costs are recognized as a cost of revenue.

Capitalization of Managed Services Costs.We capitalize certain costs associated with the set-up activities of a
managed services arrangements. These costs represent incremental external or internal costs that are directly related to the set-up, enhancement or expansion of certain managed services
offerings. The types of costs that are capitalized include labor
and related fringe benefits, subcontractor costs, consulting costs, travel costs, inventory costs and third party product costs. We begin to capitalize costs in the period when there is existence of
an arrangement. Managed services arrangements may also require the procurement of equipment, development of internally developed software and consulting services related to system enhancements and
expansions. These related costs are also capitalized. We amortize these capitalized costs upon acceptance or commercial launch of the initial set-up, enhancement or expansion of the
service over the expected relationship period or the expected economic useful life, as appropriate, using the straight-line method. Expenses incurred to maintain and sustain the service
delivery after the initial setup, enhancement or expansion of a managed services arrangement are expensed as incurred. We evaluate the lives and realizability of the capitalized costs on a periodic
basis or as needed.

In
the event indications exist that a capitalized managed services cost balance to a particular contract may be impaired, undiscounted estimated cash flows of the contract are projected
over its remaining term, and compared to the unamortized managed services contract cost balance. If the projected cash flows are not adequate to recover the unamortized cost balance, the balance would
be adjusted to equal the contract's fair value in the period such determination is made. The primary indicator used to determine when impairment testing should be performed is when a contract is
materially underperforming, or is expected to materially underperform in the future, as compared to the financial model that was developed as part of the original proposal process and subsequent
annual budgets.

Allowance for Doubtful Accounts.We maintain an allowance for doubtful accounts based upon our historical experience and any
specifically identified customer collection issues. We monitor and analyze accounts receivable and the composition of the accounts receivable aging, historical bad debts, and current economic trends,
regional factors and other known factors when evaluating the adequacy of the allowance for doubtful accounts. Based upon the analysis and estimates of the uncollectibility of our accounts receivable,
we record an allowance for doubtful accounts when the prospect of collecting a specific account receivable becomes doubtful. Actual results could differ from the allowances for doubtful accounts of
$0.1 million recorded as of December 31, 2007, and this difference may have a material effect on our financial position and results of operations.

25

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Write-down of Excess and Obsolete Inventories.We value our inventories at the lower of cost
(first-in, first-out method) or market. We regularly review our inventories and record charges for excess and obsolete inventory based primarily on our estimated forecast of
product demand and production requirements for the next twelve months. Actual excess and obsolete inventory could differ from the write-down of excess and obsolete inventories of
$2.7 million recorded as of December 31, 2007.

Goodwill and Other Intangible Assets.In accordance with Statement of Financial Accounting Standards ("SFAS") No. 142,
Goodwill and Other Intangible Assets("SFAS 142"), goodwill is reviewed for impairment on an annual basis, or more frequently if events or
circumstances indicate that the carrying value may not be recoverable. As of December 31, 2007, we performed our annual test of goodwill allocated to the LiveWire Mobile division, to determine
if there was any impairment. We determined that the LiveWire Mobile reporting unit's fair value exceeded the carrying value of its net assets, using income valuation method modeling. Accordingly, no
impairment was recorded in 2007. Estimating future cash flows requires us to make projections that can differ materially from actual results. Management evaluated the useful lives assigned to other
intangible assets, which resulted in no changes to such useful lives. Other intangible assets arose from the acquisition of Openera in February 2006, which are amortized over their respective economic
useful lives proportionate to their expected cash flow.

Discontinued Operations.In accordance with SFAS No. 144,Accounting for the Impairment or
Disposal of Long-Lived Assets("SFAS 144"), we are reporting the NI division as a discontinued operation in the consolidated financial statements for all
periods presented. The Company recorded a gain of $1.6 million (net of income tax expense of $6 thousand) upon the sale of the NI division in the fourth quarter of 2007.

Long-lived Assets.In accordance with SFAS 144, we evaluate the carrying value of our
long-lived assets. SFAS 144 first requires an assessment of whether circumstances currently exist which suggest the carrying value of long-lived assets may not be
recoverable. At December 31, 2007, we did not believe any such conditions existed. Had these conditions existed, we would assess the recoverability of the carrying value of our
long-lived assets based on estimated undiscounted cash flows to be generated from such assets. In assessing the recoverability of these assets, we would have projected estimated
enterprise-level or other appropriate cash flows based on various operating assumptions such as average revenue per subscriber unit, expected length of customer relationship and subscriber uptake. If
the projection of undiscounted cash flows did not exceed the carrying value of the long-lived assets, we would be required to record an impairment charge to the extent the carrying value
exceeded the fair value of such assets.

Stock-based Compensation Expense.On January 1, 2006, we implemented the provisions of SFAS No. 123 (revised
2004),Share-Based Payment("SFAS 123R") and related interpretations. SFAS 123R requires that all share-based payments to employees,
including grants of stock options, be recognized in the financial statements based on their fair value. We selected the modified prospective transition method for implementing SFAS 123R and
began recognizing compensation expense for stock-based awards granted on or after January 1, 2006, plus any unvested awards granted prior to January 1, 2006. Under this transition
method, prior periods have not been restated. Stock-based compensation expense for awards granted on or after January 1, 2006, is based on the grant date fair value calculated in accordance
with the provisions of SFAS 123R. Stock-based compensation related to any unvested awards granted prior to January 1, 2006, is based on the grant date fair value calculated in accordance
with the original provisions of SFAS No. 123,Accounting for Stock-Based Compensation.The fair value of our stock-based awards, less estimated
forfeitures, is amortized over the awards' vesting periods on a straight-line basis.

Prior
to the adoption of SFAS 123R, we accounted for the costs of our stock-based employee compensation plans under Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock

26

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Issued to Employees("APB 25"), and related interpretations. Under APB 25, compensation cost was not recognized for substantially all options granted because the
exercise price was at least equal to the market value of the underlying common stock on the date of grant.

The
fair value of each option award on the grant date is estimated using the Black-Scholes option-pricing model with the following assumptions: expected dividend yield, expected stock
price volatility, weighted average risk-free interest rate and weighted average expected life of the options. Under SFAS 123R, we establish the volatility assumption based
exclusively on historical volatility, and the expected life assumption is established based upon an analysis of historical option exercise behavior. The risk-free interest rate is based on
the implied yield currently available on U.S. Treasury zero-coupon issues with a remaining term approximating our expected term assumptions. We have never declared or paid any cash
dividends on our common stock and have no current plans to pay cash dividends on our common stock. The payment of any future cash dividends will be determined by the our board of directors in light of
conditions then existing, including our earnings, financial condition and capital requirements, restrictions in financing agreements, business conditions, tax laws, certain corporate law requirements
and various other factors.

The
choice of a valuation technique, and the approach utilized to develop the underlying assumptions for that technique, involve significant judgments. These judgments reflect our
assessment of the most accurate method of valuing the stock options we issue, based on historical experience, knowledge of current conditions and beliefs of what could occur in the future given
available information. Our judgments could change over time as additional information becomes available, or the facts underlying the assumptions change over time. Any change in judgments could have a
material impact on our financial statements. We believe that these estimates incorporate all relevant information and represent
a reasonable approximation in light of the difficulties involved in valuing non-traded stock options.

Restructuring and Other Related Charges.We continually evaluate our staffing levels to meet our business objectives and our
strategy to reduce our cost of operations. Severance costs are reviewed periodically to determine whether a severance charge is required to be recorded in accordance with SFAS No. 112, Employers' Accounting for
Post-employment Benefits("SFAS 112"). The provisions of SFAS 112 require us to accrue
post-employment benefits if certain specified criteria are met. Post-employment benefits include salary continuation, severance benefits and continuation of benefits such as
health and life insurance.

From
time to time, we announce reorganization plans that may include eliminating positions. Each plan is reviewed to determine whether a restructuring charge is required to be recorded
in accordance with SFAS No. 146,Accounting for Costs Associated with Exit or Disposal Activities("SFAS 146"). The provisions of
SFAS 146 require us to record an estimate of the fair value of any termination costs based on certain facts, circumstances and assumptions, including specific provisions included in the
underlying reorganization plan. Also, from time to time, we may cease to use certain facilities prior to expiration of the underlying lease agreements. Exit costs are reviewed in each of these
circumstances on a case-by-case basis to determine whether a restructuring charge is required to be recorded in accordance with SFAS 146. The provisions of
SFAS 146 require us to record an estimate of the fair value of the exit costs based on certain facts, circumstances and assumptions, including remaining minimum lease payments, potential
sublease income and specific provisions included in the underlying lease agreements.

Subsequent
to recording such accrued liabilities, changes in market or other conditions may result in changes to assumptions upon which the original liabilities were recorded that could
result in an adjustment to the liabilities and, depending on the circumstances, such adjustment could be material.

Income Taxes.The preparation of our consolidated financial statements requires us to provide for income taxes in each of the
jurisdictions in which we operate, including those outside the United States

27

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that
may be subject to certain risks that ordinarily would not be expected in the United States. A change in our income by jurisdiction could cause a change in our annual effective tax rate. The
income tax accounting process involves estimating our current income tax expense (benefit), including our uncertain tax positions, together with assessing temporary differences resulting from
differing treatment of certain items for tax and accounting purposes. These differences result in the recognition of deferred tax assets and liabilities. We must then record a valuation allowance to
reduce our deferred tax assets to the amount that is more likely than not to be realized.

Management's
judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance recorded against deferred tax assets.
We have recorded a valuation allowance of $149.8 million as of December 31, 2007 due to uncertainties related to our ability to utilize our deferred tax assets, primarily consisting of
net operating loss carry forwards. We establish valuation allowances based on historical levels of profitability as well as our estimates of future taxable income by each jurisdiction in which we
operate, and the period over which our deferred tax assets will be recoverable. If actual results differ from these estimates or we adjust these estimates in future periods, we may need to adjust our
valuation allowance, which could materially impact our consolidated financial position and results of operations.

The
provision for income taxes is computed based on pre-tax income included in the consolidated statements of operations. We recognize deferred tax assets and liabilities for
the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined based on the difference
between the financial statement carrying amounts and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse.

We
determine our effective tax rate by dividing our income tax expense by our income before taxes as reported in our consolidated statement of operations. For reporting periods prior to
the end of the fiscal year, we record income tax expense based upon an estimated annual effective tax rate. This rate is computed using the statutory tax rate and an estimate of annual net income
adjusted for an estimate of deductible and non-deductible expenses.

On
January 1, 2007, we adopted Financial Accounting Standards Board ("FASB") Interpretation No. 48,Accounting for Uncertainty in Income
Taxesan Interpretation of FASB Statement 109("FIN 48"). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an
enterprise's financial statements in accordance with SFAS 109,Accounting for Income Taxes("SFAS 109"). FIN 48 prescribes a
recognition threshold and measurement attributes for the financial statement recognition and measurement of a tax position taken in or expected to be taken in a tax return. This interpretation also
provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, and disclosure and transition. We had no adjustments to retained earnings as a result of the
implementation of FIN 48. All of our deferred tax assets have a full valuation allowance recorded against them as their realization does not meet the "more likely than not" criteria under
SFAS 109 based on our current financial status. As of December 31, 2007 and December 31, 2006, we had accrued $0.6 million and $0.4 million for uncertain tax
positions, respectively, all of which will impact our effective tax rate when recognized. It is reasonably possible that the total amount of unrecognized tax benefits will increase or decrease in the
next 12 months. As of the filing date of this annual report on Form 10-K, an estimate of the range that will reverse in the next twelve months of reasonably possible outcomes
cannot be made. Estimated interest and penalty charges related to unrecognized tax benefits are classified as income tax expense in the accompanying consolidated statements of operations. At
December 31, 2007 and 2006, we had $127,000 and $75,000, respectively, of accrued interest expense related to uncertain tax positions.

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Results of Operations

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

|                                                             |                                         | Year Ended December 31, |     
|------------------------------------------------------------ | --------------------------------------- | ----------------------- | ----
|
|Revenues                                                     |                                         | 100.0                   | %   
|Cost of revenues                                             |                                         | 38.1                    |     
|                                                             |                                         |                         |     
|                                                             | Gross profit                            |                         | 61.9
|Operating expenses:                                          |                                         |                         |     
|                                                             | Selling, general and administrative     |                         | 50.5
|                                                             | Research and development                |                         | 22.1
|                                                             | Restructuring and other related charges |                         |    
|                                                             |                                         |                         |     
|                                                             | Total operating expenses                |                         | 72.6
|                                                             |                                         |                         |     
|Operating income (loss)                                      |                                         | (10.7                   | )   
|Other income (expense), net                                  |                                         | 0.7                     |     
|                                                             |                                         |                         |     
|Income (loss) from continuing operations before income taxes |                                         | (10.0                   | )   
|                                                             |                                         |                         |     
|Income tax expense                                           |                                         | 0.4                     |     
|                                                             |                                         |                         |     
|Net income (loss) from continuing operations                 |                                         | (10.4                   | )%  
|                                                             |                                         |                         |     

Revenues.Revenues consist primarily of product and license sales and, to a lesser extent, services provided to our
customers. NMS Communications division revenues consist of sales of our systems building block products and services, video products and services, and voice quality enhancement and echo cancellation
products, systems and services. LiveWire Mobile division revenues consist of sales of our MyCaller Ringback Platform and related services, including managed services.

Cost of revenues.Cost of revenues consists primarily of product costs, cost of services provided to our customers, including
the costs of managed services, and overhead associated with fulfillment operations. Our manufacturing process is outsourced to contract manufacturers. The amortization of certain acquired intangible
assets and stock-based compensation expense are also included in cost of revenues.

Selling, general and administrative expenses.Selling, general and administrative expenses consist primarily of salaries,
stock-based compensation, commissions and related personnel and overhead expenses for those engaged in our sales, marketing, promotional, public relations, executive, accounting and administrative
activities. The amortization of intangible assets related to acquired customer relationships from Openera are also included in selling, general and administrative expenses.

Research and development expenses.Research and development expenses consist primarily of salaries, personnel expenses,
stock-based compensation, prototype and other discretionary fees related to the design, development, testing and enhancement of our products. These costs are expensed as incurred.

Restructuring and other related charges.Restructuring charges consist of involuntary severance related costs, facility
closures or downsizing and disposal of excess or unused assets.

Other income (expense), net.Other income (expense), net consists primarily of interest income, interest expense, gains or
losses realized on the repurchase of convertible debt and foreign currency translation gains and losses.

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Discontinued Operations.On December 21, 2007, we sold our NI division to Verso. Accordingly, the operating results of
the NI division have been reclassified as a discontinued operation in the consolidated statements of operations for all historic reporting periods.

The
NI division had revenues of $5.4 million, $3.6 million and $0.9 million for the years ended December 31, 2007, 2006 and 2005, respectively. Net loss from
the discontinued operations was $2.4 million (net of income tax benefit of $0.1 million), $7.7 million (net of income tax benefit of $0.1 million) and $9.5 million
(net of income tax benefit of $0.2 million) for the years ended December 31, 2007, 2006 and 2005, respectively. For the year ended December 31, 2007, we recorded a gain on the
sale of the transaction of $1.6 million (net of income tax expense of $6 thousand).

Year Ended December 31, 2007 Compared to Year Ended December 31, 2006

Revenues

|                            |  | Year Ended December 31, |     
|--------------------------- |  | ----------------------- | ----
|
|
|
|NMS Communications division |  | $                       | 69.2
|LiveWire Mobile division    |  |                         | 13.2
|                            |  |                         |     
|Total revenues              |  | $                       | 82.4
|                            |  |                         |     

We
experienced a decrease in the NMS Communications division revenues in the year ended December 31, 2007, as compared to the year ended December 31, 2006. The decrease of
our NMS Communications division sales was due primarily to continued erosion of low-end time-division multi-plex ("TDM") solutions to standard IP computing platforms, as well as, the
significant decrease of sales of our voice quality products in the first and second quarters of 2007 compared to the first and second quarters of 2006. This decrease was based primarily on deployments
of our products in the 3G network of a major Japanese operator that concluded in the second quarter of 2006. Sales from our VQS product line were $6.0 million in 2007 and $16.0 million
in 2006.

We
experienced strong growth in the LiveWire Mobile division revenues during the year ended December 31, 2007, as compared to the year ended December 31, 2006, as a result
of increased demand for our MyCaller Ringback Platform and related services. This increase was due to expansion orders
from existing customers, as our customers experience growth in subscribers, and additional new customers. We continue to see growth in this area through new and existing operator deployments around
the world. In the fourth quarter of 2007, we recognized $0.5 million related to our managed services offerings. We will continue to market managed services offerings and we expect them to
become an increasingly important component of our revenue in 2008.

|                               |  | Year Ended December 31, |     
|------------------------------ |  | ----------------------- | ----
|
|
|
|Americas                       |  | $                       | 32.9
|Europe, Middle East and Africa |  |                         | 21.0
|Asia                           |  |                         | 28.5
|                               |  |                         |     
|Total revenues                 |  | $                       | 82.4
|                               |  |                         |     

For
the year ended December 31, 2007, revenues derived from the Americas market decreased as compared to the year ended December 31, 2006, primarily due to an unusually
large $3.2 million sale of an end-of-life product in 2006, coupled with a decrease in demand for NMS Communications

30

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division
platform products. For the year ended December 31, 2007, as compared to the year ended December 31, 2006, we experienced a decrease in the revenues from the EMEA market due to
the decrease in demand for our NMS Communications division products and services. Revenues attributable to the Asia market declined during the year ended December 31, 2007, as compared to the
year ended December 31, 2006, as a Japanese mobile operator completed its deployment of our voice quality products in its 3G network in 2006, offset by growth in sales of our MyCaller Ringback
Platform and related services.

Gross Profit and Cost of Revenues

|                 |  | Year Ended December 31, |     
|---------------- |  | ----------------------- | ----
|
|
|
|Revenues         |  | $                       | 82.4
|Cost of revenues |  |                         | 31.4
|                 |  |                         |     
|Gross profit     |  | $                       | 51.0
|                 |  |                         |     

We
experienced a decrease in gross profit margin in the year ended December 31, 2007, as compared to the year ended December 31, 2006, primarily due to an overall decrease
in sales of our NMS Communications division products of $18.0 million, which typically carry higher product margins than our other products. This decrease was also a result of increased costs
associated with investments in our professional and technical services delivery capabilities, primarily in support of the LiveWire Mobile division.

Selling, General and Administrative

|                                    |  | Year Ended December 31, |     
|----------------------------------- |  | ----------------------- | ----
|
|
|
|Selling, general and administrative |  | $                       | 41.6

Selling,
general and administrative expenses decreased during the year ended December 31, 2007, compared to the year ended December 31, 2006. The decrease was primarily
comprised of a $2.1 million decrease in personnel and related costs that resulted from the restructuring actions taken in the second half of 2006 and other personnel reductions. The decrease is
also attributable to a $1.5 million reduction in travel and entertainment expenses.

Research and Development

|                         |  | Year Ended December 31, |     
|------------------------ |  | ----------------------- | ----
|
|
|
|Research and development |  | $                       | 18.2

Our
research and development spending decreased during the year ended December 31, 2007 in comparison to the year ended December 31, 2006. This decrease was primarily
attributable to a decrease in personnel and related costs as a result of the restructuring actions taken in the second half of 2006, including the closure of our Redbank, New Jersey facility in 2006.
Our research and development activities are primarily focused on opportunities relating to personalized mobile applications, and IP-based services, including VoIP. Our research and
development spending is currently

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directed
to enhance our existing board and software families, next generation board and related software offerings (incorporating for example, video capabilities), our Vision media servers, and our
MyCaller Ringback Platform product line. In 2008, we expect research and development spending to increase, as we continue to invest in our strategic product initiatives.

Restructuring and Other Related Charges

In the third quarter of 2006, in order to reduce operating costs, we eliminated 17 employee positions and closed our engineering facility in Red Bank, New Jersey,
which resulted in restructuring and other related charges of $1.3 million. These charges consisted of $0.8 million of employee severance-related costs, $0.4 million of lease
termination costs and $0.1 million of fixed asset write-offs.

In
the fourth quarter of 2006, in order to further reduce operating costs, we eliminated 40 employee positions, which resulted in restructuring charges of $1.9 million. These
charges primarily consisted of severance-related costs. In the fourth quarter of 2006, we also entered into an agreement to sublease to a third party office space located in Framingham, Massachusetts,
which was formerly used by the Company as supplementary conference, training and corporate office space (the "2006 sublease"). We exited this facility as of December 31, 2006. In 2001 and 2002,
the Company recorded restructuring charges related to other exited space in this facility, equal to the difference between committed lease payments and the estimated sublease rental income for such
space. During the fourth quarter of 2006, we updated our analysis of the estimated sublease rental income based on the signing of the 2006 sublease, and other expected market conditions. As a result,
we recorded additional pre-tax restructuring costs of approximately $0.9 million. The total pre-tax restructuring charges that we recognized in 2006 related to these
actions were $2.3 million of facility related costs. We continue to realize annual costs savings of approximately $2.6 million, which consists of $2.1 of personnel related costs and
$0.5 million of reduced facility related costs. The following table illustrates the components of the restructuring and other related charges incurred during the year ended December 31,
2006. There were no restructuring charges in 2007.

Year Ended December 31,
2006(In millions)Involuntary severance related costs

$
2.7Facility related costs


2.7Write-down of fixed assets


0.1Restructuring and other related charges

$
5.5


Other Income (Expense), Net

The decrease in interest income for the year ended December 31, 2007, as compared with the year ended December 31, 2006, is attributable to a
$2.1 million decrease in our cash, cash equivalents and marketable securities, as well as a decrease in interest rates. Included in other expense, net in the years ended December 31,
2007 and 2006, are $0.5 million and $0.7 million, respectively, of loss related to foreign exchange expense.

Year Ended
December 31,2007

2006(In millions)Interest income

$
1.2

$
1.7Other


(0.7
)

(0.8
)Total other income (expense), net

$
0.5

$
0.9


32

---



Income Tax Expense

Year Ended
December 31,2007

2006(In millions)Income tax expense

$
0.3

$
0.4


Effective
January 1, 2007, we adopted the provisions of Financial Accounting Standards Board ("FASB") Interpretation No. 48,Accounting for
Uncertainty in Income Taxesan Interpretation of FASB Statement 109("FIN 48"), which resulted in no material adjustment in the liability for unrecognized
income tax benefits.

Income
tax expense is primarily due to foreign income taxes incurred by foreign subsidiaries and additional accruals for uncertain tax positions, as discussed below. This income tax
expense is partially
offset by tax credits earned for our research and development activities performed at our Canadian facility, as well as a tax refund received by our Israeli subsidiary.

We
conduct business globally and, as a result, we or one or more of our subsidiaries files income tax returns in the U.S. federal jurisdiction and various state and foreign
jurisdictions. In the normal course of business we are subject to examination by taxing authorities throughout the world. With few exceptions, we are no longer subject to U.S. federal, state and
local, or non-U.S. income tax examinations for years before 1999.

During
the year ended December 31, 2007, we reached a final settlement with the French tax authorities related to audits for the tax years 2003 through 2004. The settlement of
$182,000 was finalized and paid in January 2008. As part of the settlement, we also adjusted our gross net operating loss carryforwards and related valuation allowances from $6.3 million to
$1.6 million as of December 31, 2006. These gross net operating loss carryforwards had a full valuation allowance against them at December 31, 2007 and 2006. Based upon the
settlement there was no material impact to our net income, accumulated deficit or net deferred taxes in any historic periods.

For
U.S. federal income tax purposes, we had net operating loss carryforwards available to reduce taxable income of $201.2 million at December 31, 2007. Of this amount,
$21.1 million relates to deductions from the exercise of stock options, of which $1.5 million is tracked separately and not included in our deferred tax asset in accordance with
SFAS 123R. The future benefit from these deductions will be recorded as a credit to additional paid-in capital when realized. Under the provisions of the Internal Revenue Code of
1986, as amended (the "Internal Revenue Code"), Section 382, certain changes in our ownership structure may result in a limitation on the amount of net operating loss carryforwards and research
and development tax credit carryforwards that may be used in future years. These carryforwards will begin to expire in 2008 if unutilized. We also had foreign net operating loss carryforwards of
$20.5 million. As of December 31, 2007, we had approximately $6.5 million of tax credits in the U.S. that are composed of federal research and development tax credits and state
and local credits. These credits will begin to expire in 2008 if unutilized. In addition, we had Canadian investment tax credits of approximately $5.0 million as of December 31, 2007.
These credits begin to expire in 2014 if unutilized.

United
States income taxes were not provided on cumulative undistributed earnings for certain non-U.S. subsidiaries of approximately $4.5 million. We intend to
reinvest these earnings indefinitely in our operations outside the United States.

33

---



Year Ended December 31, 2006 Compared to Year Ended December 31, 2005

Revenues

|                            |  | 2006 |      | 2005 |       |   |  
|--------------------------- |  | ---- | ---- | ---- | ----- | - | -
|
|
|NMS Communications division |  | $    | 87.1 |      | 90.7  | % | $
|LiveWire Mobile division    |  |      | 8.9  |      | 9.3   |   |  
|                            |  |      |      |      |       |   |  
|Total revenues              |  | $    | 96.0 |      | 100.0 | % | $
|                            |  |      |      |      |       |   |  

We
experienced a decrease in the NMS Communications division revenue in the year ended December 31, 2006, as compared to the year ended December 31, 2005.
The decrease of our NMS Communications division sales was due primarily to continued erosion of low-end TDM solutions to standard IP computing platforms. The change also resulted from a 47.5%
decrease of sales of our VQS products and services as described below. This decrease was partially offset by an increase in revenues earned by our LiveWire Mobile division. Sales of our VQS products
and services decreased in 2006 compared to 2005 based primarily on fewer deployments of our products in the 3G network of a major Japanese operator. This deployment started in the second quarter of
2005 and diminished through 2006. We do not expect to continue to earn any more revenues on such deployments in the future. The functionality incorporated in our VQS products has become an embedded
technology rather than stand-alone technology.

In
2006, we continued to see growth in the LiveWire Mobile division from sales of its MyCaller Ringback Platform and related services through new operator deployments and expansions
around the world.

|               |  | Year Ended December 31, |     
|-------------- |  | ----------------------- | ----
|
|
|
|Americas       |  | $                       | 40.4
|EMEA           |  |                         | 25.4
|Asia           |  |                         | 30.2
|               |  |                         |     
|Total revenues |  | $                       | 96.0
|               |  |                         |     

Revenues
generated from the Americas in 2006 decreased slightly in comparison to 2005. Revenue from the EMEA region increased in the year ended December 31, 2006
due to growth in the sales from our LiveWire Mobile division. The Asia market experienced a decline in revenues during the year ended December 31, 2006, as compared to the year ended
December 31, 2005, as the Japanese mobile operator completed its deployment of our VQS products in its 3G network, as described more fully above.

Gross Profit and Cost of Revenues

|                 |  | Year Ended December 31, |     
|---------------- |  | ----------------------- | ----
|
|
|
|Revenues         |  | $                       | 96.0
|Cost of revenues |  |                         | 33.1
|                 |  |                         |     
|Gross profit     |  | $                       | 62.9
|                 |  |                         |     

34

---



We
experienced a decrease in gross profit in the year ended December 31, 2006 as compared to the year ended December 31, 2005 primarily due to a decrease in
annual sales of our VQS products and related services as described above. Product sales associated with the LiveWire Mobile division generate lower product margins than our NMS Communications division
due to the labor efforts to put the products to use. Service costs, which represent primarily sales technical support activities, decreased as a result of fewer employees. During 2006, we recognized
$1.1 million of amortization expense related to the core technology acquired from Openera, and $0.1 million of stock-based compensation expense due to the adoption of SFAS 123R in
cost of revenues.

Selling, General and Administrative

|                                    |  | Year Ended December 31, |     
|----------------------------------- |  | ----------------------- | ----
|
|
|
|Selling, general and administrative |  | $                       | 44.3

Selling,
general and administrative expenses increased during the year ended December 31, 2006, as compared to the year ended December 31, 2005. The
increase for the year ended December 31, 2006 was primarily comprised of $5.0 million of increased payroll expense due to an increase in headcount, $1.8 million of stock-based
compensation expense due to the adoption of SFAS 123R and $2.5 million of stock-based compensation expense associated with the Openera acquisition, a $1.0 million increase of
travel expenses primarily related to our international customers and the integration of Openera (whose operations were primarily in India), and $0.1 million of amortization related to acquired
intangibles. These increases were partially offset by a $1.5 million decrease in sales commissions due to the decrease in 2006 annual sales.

Research and Development

|                         |  | Year Ended December 31, |     
|------------------------ |  | ----------------------- | ----
|
|
|
|Research and development |  | $                       | 21.8

Our
research and development spending decreased slightly in 2006 in comparison to 2005. This decrease was primarily attributable to a decrease in personnel costs. Our
research and development activities are primarily focused on opportunities relating to emerging wireless applications, radio access networks and emerging IP-based services, including VoIP.
Our research and development spending is currently directed to enhance our existing board and software families, next generation board and related software offerings (incorporating for example, video
capabilities), our Vision series of application ready media servers, and MyCaller Ringback platform. For the year ended December 31, 2006 we invested approximately $7.6 million in the
MyCaller Ringback platform. For the year ended December 31, 2006, we incurred $0.3 million of stock-based compensation expense associated with the adoption of SFAS 123R, which is
reflected in research and development.

Restructuring and Other Related Charges

In the third quarter of 2006, in order to reduce operating costs, we eliminated 17 employee positions and closed our engineering facility in Red Bank, New Jersey,
which resulted in restructuring and other related charges of $1.3 million. These charges consisted of $0.8 million of employee severance-related costs, $0.4 million of lease
termination costs and $0.1 million of fixed asset write-offs.

In
the fourth quarter of 2006, in order to further reduce operating costs, we eliminated 40 employee positions, which resulted in restructuring charges of $1.9 million. These
charges primarily

35

---



consisted
of severance-related costs. In the fourth quarter of 2006, we also entered into an agreement to sublease to a third party office space located in Framingham, Massachusetts, which was
formerly used by the Company as supplementary conference, training and corporate office space (the "2006 sublease"). We exited this facility as of December 31, 2006. In 2001 and 2002, the
Company recorded restructuring charges related to other exited space in this facility, equal to the difference between committed lease payments and the estimated sublease rental income for such space.
During the fourth quarter of 2006, we updated our analysis of the estimated sublease rental income based on the signing of the 2006 sublease, and other expected market conditions. As a result, we
recorded additional pre-tax restructuring costs of approximately $0.9 million. The total pre-tax restructuring charges we recognized in 2006 related to these actions
were $2.3 million of facility related costs. The following table illustrates the components of the restructuring and other related charges incurred during the year ended December 31,
2006. There were no restructuring charges in 2005.

Year Ended December 31, 2006(In millions)Involuntary severance related costs

$
2.7Facility related costs


2.7Write-down of fixed assets


0.1Restructuring and other related charges

$
5.5


Other Income (Expense), Net

Interest income increased due to a rise in interest rates in 2006. The decrease in interest expense was attributable to the repurchase and retirement of
outstanding convertible debt in 2005. There was no third-party debt outstanding as of December 31, 2006. Included in "Other" in the year ended December 31, 2006, are $0.4 million
of foreign exchange expense.

Year Ended December 31,2006

2005(In millions)Interest income

$
1.7

$
1.6Interest expense





(0.8
)Other


(0.8
)

0.6Total other income (expense), net

$
0.9

$
1.4


Income Tax Expense

Year Ended December 31,2006

2005(In millions)Income tax expense

$
0.4

$
0.5


Income
tax expense is primarily due to foreign income taxes incurred by foreign subsidiaries offset by tax credits earned related to our research and development
activities performed at our Canadian facility.

For
U.S. federal income tax purposes, we had net operating loss carryforwards available to reduce taxable income of approximately $176.2 million at December 31, 2006. Of
this amount, $21.1 million relates to deductions from the exercise of stock options, of which approximately $1.5 million is tracked separately and not included in our deferred tax asset
(in accordance with FAS 123R). The future benefit from these deductions will be recorded as a credit to additional paid-in capital when realized.

36

---



Under
the provisions of the Internal Revenue Code Section 382, certain changes in our ownership structure may result in a limitation on the amount of net operating loss carryforwards and
research and development credit carryforwards that may be used in future years. These carryforwards began to expire in 2007 if unutilized. We also had foreign net operating loss carryforwards of
approximately $28.4 million as of December 31, 2006. As of December 31, 2006, we had approximately $6.4 million of tax credits in the U.S. that are comprised of federal
research and development credits and state and local credits. These credits began to expire in 2007 if unutilized. In addition, we had Canadian investment tax credits of approximately
$4.4 million as of December 31, 2006. These credits begin to expire in 2014 if unutilized.

We
have established a valuation allowance against net deferred tax assets in certain jurisdictions including the United States, because we believe that it is more likely than not that
the tax assets in those jurisdictions will not be realized prior to their expiration. We will continue to assess the valuation allowance and to the extent it is determined that any allowance is no
longer required, the tax benefit of the remaining net deferred tax assets would be recognized in the future.

United
States income taxes were not provided on cumulative undistributed earnings for certain non-U.S. subsidiaries of approximately $3.2 million as of
December 31, 2006. We intend to reinvest these earnings indefinitely in our operations outside the United States.

Liquidity and Capital Resources

December 31,2007

2006(In millions)Cash, cash equivalents and marketable securities

$
30.2

$
32.3Working capital

$
31.3

$
35.8


As
of December 31, 2007, our liquid assets included cash, cash equivalents and marketable securities of $30.2 million. We intend to use our cash for general
corporate purposes, which may include working capital, capital expenditures, share repurchases and potential acquisitions. In connection with the sale of the NI division, we received consideration of
$850,000 of cash and 5,374,033 shares of Verso common stock, which is valued at $1.8 million as of December 31, 2007. As of December 31, 2007, these shares were unregistered. Per
the terms of the Agreement, Verso has 90 days from the close of the transaction date to register the shares. Trading of the shares is limited until such registration occurs. As of
December 31, 2007, we had no significant capital spending or purchase commitments other than facility leases and purchase orders in the ordinary course of business.

In
January 2008, we formed a wholly-owned subsidiary, LiveWire Mobile, Inc. ("LiveWire Mobile"), a Delaware Corporation. In conjunction with creating LiveWire Mobile, we intend to
contribute or license the personnel, assets, liabilities and intellectual property rights of our LiveWire Mobile division. On March 17, 2008, LiveWire Mobile acquired Groove Mobile, Inc.
("Groove Mobile") for cash
consideration of $14.5 million. Groove Mobile, whose operations are based in Bedford, Massachusetts, is a provider of mobile music solutions. The acquisition will enable LiveWire Mobile to
expand its ability to offer a portfolio of managed services, including ringback tones, ringtones, and full track music and video downloads delivered though an integrated storefront.

We
believe that our available liquid assets and working capital are sufficient to meet our operating expenses, capital requirements and contractual obligations for at least the next
12 months. Material risks to cash flow from operations include lower than anticipated revenues and delayed cash receipts from sales of our products and services. Our future liquidity and cash
requirements will depend on numerous factors, including, but not limited to, the level of revenue we will be able to achieve in the future, the successful introduction of new products and services in
the market and capital expenditures required to support our business. Long-term cash requirements for normal operating expenses and as well as for selling and general administrative
expenses are anticipated for the continued development of

37

---



new
products as well as for selling and general administrative expenses. At this time we do not anticipate additional significant acquisitions of businesses or technologies complementary to our
business. In the future we could require additional external financing through the sales of additional equity or other financing vehicles. There is no assurance that such financing can be obtained on
favorable terms, if at all.

Cash Flow

Sources and uses of cash for the 2007, 2006 and 2005 years are summarized in the table below.

Year Ended December 31,2007

2006

2005(In millions)Net cash provided by (used in) operating activities

$
0.1

$
(5.5
)
$
3.6Net cash provided by (used in) investing activities

$
(5.2
)
$
1.4

$
32.8Net cash provided by (used in) financing activities

$
0.2

$
(22.4
)
$
(18.0
)


The
principal driver in the change in cash flows provided by operations is net income (loss) adjusted by certain non-cash items such as amortization and
stock-based compensation. Net loss decreased by $6.5 million from a net loss of $15.8 million for the year ended December 31, 2006, to a net loss of $9.3 million for the
year ended December 31, 2007. We recognized net income of $5.0 million in 2005. In both the years ended December 31, 2007 and 2006, we incurred amortization expense of
$1.2 million, as a result of the acquisition of Openera in February 2006. We also incurred stock-based compensation expense of $5.1 million and $4.8 million during the years ended
December 31, 2007 and 2006, with the adoption of SFAS 123R on January 1, 2006. These amounts include stock-based compensation expense of $2.8 million and
$2.5 million for the years ended December 31, 2007 and 2006, respectively, related to the restricted stock and common stock consideration used to purchase Openera in February
2006. There was no stock-based compensation expense in 2005.

Our
cash flows from operating activities are also affected by changes in our operating assets and liabilities. As of December 31, 2007, 2006 and 2005, DSO from continued and
discontinued operations, collectively, were 57 days, 49 days and 56 days, respectively. DSO is significantly affected by the timing of customer shipments and invoicing. For most
of our products, we invoice at the time of shipment. For other of our products, we partially invoice our customers at the time of order receipt, with the remainder of the order being invoiced at
certain milestones. Deferred revenues represents inventory in the channel, systems shipped to customers from which we are awaiting acceptance or other deferred elements of a contract, maintenance and
support services billed but not yet delivered and managed services where revenue is not yet recognized. For the year ended December 31, 2007, cash flows used in accounts receivable and deferred
revenue activity were $(0.5) million and $(0.8) million, respectively. These balances may vary based on timing of invoicing, cash receipts and timing of revenue recognition. For the year
ended December 31, 2007, we utilized cash aggregating $1.6 million related to the restructuring activities taken in the second half of 2006.

Our
cash flows used in investing activities were primarily driven by the purchases of fixed assets and other long term assets and purchases and maturities of our marketable securities.
On December 21, 2007, we sold our NI division to Verso for consideration of $850,000 and 5,374,033 shares of Verso common stock, which was valued at $1.8 million as of
December 31, 2007.

38

---





As part of our board of director's plan to repurchase our common stock, we used $23.3 million in 2006 to repurchase 7,888,985 shares of our common stock. The stock repurchase
programs were completed in September 2006.

In
connection with the acquisition of Openera, we acquired debt of $0.7 million which was repaid in 2006. For the year ended December 31, 2005, we used $20.9 million
to repurchase $19.9 million of debt obligations, which were fully retired in October 2005, and related interest of $1.0 million.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet financing arrangements, other than property and equipment operating leases that are disclosed in the contractual
obligations table below and in our consolidated financial statements, nor do we have any transactions, arrangements or other relationships with any special purpose entities established by us, at our
direction or for our benefit. The following table details our future contractual payment obligations.

Contractual Obligations

|                                             |  | Payments due by Period
|-------------------------------------------- |  | ----------------------
|
|Operating lease obligations                  |  | $                     
|Purchase obligations                         |  |                       
|Uncertain tax positions and related interest |  |                       
|                                             |  |                       
|Total contractual obligations                |  | $                     
|                                             |  |                       

Operating
lease obligations do not include estimated sublease income of $2.3 million, which is expected to be received over the next five years. Purchase obligations are open
purchase orders defined as agreements to purchase goods or services that are enforceable and legally binding and that specify all significant terms, including: fixed or minimum quantities to be
purchased; fixed, minimum or variable pricing provisions; and the approximate timing of the transactions. These obligations primarily relate to
components, software licenses and services, and equipment maintenance services. The amounts are based on our contractual commitments.

Our
agreement with one of our manufacturers, Plexus, requires Plexus to turn NMS-related inventory at least eight times per year. If this condition is not met, we must
purchase enough inventory to bring Plexus up to eight turns. At December 31, 2007, we satisfied the eight turn goal. As such, we have not included any amounts in the table of contractual
obligations related to our commitment with Plexus at December 31, 2007. We can only ascribe value to such commitment when we have not met the condition as determined at a specific point in
time, based on facts and circumstances. We have no such arrangements with our other third-party contract manufacturer.

As
of December 31, 2007, we recorded a liability related to uncertain tax positions of $587,000 and related interest of $127,000. In January 2008, we paid $182,000 of taxes and interest,
related to an uncertain tax position recorded in 2007. We are unable to reasonably estimate the timing of the remainder uncertain tax positions and related interest in individual years beyond 12
months due to uncertainties in the timing of the effective settlements of tax positions.

Recent Accounting Pronouncements

In September 2006, the FASB issued SFAS No. 157,Fair Value Measurements("SFAS 157").
SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles ("GAAP") and expands disclosures about fair value measurements.
SFAS 157

39

---



applies
under other accounting pronouncements that require or permit fair value measurements, the FASB having previously concluded in those accounting pronouncements that fair value is the relevant
measurement attribute. Accordingly, SFAS 157 does not require any new fair value measurements. SFAS 157 is effective for fiscal years beginning after November 15, 2007, and
interim periods within those fiscal years, with earlier adoption permitted. The provisions of SFAS 157 should be applied prospectively as of the beginning of the fiscal year in which it is
initially applied, with limited exceptions. We are currently evaluating the provisions of SFAS 157.

In
February 2007, the FASB issued SFAS No. 159,The Fair Value Option for Financial Assets and Financial Liabilities, including an amendment of FASB
Statement No. 115("SFAS 159"). SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value that are
not currently required to be measured at fair value. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings. SFAS 159 does not affect any
existing accounting literature that requires certain assets and liabilities to be carried at fair value. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. We
do not expect our adoption of this new standard to have a material impact on our financial position, results of operations or cash flows.

In
December 2007, the FASB issued SFAS No. 141 (revised 2007),Business Combinations("SFAS 141R") and SFAS No. 160, Noncontrolling Interests in Consolidated Financial
Statements, an amendment of Accounting Research Bulletin No. 51("SFAS 160").
SFAS 141R will change how business acquisitions are accounted for and will impact financial statements both on the acquisition date and in subsequent periods. SFAS 160 will change the
accounting and reporting for minority interests, which will be recharacterized as noncontrolling interests and classified as a component of equity. The provisions of SFAS 141R and
SFAS 160 are effective for fiscal years beginning on or after December 15, 2008. We are currently evaluating the impact that SFAS 141R and SFAS 160 will have on our results
of operations or financial condition.

ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Foreign Currency Exchange Risk

We maintain sales and business operations in foreign countries. As such, we have exposure to adverse changes in exchange rates associated with operating expenses
of our foreign operations. The majority of our orders are billed in U.S. dollars, however, we do accept orders and bill in currencies other than U.S. dollars. We regularly monitor the level of
non-U.S. dollar accounts receivable balances to determine if any actions should be taken to minimize the impact of fluctuating exchange rates on our results of operations.

Our
exposure to foreign currency exchange risk also relates to the remeasurement of our intercompany balances. The balances are remeasured at each reporting period, at the current
foreign exchange rates.

Interest Rate Sensitivity

We had cash and cash equivalents of $20.2 million and short term investments of $10.0 million, which includes $1.8 million of Verso common
stock, at December 31, 2007. The cash and cash equivalents are held for working capital purposes. We do not enter into investments for trading or speculative purposes. Some of the securities in
which we invest, however, may be subject to market risk. This means that a change in prevailing interest rates may cause the principal amount of the investment to fluctuate. To minimize this risk, we
intend to maintain our portfolio of cash equivalents and
short-term investments in low-risk securities, including money market funds, certificates of deposit and U.S. government and agency bonds. As of December 31, 2007, our
cash equivalents and our short-term investments were comprised of money market funds, certificates of deposit, U.S. government and agency bonds and Verso common stock. The Verso common
stock is subject to market volatility. A change in the market price of the Verso common stock may cause its fair value to fluctuate.

40

---





ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

Report of Independent Registered Public Accounting Firm

To
the Board of Directors and Shareholders of NMS Communications Corporation:

In
our opinion, the consolidated financial statements included in the index appearing under Item 15(a)(1) present fairly, in all material respects, the financial position of NMS
Communications Corporation and its subsidiaries at December 31, 2007 and December 31, 2006, and the results of their operations and their cash flows for each of the three years in the
period ended December 31, 2007 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed
in the index appearing Item 15(a)(2), presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements.
Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2007, based on criteria established in Internal ControlIntegrated
Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's
management is responsible for these financial statements and financial statement schedule, for maintaining effective internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting, included in "Management's Report on Internal Control over Financial Reporting" appearing under Item 9A. Our responsibility is to
express opinions on these financial statements, on the financial statement schedule, and on the Company's internal control over financial reporting based on our integrated audits. We conducted our
audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance
about whether the financial statements are free
of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test
basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall
financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a
material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as
we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

As
discussed in Note 11 to the consolidated financial statements, the Company changed the manner in which it accounts for uncertain tax positions in 2007. Also, as discussed in
Note 2 to the consolidated financial statements, the Company changed the manner in which it accounts for share-based compensation in 2006.

A
company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures
that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

41

---



Because
of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/
PricewaterhouseCoopers LLP

Boston,
Massachusetts
April 1, 2008

42

---





NMS Communications Corporation        Consolidated Balance Sheets

|                                        |                                                                                                                                                                                                                                                                        | December 31,                         |      
|--------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------ | -----
|
|
|Assets                                  |                                                                                                                                                                                                                                                                        |                                      |      
|Current assets:                         |                                                                                                                                                                                                                                                                        |                                      |      
|                                        | Cash and cash equivalents                                                                                                                                                                                                                                              |                                      | $    
|                                        | Marketable securities                                                                                                                                                                                                                                                  |                                      |      
|                                        | Accounts receivable, net of allowance for doubtful accounts of $113 and $829, respectively                                                                                                                                                                             |                                      |      
|                                        | Inventories                                                                                                                                                                                                                                                            |                                      |      
|                                        | Prepaid expenses and other assets                                                                                                                                                                                                                                      |                                      |      
|                                        |                                                                                                                                                                                                                                                                        |                                      |      
|                                        | Total current assets                                                                                                                                                                                                                                                   |                                      |      
|                                        |                                                                                                                                                                                                                                                                        |                                      |      
|Property and equipment, net             |                                                                                                                                                                                                                                                                        |                                      | 5,096
|Goodwill                                |                                                                                                                                                                                                                                                                        |                                      | 5,427
|Other intangible assets, net            |                                                                                                                                                                                                                                                                        |                                      | 4,185
|Other assets, net                       |                                                                                                                                                                                                                                                                        |                                      | 2,964
|                                        |                                                                                                                                                                                                                                                                        |                                      |      
|                                        | Total assets                                                                                                                                                                                                                                                           |                                      | $    
|                                        |                                                                                                                                                                                                                                                                        |                                      |      
|                                        |                                                                                                                                                                                                                                                                        | Liabilities and Stockholders' Equity |      
|Current liabilities:                    |                                                                                                                                                                                                                                                                        |                                      |      
|                                        | Accounts payable                                                                                                                                                                                                                                                       |                                      | $    
|                                        | Accrued expenses and other liabilities                                                                                                                                                                                                                                 |                                      |      
|                                        | Accrued restructuring                                                                                                                                                                                                                                                  |                                      |      
|                                        | Deferred revenue                                                                                                                                                                                                                                                       |                                      |      
|                                        |                                                                                                                                                                                                                                                                        |                                      |      
|                                        | Total current liabilities                                                                                                                                                                                                                                              |                                      |      
|                                        |                                                                                                                                                                                                                                                                        |                                      |      
|Accrued restructuring                   |                                                                                                                                                                                                                                                                        |                                      | 1,811
|Accrued warranty expense                |                                                                                                                                                                                                                                                                        |                                      | 171  
|                                        |                                                                                                                                                                                                                                                                        |                                      |      
|                                        | Total liabilities                                                                                                                                                                                                                                                      |                                      |      
|                                        |                                                                                                                                                                                                                                                                        |                                      |      
|Commitments and contingencies (note 16) |                                                                                                                                                                                                                                                                        |                                      |      
|Stockholders' equity:                   |                                                                                                                                                                                                                                                                        |                                      |      
|                                        | Preferred stock, $0.05 par value, 3,000,000 shares authorized at December 31, 2007 and 2006, respectively, no shares issued and outstanding                                                                                                                            |                                      |      
|                                        | Common stock, $0.01 par value, 125,000,000 shares authorized at December 31, 2007 and 2006, respectively; 52,991,435 shares issued and 45,642,905 shares outstanding at December 31, 2007 and 52,991,435 shares
issued and 45,441,183 outstanding at December 31, 2006 |                                      |      
|                                        | Additional paid-in capital                                                                                                                                                                                                                                             |                                      |      
|                                        | Accumulated deficit                                                                                                                                                                                                                                                    |                                      |      
|                                        | Accumulated other comprehensive loss                                                                                                                                                                                                                                   |                                      |      
|                                        | Treasury stock, at cost, 7,348,530 shares at December 31, 2007 and 7,550,252 shares at December 31, 2006                                                                                                                                                               |                                      |      
|                                        |                                                                                                                                                                                                                                                                        |                                      |      
|                                        | Total stockholders' equity                                                                                                                                                                                                                                             |                                      |      
|                                        |                                                                                                                                                                                                                                                                        |                                      |      
|                                        | Total liabilities and stockholders' equity                                                                                                                                                                                                                             |                                      | $    
|                                        |                                                                                                                                                                                                                                                                        |                                      |      

The
accompanying notes are an integral part of the consolidated financial statements.

43

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NMS Communications Corporation        Consolidated Statements of Operations

|                                                             |                                                                                                   | Year Ended December 31, |       
|------------------------------------------------------------ | ------------------------------------------------------------------------------------------------- | ----------------------- | ------
|
|
|Revenues                                                     |                                                                                                   | $                       | 82,452
|Cost of revenues                                             |                                                                                                   |                         | 31,445
|                                                             |                                                                                                   |                         |       
|Gross profit                                                 |                                                                                                   |                         | 51,007
|Operating expenses:                                          |                                                                                                   |                         |       
|                                                             | Selling, general and administrative                                                               |                         |       
|                                                             | Research and development                                                                          |                         |       
|                                                             | Restructuring and other related charges                                                           |                         |       
|                                                             |                                                                                                   |                         |       
|                                                             | Total operating expenses                                                                          |                         |       
|                                                             |                                                                                                   |                         |       
|Operating income (loss)                                      |                                                                                                   |                         | (8,813
|Other income (expense):                                      |                                                                                                   |                         |       
|                                                             | Interest income                                                                                   |                         |       
|                                                             | Interest expense                                                                                  |                         |       
|                                                             | Other                                                                                             |                         |       
|                                                             |                                                                                                   |                         |       
|                                                             | Other income, net                                                                                 |                         |       
|                                                             |                                                                                                   |                         |       
|Income (loss) from continuing operations before income taxes |                                                                                                   |                         | (8,269
|                                                             | Income tax expense                                                                                |                         |       
|                                                             |                                                                                                   |                         |       
|Income (loss) from continuing operations                     |                                                                                                   |                         | (8,575
|                                                             |                                                                                                   |                         |       
|                                                             | Loss from discontinued operations (net of income tax benefit of $90, $139 and $153, respectively) |                         |       
|                                                             | Gain on disposal of discontinued operations (net of income tax expense of $6)                     |                         |       
|                                                             |                                                                                                   |                         |       
|Net income (loss)                                            |                                                                                                   | $                       | (9,310
|                                                             |                                                                                                   |                         |       
|                                                             | Net income (loss) from continuing operations per common sharebasic and diluted                   |                         | $     
|                                                             |                                                                                                   |                         |       
|                                                             | Net income (loss) per common sharebasic and diluted                                              |                         | $     
|                                                             |                                                                                                   |                         |       
|                                                             | Shares used in net income (loss) per common sharebasic                                           |                         |       
|                                                             |                                                                                                   |                         |       
|                                                             | Shares used in net income (loss) per common sharediluted                                         |                         |       
|                                                             |                                                                                                   |                         |       

The
accompanying notes are an integral part of the consolidated financial statements.

44

---



NMS Communications Corporation

Consolidated Statements of Stockholders' Equity

|                           |                                                                         |        |       |   |     |    |   |         |       |   |          | Treasury stock |   |        |        |       |      
|-------------------------- | ----------------------------------------------------------------------- | ------ | ----- | - | --- | -- | - | ------- | ----- | - | -------- | -------------- | - | ------ | ------ | ----- | -----
|
|
|
|Balance, December 31, 2004 |                                                                         | 47,369 |       | $ | 474 |    | $ | 412,989 |       | $ | (342,732 | )              | $ | (2,300 | )      |      |      
|                           |                                                                         |        |       |   |     |    |   |         |       |   |          |                |   |        |        |       |      
|                           | Exercise of common stock options                                        |        | 898   |   |     | 8  |   |         | 1,560 |   |          |                |   |        |        |       |      
|                           | Issuance of common stock under employee purchase plan                   |        | 145   |   |     | 2  |   |         | 390   |   |          |                |   |        |        |       |      
|                           | Change in market value of securities available for sale                 |        |       |   |     |    |   |         |       |   |          |                |   |        | 95     |       |      
|                           | Foreign currency translation adjustment                                 |        |       |   |     |    |   |         |       |   |          |                |   |        | (1,363 | )     |      
|                           | Net income                                                              |        |       |   |     |    |   |         |       |   |          | 4,972          |   |        |        |       |      
|                           |                                                                         |        |       |   |     |    |   |         |       |   |          |                |   |        |        |       |      
|Balance, December 31, 2005 |                                                                         | 48,412 |       | $ | 484 |    | $ | 414,939 |       | $ | (337,760 | )              | $ | (3,568 | )      |      |      
|                           |                                                                         |        |       |   |     |    |   |         |       |   |          |                |   |        |        |       |      
|                           | Exercise of common stock options                                        |        | 534   |   |     | 5  |   |         | 518   |   |          |                |   |        |        |       | (275 
|                           | Issuance of common stock under employee purchase plan                   |        | 67    |   |     | 1  |   |         | 141   |   |          |                |   |        |        |       | (64  
|                           | Repurchase of common stock                                              |        |       |   |     |    |   |         |       |   |          |                |   |        |        |       | 7,889
|                           | Issuance of common stock and restricted stock under Openera acquisition |        | 3,978 |   |     | 40 |   |         | 7,774 |   |          |                |   |        |        |       |      
|                           | Issuance of vested common stock options under Openera acquisition       |        |       |   |     |    |   |         | 577   |   |          |                |   |        |        |       |      
|                           | Stock based compensation                                                |        |       |   |     |    |   |         | 4,768 |   |          |                |   |        |        |       |      
|                           | Change in market value of securities available for sale                 |        |       |   |     |    |   |         |       |   |          |                |   |        | 15     |       |      
|                           | Foreign currency translation adjustment                                 |        |       |   |     |    |   |         |       |   |          |                |   |        | 791    |       |      
|                           | Net loss                                                                |        |       |   |     |    |   |         |       |   |          | (15,751        | ) |        |        |       |      
|                           |                                                                         |        |       |   |     |    |   |         |       |   |          |                |   |        |        |       |      
|Balance, December 31, 2006 |                                                                         | 52,991 |       | $ | 530 |    | $ | 428,717 |       | $ | (353,511 | )              | $ | (2,762 | )      | 7,550 |      
|                           |                                                                         |        |       |   |     |    |   |         |       |   |          |                |   |        |        |       |      
|                           | Exercise of common stock options                                        |        |       |   |     |    |   |         | (291  | ) |          |                |   |        |        |       | (114 
|                           | Issuance of common stock under employee purchase plan                   |        |       |   |     |    |   |         | (131  | ) |          |                |   |        |        |       | (87  
|                           | Stock based compensation                                                |        |       |   |     |    |   |         | 5,128 |   |          |                |   |        |        |       |      
|                           | Change in market value of securities available for sale                 |        |       |   |     |    |   |         |       |   |          |                |   |        | (53    | )     |      
|                           | Foreign currency translation adjustment                                 |        |       |   |     |    |   |         |       |   |          |                |   |        | 419    |       |      
|                           | Net loss                                                                |        |       |   |     |    |   |         |       |   |          | (9,310         | ) |        |        |       |      
|                           |                                                                         |        |       |   |     |    |   |         |       |   |          |                |   |        |        |       |      
|Balance, December 31, 2007 |                                                                         | 52,991 |       | $ | 530 |    | $ | 433,423 |       | $ | (362,821 | )              | $ | (2,396 | )      | 7,349 |      
|                           |                                                                         |        |       |   |     |    |   |         |       |   |          |                |   |        |        |       |      

The accompanying notes are an integral part of the consolidated financial statements.

45

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NMS Communications Corporation        Consolidated Statements of Cash Flows

|                                                                                               |                                                                              | Years Ended December 31,                            |                                                
|---------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------- | --------------------------------------------------- | -----------------------------------------------
|
|
|Cash flow from operating activities:                                                           |                                                                              |                                                     |                                                
|                                                                                               | Net income (loss)                                                            |                                                     | $                                              
|Adjustments to reconcile net income (loss) to cash provided by (used in) operating activities: |                                                                              |                                                     |                                                
|                                                                                               | Depreciation of property and equipment                                       |                                                     |                                                
|                                                                                               | Gain on disposal of discontinued operations                                  |                                                     |                                                
|                                                                                               | Amortization of managed services assets                                      |                                                     |                                                
|                                                                                               | Amortization of other intangibles                                            |                                                     |                                                
|                                                                                               | Amortization (accretion) of marketable securities                            |                                                     |                                                
|                                                                                               | Stock based compensation expense                                             |                                                     |                                                
|                                                                                               | Loss on disposal of property and equipment                                   |                                                     |                                                
|                                                                                               | Foreign exchange translation loss (gain)                                     |                                                     |                                                
|                                                                                               | Write-off and amortization of debt issuance costs                            |                                                     |                                                
|                                                                                               | Changes in operating assets and liabilities, net of effects of acquisitions: |                                                     |                                                
|                                                                                               |                                                                              | Accounts receivable                                 |                                                
|                                                                                               |                                                                              | Inventories                                         |                                                
|                                                                                               |                                                                              | Prepaid expenses and other assets                   |                                                
|                                                                                               |                                                                              | Accounts payable                                    |                                                
|                                                                                               |                                                                              | Accrued expenses and other liabilities              |                                                
|                                                                                               |                                                                              | Accrued restructuring                               |                                                
|                                                                                               |                                                                              | Deferred revenue                                    |                                                
|                                                                                               |                                                                              |                                                     |                                                
|                                                                                               |                                                                              |                                                     | Cash (used in) provided by operating activities
|                                                                                               |                                                                              |                                                     |                                                
|Cash flow from investing activities:                                                           |                                                                              |                                                     |                                                
|                                                                                               | Purchases of property and equipment                                          |                                                     |                                                
|                                                                                               | Purchases of managed services assets                                         |                                                     |                                                
|                                                                                               | Purchases of licenses                                                        |                                                     |                                                
|                                                                                               | Purchases of marketable securities                                           |                                                     |                                                
|                                                                                               | Proceeds from the maturity of marketable securities                          |                                                     |                                                
|                                                                                               | Proceeds from sale of the NI division                                        |                                                     |                                                
|                                                                                               | Cash acquired through acquisition of a business                              |                                                     |                                                
|                                                                                               |                                                                              |                                                     |                                                
|                                                                                               |                                                                              |                                                     | Cash provided by (used in) investing activities
|                                                                                               |                                                                              |                                                     |                                                
|Cash flow from financing activities:                                                           |                                                                              |                                                     |                                                
|                                                                                               | Repayment of debt                                                            |                                                     |                                                
|                                                                                               | Repurchase of common stock                                                   |                                                     |                                                
|                                                                                               | Proceeds from issuance of common stock                                       |                                                     |                                                
|                                                                                               |                                                                              |                                                     |                                                
|                                                                                               |                                                                              |                                                     | Cash (used in) provided by financing activities
|                                                                                               |                                                                              |                                                     |                                                
|Effect of exchange rate changes on cash                                                        |                                                                              |                                                     | (97                                            
|                                                                                               |                                                                              |                                                     |                                                
|Net increase (decrease) in cash and cash equivalents                                           |                                                                              |                                                     | (4,997                                         
|                                                                                               |                                                                              |                                                     |                                                
|Cash and cash equivalents, beginning of year                                                   |                                                                              |                                                     | 25,176                                         
|                                                                                               |                                                                              |                                                     |                                                
|Cash and cash equivalents, end of year                                                         |                                                                              | $                                                   | 20,179                                         
|                                                                                               |                                                                              |                                                     |                                                
|Supplemental cash flow information:                                                            |                                                                              |                                                     |                                                
|                                                                                               | Interest paid                                                                |                                                     | $                                              
|                                                                                               | Taxes paid                                                                   |                                                     | $                                              
|                                                                                               | Acquisition of Openera:                                                      |                                                     |                                                
|                                                                                               |                                                                              | Fair value of assets acquired, net of cash acquired |                                                
|                                                                                               |                                                                              | Fair value of liabilities acquired                  |                                                
|                                                                                               | Receipt of Verso common stock from sale of NI division                       |                                                     | $                                              

The accompanying notes are an integral part of the consolidated financial statements.

46

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Notes to Consolidated Financial Statements

1Summary of Significant Accounting Policies

Business Description

NMS Communications Corporation is a provider of enabling technologies, platforms and systems to wireless and wireline telecommunications operators and network
equipment and application providers. The Company's products, which include systems building blocks, service delivery systems and personalized mobile entertainment applications, voice quality systems,
and services address a wide range of customers' needs as they seek to develop and deploy enhanced voice and data services and applications, and improve the quality and efficiency of communications
networks. Telecommunications operators use the Company's products to improve customer acquisition and retention, diversify revenue streams and reduce operating costs and capital expenditures. Network
equipment and application providers use the Company's products to help deploy leading technology solutions for their telecommunication operator and enterprise customers in a timely and
cost-effective manner. The Company sells its products worldwide through its direct sales force as well as through channel partners. The Company's customers include leading
telecommunications operators and network equipment and application providers.

Principles of Consolidation

The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. Intercompany balances and transactions have been
eliminated in consolidation.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make
estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis,
management evaluates estimates related to the allowance for doubtful accounts and sales returns, write-down of excess and obsolete inventories to the lower of cost or market value, the
realizability of goodwill and other long-lived assets, income taxes, restructuring and other related charges, and accounting for acquisitions. Management establishes these estimates based
on historical experience and various assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of
assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

Foreign Currency Translation

Assets and liabilities of the Company's subsidiaries operating outside the United States, which operate in a functional currency other than U.S. dollars, are
translated into U.S. dollars using year-end exchange rates. Revenues and expenses are translated at the average exchange rates effective during the year. Foreign currency translation gains
and losses are included as a component of accumulated other comprehensive income (loss) within stockholders' equity. Gains and losses resulting from foreign currency transactions are included in other
income (expense), net. The foreign currency translation gain or loss generated by the remeasurement of our intercompany debt at each reporting period is recorded as a component of accumulated other
comprehensive income (loss) within stockholders' equity, since the Company expects those loans to be permanently reinvested.

47

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Revenue Recognition

The Company derives its revenue from two sources: (i) sales of products, including hardware and software licenses; and (ii) services, including
maintenance and support services, software updates, professional services and managed services. Maintenance and support services consist of on-site support, telephone and
on-line support, and training. Professional services projects may consist of multiple elements including hardware and/or software installation, configuration, integration and customization
services provided to customers. Managed services consist of supplying, outsourcing and/or maintaining systems for the benefit of customers. These systems may be Company owned pursuant to managed
services arrangements or customer owned pursuant to a cap-ex arrangement.

The
Company sells its products and services through its direct sales force and through channel partners, which include resellers, distributors and system integrators. When the software
is more than incidental and is essential to the functionality of the hardware, the Company recognizes revenue in accordance with the provisions of the American Institute of Certified Public
Accountants ("AICPA") Statement of Position ("SOP") 97-2,Software Revenue Recognition("SOP 97-2"), and related
interpretations. The Company recognizes revenue from the sale of products when persuasive evidence of an arrangement exists; delivery has occurred; the fee is fixed or determinable; and collection is
considered probable. For all sales, the Company uses a binding contract and/or a purchase order as evidence of an arrangement with the customer or channel partner. Sales to the Company's channel
partners are evidenced by a master agreement governing the relationship, together with binding purchase orders for individual transactions. The Company considers delivery to occur when it ships the
product, so long as title and risk of loss have passed to the customer. At the time of a transaction, the Company assesses whether the sale amount is fixed or determinable based upon the terms of the
documented agreement. If the Company determines the fee is not fixed or determinable, the Company recognizes revenue when the fee is fixed. The Company assesses if collection is probable based on a
number of factors, including past transaction history and the creditworthiness of the customer. If the Company determines that collection is not probable, the Company does not record revenue until
such time as collection becomes probable, which is generally upon the receipt of cash or when payments become due.

For
arrangements with customers that include acceptance provisions, the Company recognizes revenue upon the customer's acceptance of the product, which occurs upon the earlier of receipt
of a written customer acceptance or expiration of the contractual acceptance period. In accordance with SOP 97-2, in some circumstances, the Company recognizes revenue on
arrangements that contain certain acceptance provisions when it has historical experience that the acceptance provision is perfunctory.

When
an arrangement involves multiple elements, such as hardware and software products, maintenance and/or professional services, the Company allocates the entire sale price to each
respective element based on vendor specific objective evidence ("VSOE") of fair value for each undelivered element. When arrangements contain multiple elements and VSOE of fair value only exists for
all undelivered elements, the Company recognizes revenue for the delivered elements using the residual method in accordance with the provisions of the AICPA SOP 98-9, Modification of SOP 97-2, Software Revenue
Recognition, With Respect to Certain Transactions("SOP 98-9"). The
residual method requires that the portion of the total arrangement fee attributable to undelivered elements, as indicated by VSOE of fair value, be deferred and subsequently recognized when delivered.
The Company establishes VSOE of fair value for undelivered elements based on either substantial renewal rates of maintenance and support agreements, the price the Company charges when the same element
is sold separately, or the price established by management who have the relevant authority to set prices for an element not yet sold separately. For arrangements containing multiple elements where
VSOE of fair value does not exist for all undelivered elements, the Company defers revenue for the delivered and undelivered

48

---



elements
until VSOE of fair value exists for all undelivered elements or all elements have been delivered.

In
accordance with Statement of Financial Accounting Standards ("SFAS") No. 48Revenue Recognition when Right of Return
Exists("SFAS 48"), the Company recognizes revenue upon shipment of products to its stocking distributors, net of estimated returns. The Company offers quarterly return
rights to a limited number of channel partners that allow the channel partner to exchange a percentage of its inventory based on its prior purchases. The Company provides for these return rights each
quarter in an amount equal to estimated returns.

When
selling to resellers and distributors, the Company defers revenue until collection is deemed probable. When revenue is deferred, if reliable reporting from the reseller or
distributor exists, the Company will recognize revenue when the reseller or distributor sells the product to an end-user ("sell-through"). Where reliable reporting does not
exist, revenue will be recognized upon the Company's receipt of payment, or in limited circumstances, upon receipt of a letter of credit or similar arrangement.

Services
revenue is primarily comprised of professional services, maintenance and support services and managed services. The Company recognizes revenue from professional services as the
services are performed. Maintenance and support services, which are typically sold separately from products, consist of on-site support, telephone and on-line support and
training. The Company defers maintenance and support services revenue, whether sold separately or as part of a multiple element arrangement, and recognizes it ratably over the term of the maintenance
contract, generally twelve months. The Company provides managed services under long term arrangements, typically two to three years. The arrangements may contain provisions requiring customer
acceptance of the set-up activities, including installation and implementation activities, prior to the commencement of the ongoing services arrangement. The Company recognizes maintenance
and support and managed services revenue in accordance with the Securities and Exchange Commission ("SEC") Staff Accounting Bulletin ("SAB") No. 101,Revenue
Recognition in Financial Statements, as
amended by SEC Staff Accounting Bulletin SAB No. 104,Revenue Recognition. Accordingly, amounts are earned when all of the following
conditions are satisfied: there is persuasive evidence of an arrangement; the service has been provided to the customer; the amount of fees to be paid by the customer is fixed or determinable; and the
collection of fees from the customer is reasonably assured.

Service
revenue represents less than 10% of revenue for each of the years ended December 31, 2007, 2006 and 2005.

When
there are shipping and handling fees, the Company invoices customers for such fees. The Company recognizes the invoiced amounts as revenue and the related costs as a cost of
revenue.

Capitalization of Managed Services Costs

The Company capitalizes certain costs associated with the set-up activities of a managed services arrangement. These costs represent incremental
external costs or internal costs that are directly related to the set-up, enhancement or expansion of certain managed services offerings. The types of costs that are capitalized include
labor and related fringe benefits, subcontractor costs, consulting costs, travel costs, inventory costs and third party product costs. The Company begins to capitalize costs in the period when there
is existence of an arrangement. Managed services arrangements may also require the procurement of equipment, development of internally developed software and consulting services related to system
enhancements and expansions. These related costs are also capitalized. The Company amortizes these capitalized costs upon acceptance or commercial launch of the initial set-up, enhancement
or expansion over the expected relationship period or the expected economic useful life, as appropriate, using the straight-line method. Expenses incurred to maintain and sustain the
service delivery after the initial setup, enhancement or expansion of a managed services arrangement are

49

---



expensed
as incurred. The Company evaluates the lives and realizability of the capitalized costs on a periodic basis or when events or circumstances indicate that its carrying amount may not be
recoverable.

In
the event indications exist that a capitalized managed services cost balance to a particular contract may be impaired, undiscounted estimated cash flows of the contract are projected
over its remaining expected term and compared to the unamortized managed services contract cost balance. If the projected cash flows are not adequate to recover the unamortized cost balance, the
balance would be adjusted to equal the contract's fair value in the period such determination is made. The primary indicator used to determine when impairment testing should be performed is when a
contract is materially underperforming, or is expected to materially underperform in the future, as compared to the financial model that was developed as part of the original proposal process and
subsequent annual budgets.

Capitalization of Software Development Costs

The Company capitalizes software development costs incurred after a product's technological feasibility has been established and before it is available for
general release to customers. Amortization of capitalized software costs is computed on an individual product basis and is the greater of a) the ratio that current gross revenues for a product
bear to the total of current and anticipated future gross revenues of that product or b) the straight-line method over the estimated economic life of the product. Costs qualifying
for capitalization have been immaterial for all periods presented and, accordingly, have not been capitalized.

Cash Equivalents

Cash equivalents include short-term investments with remaining maturities of three months or less at date of purchase.

Accounts Receivable

The Company's accounts receivable balances are composed of trade receivables. The Company has recorded receivables associated with product and services that have
been delivered but not yet accepted.

The
Company establishes allowances against doubtful accounts for potential credit losses when it determines receivables are at risk for collection based upon the length of time the
receivables are outstanding, as well as various other criteria. Receivables are written off against these allowances in the period they are determined to be uncollectible.

The
Company does not require collateral on accounts receivable or letters of credit on all foreign export sales. The Company evaluates its customers' creditworthiness before extending
credit and performs periodic credit reviews on existing customers.

Investments

The Company classifies all of its investments in marketable securities as available-for-sale securities. These securities are stated at
market value, with unrealized gains and losses reflected in other comprehensive income (loss) in stockholders' equity. The amortized cost of debt securities is adjusted for amortization of premiums
and accretion of discounts to maturity. Such amortization and accretion are included in interest income. Realized gains and losses on marketable securities are included in earnings and are derived
using the specific identification method for determining the cost of securities. The Company periodically evaluates the carrying value of its investments for other-than-temporary impairment.

50

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Advertising

Advertising costs are expensed in the period when incurred and were immaterial for each of the years presented.

Inventories

Inventories are stated at the lower of cost (first-in, first-out method) or market. Inventories consist of raw materials, work in process,
finished goods and inventory at customer sites. Inventory at customer sites represents inventory associated with product that has not yet been accepted by the customer. Write-downs of inventory to
lower of cost or market value are based primarily on the estimated forecast of product demand and production requirements over the next twelve months.

Property and Equipment

Property and equipment are recorded at cost. Depreciation is based on the following estimated useful lives of the assets using the straight-line
method:

Machinery and equipment

3 yearsComputer software and equipment

3-5 yearsFurniture and fixtures

5 yearsTelecommunications computer equipment

5 yearsLeasehold improvements

Shorter of the lease term or economic life


Expenditures
for additions, renewals and betterments of property and equipment are capitalized. Expenditures for repairs and maintenance are charged to expense as incurred. As assets are
retired or sold, the related cost and accumulated depreciation are removed from the accounts and any resulting gain or loss is included in the results of operations.

Goodwill and Other Intangible Assets

In accordance with SFAS No. 142,Goodwill and Other Intangible Assets("SFAS 142"), goodwill is
reviewed for impairment on an annual basis, or more frequently if events or circumstances indicate that the carrying value may not be recoverable. As of December 31, 2007, the Company performed
its annual test of goodwill allocated to the LiveWire Mobile division to determine if there was any impairment. The Company determined that the LiveWire Mobile reporting unit's fair value exceeded the
carrying value of its net assets, using the income valuation method. Accordingly, no impairment was recorded in 2007. Estimating future cash flows requires management to make projections that can
differ materially from actual results. The Company evaluated the useful lives assigned to its other intangible assets, which resulted in no changes to such useful lives. Other intangible assets arose
from the acquisition of Openera in February 2006, which are amortized over their respective estimated economic useful lives.

Discontinued Operations

In the fourth quarter of 2007, the Company sold its NI division and certain assets and liabilities of the NI division to Verso Technologies, Inc.
("Verso"), and recognized a $1.6 million gain (net of income tax expense of $6,000). In accordance with SFAS No. 144,Accounting for the Impairment or Disposal of
Long-lived Assets("SFAS 144"), the operating results of the NI division have been reclassified as a discontinued operation in the consolidated statement of
operations and related disclosures in the Notes to the consolidated financial statements for all historical reporting periods.

51

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Long-Lived Assets

In accordance with SFAS 144, the Company performs reviews for the impairment of long-lived assets whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. An impairment loss is recognized when estimated undiscounted future cash flows expected to result from the use of the asset and
its eventual disposition are less than its carrying amount. If future expected undiscounted cash flows are insufficient to recover the carrying value of the assets, then an impairment loss is
recognized based upon the excess of the carrying value of the asset over the anticipated cash flows on a discounted basis.

The
Company also reviews any legal and contractual obligations associated with the retirement of its long-lived assets and records assets and liabilities, as necessary,
related to the cost of such obligations. Costs associated with such obligations that are reasonably estimable and probable are accrued and expensed, or capitalized as appropriate. The asset recorded
shall be recorded during the period in which it occurs and shall be amortized over the useful life of the related long-lived tangible asset. The liability recorded is relieved when the
costs are incurred to retire the related long-lived tangible asset.

Research and Development

Research and development expenses consist primarily of salaries, personnel expenses and prototype fees related to the design, development, testing and enhancement
of the Company's products. All research and development costs are expensed as incurred.

Financial Instruments

The Company's financial instruments include cash, marketable securities, accounts receivable, debt and accounts payable. The fair value of marketable securities,
accounts receivable and accounts payable are
equal to their carrying value at December 31, 2007 and 2006. Debt obligations were repaid in 2006 and 2005. Debt is recorded at its face value.

Restructuring and Other Related Charges and Accrued Restructuring

The Company continually evaluates its staffing levels to meet its business objectives and its strategy to reduce its cost of operations. Severance costs are
reviewed periodically to determine whether a severance charge is required to be recorded in accordance with SFAS No. 112,Employers' Accounting for
Post-employment Benefits, ("SFAS 112"). The provisions of SFAS 112 require the Company to accrue post-employment benefits if certain
specified criteria are met. Post-employment benefits include salary continuation, severance benefits and continuation of benefits such as health and life insurance.

From
time to time, the Company will announce reorganization plans that may include eliminating positions within the Company. Each plan is reviewed to determine whether a restructuring
charge is required to be recorded in accordance with SFAS No. 146,Accounting for Costs Associated with Exit or Disposal Activities,
("SFAS 146"). The provisions of SFAS 146 require the Company to record an estimate of the fair value of any termination costs based on certain facts, circumstances and assumptions,
including specific provisions included in the underlying reorganization plan. Also from time to time, the Company may cease to use certain facilities prior to expiration of the underlying lease
agreements. Exit costs are reviewed in each of these circumstances on a case-by-case basis to determine whether a restructuring charge is required to be recorded in accordance
with SFAS 146. The provisions of SFAS 146 require the Company to record an estimate of the fair value of the exit costs based on certain facts, circumstances and assumptions, including
remaining minimum lease payments, potential sublease income and specific provisions included in the underlying lease agreements.

52

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Subsequent
to recording such accrued liabilities, changes in market or other conditions may result in changes to assumptions upon which the original liabilities were recorded that could
result in an adjustment to the liabilities and, depending on the circumstances, such adjustment could be material.

Income Taxes

The provision for income taxes is computed based on pre-tax income included in the consolidated statements of operations. The Company recognizes
deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are
determined based on the difference between the financial statement carrying amounts and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are
expected to reverse.

The
Company determines its effective tax rate by dividing its income tax expense by its income before taxes as reported in its consolidated statement of operations. For reporting periods
prior to the end of the Company's fiscal year, the Company records income tax expense based upon an estimated annual effective tax rate. This rate is computed using the statutory tax rate and an
estimate of annual net income adjusted for an estimate of non-deductible expenses.

On
January 1, 2007, the Company adopted Financial Accounting Standards Board ("FASB") Interpretation No. 48,Accounting for Uncertainty in Income
Taxesan Interpretation of FASB Statement 109("FIN 48"). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an
enterprise's financial statements in accordance with FASB SFAS No. 109,Accounting for Income Taxes("SFAS 109"). FIN 48 prescribes
a recognition threshold and measurement attributes for the financial statement recognition and measurement of a tax position taken in or expected to be taken in a tax return. This interpretation also
provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, and disclosure and transition. The Company had no adjustments to retained earnings as a
result of the implementation of FIN 48. The Company has established a valuation allowance against net deferred tax assets in certain jurisdictions including the United States, because the
Company believes that it is more likely than not that the tax assets in those jurisdictions will not be realized prior to their expiration. The Company will continue to assess the valuation allowance
and to the extent it is determined that such allowance is no longer required, the tax benefit of the remaining net deferred tax assets would be recognized in the future. As of December 31, 2007
and December 31, 2006, the Company had accrued $0.6 million and $0.4 million for uncertain tax positions, respectively, all of which will impact the Company's effective tax rate
when recognized. It is reasonably possible that the total amount of unrecognized tax benefits will increase or decrease in the next 12 months. Such changes would occur based on the results of
ongoing tax audits in various jurisdictions around the world. As of the filing date of this annual report on Form 10-K, an estimate of the range of reasonably possible outcomes
cannot be made. Estimated interest and penalty charges related to unrecognized tax benefits are classified as income tax expense in the accompanying consolidated statements of operations. At
December 31, 2007 and 2006, the Company had $127,000 and $75,000, respectively, of accrued interest expense related to uncertain tax positions, which is recorded as a component of tax expense.

The
evaluation of a tax position in accordance with FIN 48 is a two-step process. The first step is recognition: The enterprise determines whether it is more likely
than not that a tax position will be sustained upon examination, including resolution of any litigation. The second step is measurement: A tax position that meets the
more-likely-than-not recognition threshold is measured to
determine the amount of benefit to recognize in the financial statements. The tax position is measured at the largest amount of benefit that is greater than 50 percent likely of being realized
upon ultimate resolution.

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Stock Option and Stock Purchase Plans

Effective January 1, 2006, the Company implemented the provisions of SFAS No. 123 (revised 2004),Share-Based
Payment("SFAS 123R") and related interpretations. (See Note 2 of Notes to Consolidated Financial Statements). SFAS 123R requires that all share-based
payments to employees, including grants of stock options, be recognized in the financial statements based on their fair value. The Company selected the modified prospective transition method for
implementing SFAS 123R, and began recognizing compensation expense for stock-based awards granted on or after January 1, 2006, plus any unvested awards granted prior to January 1,
2006. Under this transition method, prior periods have not been restated. Stock-based compensation expense for awards granted on or after January 1, 2006, is based on the grant date fair value
calculated in accordance with the provisions of SFAS 123R. Stock-based compensation related to any unvested awards granted prior to January 1, 2006, is based on the grant date fair value
calculated in accordance with the original provisions of SFAS No. 123,Accounting for Stock-Based Compensation.The fair value of the Company's
stock-based awards, less estimated forfeitures, is amortized over the awards' vesting periods on a straight-line basis.

Prior
to the adoption of SFAS 123R, the Company accounted for the costs of its stock-based employee compensation plans under Accounting Principles Board ("APB") Opinion
No. 25,Accounting for Stock Issued to Employees("APB 25"), and related interpretations. Under APB 25, compensation cost was not
recognized for substantially all options granted because the exercise price was at least equal to the market value of the underlying common stock on the date of grant.

The
fair value of each option award on the grant date was estimated using the Black-Scholes option-pricing model with the following assumptions: expected dividend yield, expected stock
price volatility, weighted average risk-free interest rate and weighted average expected life of the options. Under SFAS 123R, the Company's expected volatility assumption used in
the Black-Scholes option-pricing model was based exclusively on historical volatility and the expected life assumption was established based upon an analysis of historical option exercise behavior.
The risk-free interest rate used in the Black-Scholes model was based on the implied yield currently available on U.S. Treasury zero-coupon issues with a remaining term
approximately equal to the Company's expected term assumption. The Company has never declared or paid any cash dividends on the Common Stock and has no current plans to pay cash dividends on the
Common Stock. The payment of any future cash dividends will be determined by the Company's board of directors in light of conditions then existing, including the Company's earnings, financial
condition and capital
requirements, restrictions in financing agreements, business conditions, tax laws, certain corporate law requirements and various other factors.

The
choice of a valuation technique, and the approach utilized to develop the underlying assumptions for that technique, involve significant judgments. These judgments reflect
management's assessment of the most accurate method of valuing the stock options the Company issues, based on historical experience, knowledge of current conditions and beliefs of what could occur in
the future given available information. The Company's judgments could change over time as additional information becomes available, or the facts underlying the assumptions change over time. Any change
in judgments could have a material impact on the Company's financial statements. The Company believes that these estimates incorporate all relevant information and represent a reasonable approximation
in light of the difficulties involved in valuing non-traded stock options.

Basic and Diluted Net Earnings (Loss) Per Common Share

Basic net earnings (loss) per common share are computed by dividing net income (loss) by the weighted-average number of common shares outstanding during the
period. Diluted net earnings (loss) per common share is computed by dividing the net income (loss) by the sum of the weighted-average number of common shares outstanding plus all additional common
shares that would have been

54

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outstanding
if potentially dilutive common stock equivalents had been issued. Outstanding treasury stock is excluded from the computations of basic and diluted net earnings (loss) per share.

Recent Accounting Pronouncements

In September 2006, the FASB issued SFAS No. 157,Fair Value Measurements("SFAS 157").
SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles ('GAAP") and expands disclosures about fair value measurements.
SFAS 157 applies under other accounting pronouncements that require or permit fair value measurements, the FASB having previously concluded in those accounting pronouncements that fair value is
the relevant measurement attribute. Accordingly, SFAS 157 does not require any new fair value measurements. SFAS 157 is effective for fiscal years beginning after November 15,
2007, and interim periods within those fiscal years, with earlier adoption permitted. The provisions of SFAS 157 should be applied prospectively as of the beginning of the fiscal year in which
it is initially applied, with limited exceptions. The Company is currently evaluating the provisions of SFAS 157.

In
February 2007, the FASB issued SFAS No. 159,The Fair Value Option for Financial Assets and Financial Liabilities, including an amendment of FASB
Statement No. 115("SFAS 159"). SFAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value that are
not currently required to be measured at fair value. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings. SFAS 159 does not affect any
existing accounting literature that requires certain assets and liabilities to be carried at fair value. SFAS 159 is effective for fiscal years beginning after November 15, 2007. The
Company does not expect the adoption of this new standard to have a material impact on the Company's financial position, results of operations or cash flows.

In
December 2007, the FASB issued SFAS No. 141 (revised 2007),Business Combinations("SFAS 141R") and SFAS No. 160, Noncontrolling Interests in Consolidated Financial
Statements, an amendment of Accounting Research Bulletin No. 51("SFAS 160").
SFAS 141R will change how business acquisitions are accounted for and will impact financial statements both on the acquisition date and in subsequent periods. SFAS 160 will change the
accounting and reporting for minority interests, which will be recharacterized as noncontrolling interests and classified as a component of equity. The provisions of SFAS 141R and
SFAS 160 are effective for fiscal years beginning on or after December 15, 2008. The Company is currently evaluating the impact that SFAS 141R and SFAS 160 will have on the
Company's results of operations or financial condition.

2Stock-Based Compensation

The following table presents stock-based compensation expense, inclusive of expense associated with discontinued operations, by the type of award and the effect
of recording stock-based

55

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compensation
expense in the Company's consolidated statements of operations for the years ended December 31, 2007 and 2006 under SFAS 123R:

Year Ended
December 31,(In thousands, except per share data)2007

2006Stock-based compensation expense by type of award:Stock options

$
2,324

$
1,939Restricted stock and options


2,770


2,548Employee stock purchase plan


34


307Total stock-based compensation expense

$
5,128

$
4,794Effect on earnings per shareIncrease to basic and diluted loss per share

$
0.12

$
0.10Effect of stock-based compensation on income by line item:Cost of revenues

$
263

$
98Selling, general and administrative


4,398


4,247Research and development


373


245Discontinued operations


94


204Total stock-based compensation expense

$
5,128

$
4,794


The
Company estimates the fair value of each equity award (i.e. stock options, restricted stock and options, and stock related to the employee stock purchase plan) using the
Black-Scholes pricing model. This valuation model uses the exercise price of the award and the following significant assumptions: the expected term of the award, the expected volatility of the
Company's common stock over the expected term, the risk-free interest rate over the expected term, and the Company's expected annual dividend yield. The Company believes that the valuation
method and the approach utilized to develop the underlying assumptions are appropriate in calculating the fair values of the Company's equity awards on respective grant dates during the years ended
December 31, 2007 and 2006. Estimates of fair value are not intended to predict actual future events or the value ultimately realized by persons who receive equity awards.

Assumptions
used to determine the fair value of stock options granted during the years ended December 31, 2007 and 2006, using a Black-Scholes valuation model were:

Year Ended
December 31,(In thousands, except per share data)2007

2006Expected term(1)

3.3 to 4.2 years

3.25 to 3.5 yearsExpected common stock price volatility(2)

61 to 71%

69 to 73%Risk-free interest rate(3)

2.4 to 5.0%

4.4 to 5.2%Expected annual dividend yield






---

56

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Stock-based
compensation expense related to the Purchase Plan (as defined below) was determined using the Black-Scholes valuation model. The compensation expense is recorded over the
period in which the awards are earned. During the years ended December 31, 2007 and 2006, the Company recorded stock-based compensation expense based on actual shares, less a forfeiture rate
and an estimate of actual shares to be issued under the Company's Employee Stock Purchase Plan in the second fiscal quarter of 2008 and 2007, respectively.

Prior
to January 1, 2006, the Company accounted for stock-based compensation to employees in accordance with APB 25 and disclosed the pro-forma stock-based
compensation and its impact on net loss and net loss per share in accordance with SFAS 123. The following table illustrates the effects on net income and net income per share for the year ended
December 31, 2005 if the Company had applied the fair value recognition provisions of SFAS 123 to stock-based employee awards.

Year ended
December 31, 2005Income from continuing operationsas reported

$
14,507Add: Stock-based employee compensation expense included in income from continuing operations


Less: Total stock-based employee compensation expense determined under the fair value method


(7,795
)Pro forma income from continuing operations

$
6,712Net income per common share:Income from continuing operations per common sharebasic and diluted as reported

$
0.30Income from continuing operations per common sharebasic and diluted pro forma

$
0.14Net incomeas reported

$
4,972Add: Stock-based employee compensation expense included in net income


Less: Total stock-based employee compensation expense determined under the fair value method


(654
)Pro forma net income

$
4,318Net income per common share:Net income per common sharebasic and diluted as reported

$
0.10Net income per common sharebasic and diluted pro forma

$
0.09


57

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In determining the stock-based compensation expense to be disclosed under SFAS 123, the Company estimated the fair value of each stock option award using the Black-Scholes
valuation model. Assumptions used to determine the fair value of options granted under SFAS 123 during the year ended December 31, 2005 were:

Year ended
December 31, 2005Expected term

3.5 yearsExpected stock price volatility

82%Risk-free interest rate

4.0%Expected dividend yield

0%


In
the fourth quarter of 2005, the Company accelerated the vesting of options to purchase 589,499 shares of common stock with exercise prices greater than or equal to $4.03 per share
that were awarded to employees, officers and other eligible participants under the Company's various stock option plans. The acceleration of the vesting of these options did not result in a charge
based on generally accepted accounting principles. The Company disclosed $2.9 million of pro-forma stock-based compensation for those modifications during the year ended
December 31, 2005. These modifications were made in anticipation of adopting SFAS No. 123R to avoid stock-based compensation expense.

Stock Incentive Plans

The Company has stock option and stock purchase plans authorizing various types of stock option awards that may be granted to officers, directors and employees.
The following is a summary of all of the plans of the Company:

1993 Stock Option Plan

In October 1993, the Company's Board of Directors adopted the 1993 Stock Option Plan (the "1993 Plan"). The 1993 Plan permits both incentive and
non-statutory options to be granted to employees, directors and consultants. Options granted under the 1993 Plan generally vest over four years. The terms of options granted under the 1993
Plan do not exceed ten years. In March 1998, the Board of Directors adopted, and in April 1998 the Company's stockholders approved, (i) an increase in the number of shares available under the
1993 Plan from 3,000,000 to 3,800,000 and (ii) a requirement that the exercise price of options granted under the 1993 Plan be at least equal to the fair market value of the Company's common
stock on the date of grant. In March 2000, the Board of Directors superseded the 1993 Plan with the Company's 2000 Equity Incentive Plan (the "2000 Plan") and no further grants under the 1993 Plan
will be made. Options granted previously under the 1993 Plan will continue to be governed by the terms of the 1993 Plan. As of December 31, 2007, there were 334,000 options outstanding under
the 1993 Plan. The outstanding options under the 1993 Plan were fully vested as of December 31, 2007. As of December 31, 2007, 334,000 shares of common stock have been reserved for
issuance upon the exercise of stock options under the 1993 Plan.

1993 Non-Employee Directors Stock Option Plan

In October 1993, the Company's Board of Directors adopted the 1993 Non-Employee Directors Stock Option Plan (the "Directors Plan") which provides for
the purchase of up to 240,000 shares of common stock pursuant to the grant of non-statutory stock options to directors who are not employees of the Company. Options granted under the
Directors Plan generally vest over four years. The terms of options granted under the Directors Plan do not exceed ten years. In March 1996 the Board of Directors adopted, and in May 1996 the
Company's stockholders approved, (i) an increase in the number of shares for which options shall be granted to newly elected non-employee directors from

58

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20,000
to 30,000 and (ii) an increase in the number of shares for which options shall be granted annually to incumbent non-employee directors from 4,000 to 10,000. In March 1999,
the Board of Directors adopted, and in April 1999 the Company's stockholders approved, an increase in the number of shares available under the Directors Plan from 240,000 to 480,000 shares. The
exercise price of the options may not be less than 100% of the fair market value of the Company's common stock on the date of the grant. In March 2000, the Board of Directors superseded the Directors
Plan with the 2000 Equity Incentive Plan and no further grants under the Directors Plan will be made. As of December 31, 2007, there were 37,000 options outstanding under the Directors Plan.
The outstanding options under the Directors Plan were fully vested as of December 31, 2007. Options granted previously under the Directors Plan will continue to be governed by the terms of the
Directors Plan. As of December 31, 2007, 37,000 shares of common stock have been reserved for issuance upon the exercise of stock options under the Directors Plan.

1995 Non-Statutory Stock Option Plan

In October 1995, the Company's Board of Directors adopted the 1995 Non-Statutory Stock Option Plan (the "1995 Plan"). The 1995 Plan expired in October
2005. The exercise price of options outstanding under the 1995 Plan is not less than 100% of the fair market value of the Company's common stock on the date of grant. Options outstanding under the
1995 Plan generally vest over two years. The terms of options granted under the 1995 Plan do not exceed ten years. As of December 31, 2007, there were 1,065,509 options outstanding under the
1995 Plan. As of December 31, 2007, there were 1,060,037 options vested under the 1995 Plan. As of December 31, 2007, 1,065,509 shares of common stock have been reserved for issuance
upon the exercise of stock options under the 1995 Plan.

2000 Equity Incentive Plan

In March 2000, the Company's Board of Directors adopted, and in April 2000 the Company's stockholders approved, the 2000 Equity Incentive Plan (the "2000 Plan").
The 2000 Plan provides for the grant of incentive stock options and stock appreciation rights to employees and non-statutory stock options, stock bonuses, rights to purchase restricted
stock and other awards based on the Company's common stock (collectively, "Stock Awards") to employees, non-employee directors and consultants. On April 28, 2005, the Company's
stockholders approved amendments to the 2000 Plan to (i) increase the number of shares which may be issued under the 2000 Plan by 2,050,000 shares, (ii) eliminate the Company's ability
to grant non-statutory stock options at an exercise price less than fair market value of the Company's common stock on the date of grant and (iii) amend certain other terms and
conditions of the 2000 Plan. The aggregate number of shares which may be issued under the 2000 Plan, as amended, is 7,050,000 plus any shares of the Company's common stock covered by options granted
under the 1993 Plan and the Directors Plan (both of which are superseded by the 2000 Plan) which are forfeited, expire or are canceled. The exercise price of options granted pursuant to the 2000 Plan
may not be less than the fair market value of the Company's common stock on the date of grant. Options granted under the 2000 Plan generally vest over two years except that, options granted to new
hires generally vest over three years. The terms of options granted under the 2000 Plan do not exceed ten years. The terms of options granted during 2007 do not exceed 7 years. As of
December 31, 2007, there were 6,468,068 options outstanding under the 2000 Plan. As of December 31, 2007, there were 3,479,972 options vested under the 2000 Plan. As of
December 31, 2007, 7,286,508 shares of common stock have been reserved for issuance upon the exercise of stock options under the 2000 Plan.

2003 Employee Stock Purchase Plan

In March 2003, the Board of Directors adopted, and in April 2003 the Company's stockholders approved, the 2003 Employee Stock Purchase Plan (the "Purchase Plan").
The Purchase Plan permits employees and officers of the Company to participate in periodic plan offerings, in which payroll

59

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deductions
may be used to purchase shares of common stock. The purchase price is 85% of the lower of the fair market value at the date the offering commences or terminates. In May 2006, the Board of
Directors adopted the Indian Supplement to the Purchase Plan. As a result, the Company allocated 150,000 shares from the Purchase Plan to be used for the Indian Supplement. The Company has reserved a
total of 750,000 shares for the Purchase Plan. The Company issued 87,117 shares under the Purchase Plan during the year ended December 31, 2007. As of December 31, 2007, 147,341 shares
of common stock have been reserved for issuance upon the exercise of stock options under the Purchase Plan.

2005 Openera Plan

In connection with the acquisition of Openera Technologies, Inc. ("Openera") on February 24, 2006, the Company assumed the Openera 2005 Equity
Incentive Plan (the "Openera Plan"). The Openera Plan provides for the grant of incentive stock options to employees and non-statutory stock options to employees, non-employee
directors and advisors and consultants. A total of 762,065 shares may be issued under the Openera Plan. The exercise price of incentive stock options granted pursuant to the Openera Plan may not be
less than the fair market value of the company's common stock on the date of grant. Options granted under the Openera Plan generally vest over two years except that, options granted to new hires
generally vest over three years. The terms of options granted under the Openera Plan do not exceed ten years. The terms of options granted during 2007 do not exceed five years. As of
December 31, 2007, there were 299,769 options outstanding under the Openera Plan. As of December 31, 2007, there were 93,710 options vested under the Openera Plan. As of
December 31, 2007, 353,963 shares of common stock have been reserved for issuance upon the exercise of stock options under the Openera Plan.

2006 India Stock Option Plan

In May 2006, the Company's Board of Directors adopted the 2006 India Stock Option Plan (the "2006 India Plan"). The 2006 India Plan provides for the grant of
non-statutory stock options to purchase shares of the Company's common stock to India residents, non-executive office employees of and consultants to the Company or any of its
subsidiaries. A total of 600,000 options may be issued under the 2006 India Plan. Options granted under the 2006 India Plan generally vest over two years except that, options granted to new hires
generally vest over three years. The terms of options granted under the 2006 India Plan do not exceed five years. As of December 31, 2007, there were 53,475 options outstanding under the 2006
India Plan. As of December 31, 2007, there were 26,675 options vested under the 2007 India Plan. As of December 31, 2007, 602,175 shares of common stock have been reserved for issuance
upon the exercise of stock options under the 2006 India Plan.

60

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A
summary of the Company's stock option activity for the years ended December 31, 2007, 2006 and 2005 is as follows:

|                                   |  | Year Ended December 31,
|---------------------------------- |  | -----------------------
|
|
|Outstanding at beginning of period |  | 8,061,567              
|Granted                            |  | 2,332,812              
|Exercised                          |  | (114,605               
|Forfeited and cancelled            |  | (2,021,953             
|                                   |  |                        
|Outstanding at end of period       |  | 8,257,821              
|                                   |  |                        
|Exercisable at end of period       |  | 5,031,394              
|                                   |  |                        

The
following table summarizes outstanding stock options as of December 31, 2007:

|Range of Exercise Prices |  | Number
Outstanding |  | Weighted
Average
Remaining
Contractual
Life |  | Weighted
Average
Exercise Price |       | Number
Exercisable |           | Weighted
Average
Exercise Price
|------------------------ |  | ------------------ |  | ------------------------------------------- |  | ------------------------------- | ----- | ------------------ | --------- | -------------------------------
|$0.01$5.00              |  | 7,236,159          |  | 3.3                                         |  | $                               | 2.39  |                    | 4,010,678 |                                
|$5.01$10.00             |  | 886,862            |  | 1.1                                         |  |                                 | 6.75  |                    | 885,916   |                                
|$10.01$20.00            |  | 113,200            |  | 0.2                                         |  |                                 | 16.67 |                    | 113,200   |                                
|$20.01$30.00            |  | 17,000             |  | 1.8                                         |  |                                 | 29.25 |                    | 17,000    |                                
|$30.01$40.00            |  | 4,600              |  | 2.2                                         |  |                                 | 36.44 |                    | 4,600     |                                
|                         |  |                    |  |                                             |  |                                 |       |                    |           |                                
|                         |  | 8,257,821          |  | 3.0                                         |  | $                               | 3.13  |                    | 5,031,394 |                                
|                         |  |                    |  |                                             |  |                                 |       |                    |           |                                

During
the years ended December 31, 2007 and 2006, the Company granted options to purchase 2,032,812 and 3,098,301 shares, respectively, of its common stock with exercise prices
equal to the fair market value of the Company's common stock on the grant date. During 2007, the Company granted a restricted stock award to an employee to purchase 300,000 shares of its common stock
at an exercise price of $0.01 per share. The stock award is contingent upon continued service with the Company and vests 20% annually at the anniversary date of the original grant date.

Options
granted during the years ended December 31, 2007, 2006 and 2005, had a weighted average grant date fair value of $1.39, $2.55 and $3.49, respectively.

In
connection with the acquisition of Openera in 2006, the Company issued 369,175 options with exercise prices less than fair market value of the Company's common stock on the grant date
(the "Openera Options"). The Openera Options vest 40% at the time of acquisition and 20% at the 12, 24 and 30 month intervals of the acquisition date (February 24, 2006). Openera Options
to purchase 147,670 shares were vested at the acquisition date. The exercise prices of such options ranged from $0.01 to $0.03 per option.

At
December 31, 2007 and 2006, the weighted average remaining contractual terms of options outstanding were 3.0 years and 3.2 years, respectively. At December 31, 2007 and
2006, the weighted average remaining contractual terms of options exercisable were 2.0 years and 2.1 years, respectively.

At
December 31, 2007 and 2006, the aggregate intrinsic values of options outstanding were $1.1 million and $1.0 million, respectively. At December 31, 2007
and 2006, the aggregate intrinsic values of options exercisable were $0.2 million and $0.5 million, respectively. The intrinsic value of a

61

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stock
option is the amount by which the market value of the underlying stock exceeds the exercise price of the option. The aggregate intrinsic value of options exercised during the years ended
December 31, 2007, 2006 and 2005, were $0.1 million, $1.7 million and $2.4 million, respectively.

At
December 31, 2007, 5,031,394 stock options were vested and are expected to vest over a weighted average exercise period of 2.0 years. At December 31, 2007, these options have a
weighted average exercise price of $4.11. The aggregate intrinsic value of vested options is $0.2 million at December 31, 2007.

As
of December 31, 2007, a total of 9,679,155 shares of common stock have been reserved for issuance upon the exercise of stock options. As of December 31, 2007, a total of
1,421,334 shares of common stock have been reserved for grants of stock options.

At
December 31, 2007, unrecognized compensation expense related to non-vested stock options, net of estimated forfeitures, was $2.1 million, which is expected
to be recognized over a weighted average period of 1.2 years.

The
following table summarizes the activity associated with the unvested restricted shares of common stock for the years ended December 31, 2007 and 2006:

Year Ended December 31,2007

2006Restricted Shares

Weighted
Average
Exercise
Price

Restricted Shares

Weighted
Average
Exercise
PriceNon-vested restricted shares at beginning of period

2,384,299

$
3.48



$
Issued in connection with the acquisition of Openera






2,386,511


3.48Vested

(795,504
)

3.48




Repurchased

(107,873
)

3.48Forfeited






(2,212
)

3.48Non-vested restricted shares at end of period

1,480,922

$
3.48

2,384,299

$
3.48


The
aggregate intrinsic values of vested and expected to vest restricted shares were $2.8 and $3.4 at December 31, 2007 and 2006, respectively.

At
December 31, 2007, non-vested restricted shares of 1,480,922 are expected to vest over a weighted average period of 0.4 years.

At
December 31, 2007, unrecognized compensation expense, net of estimated forfeitures, related to non-vested restricted stock was $1.8 million, which is
expected to be recognized over a weighted average period of 0.4 years.

62

---



3Income (Loss) per Common Share

The following table provides the computations of basic and diluted income (loss) from continuing operations per common share and net income (loss) per common
share:

Year Ended December 31,2007

2006

2005(In thousands except per share data)Numerator:Income (loss) from continuing operations

$
(8,575
)
$
(8,059
)
$
14,507Income (loss) from discontinued operations (net of income tax benefit of $90, $139 and $153, respectively)


(2,366
)

(7,692
)

(9,535
)Gain on disposal of discontinued operations, (net income tax expense of $6)


1,631





Net income (loss)

$
(9,310
)
$
(15,751
)
$
4,972Denominator:Shares used in net income (loss) from continuing operations per common sharebasic


43,953


48,467


47,884Dilutive stock options








401Shares used in net income (loss) from continuing operations per common sharediluted


43,953


48,467


48,285Net income (loss) per common sharebasic and dilutedContinuing operations

$
(0.20
)

(0.17
)

0.30Discontinued operations


(0.01
)

(0.16
)

(0.20
)Net income (loss) per common sharebasic and diluted

$
(0.21
)

(0.33
)

0.10


63

---



All of the Company's outstanding options and unvested restricted stock were anti-dilutive for the years ended December 31, 2007 and 2006 due to the net loss position
of the Company. The number of options that were excluded from the calculation of diluted earnings (loss) per common share, as their inclusion would have been anti-dilutive, was 4,547,354
for the year ended December 31, 2005.

4Acquisitions

Effective February 24, 2006 (the "effective date"), the Company acquired (the "acquisition") Openera, with operations based primarily in Bangalore, India,
for a total purchase price of $11.5 million, including transaction costs of approximately $0.4 million and liabilities assumed of $2.8 million.

Openera
developed mobile application handset solutions for converged mobile networks. Openera has developed a set of applications aimed at Internet Protocol Multimedia Subsystems (IMS)
and peer-to-peer communications services. These applications include peer-to-peer video, push-to-talk over cellular, active
phonebook, instant message and location-based services. Openera was allocated into the LiveWire Mobile division.

In
connection with the acquisition of Openera, the Company issued 3,977,518 shares of its common stock to employee and non-employee stockholders of Openera, subject to
certain restrictions. The shares vested 40% at the effective date of the acquisition and 20% each at 12, 24 and 30 month intervals subsequent to the effective date. A total of 1,981,047 shares
issued to employees are subject to their continued employment over the 30-month period following the effective date of the acquisition. These restricted shares have been excluded from the
purchase price of the acquisition. The fair value of the shares issued was determined based on a five-day average market price of the Company's common stock two days before and ending two
days after the acquisition was publicly announced. The table below summarizes the allocations of the shares issued:

Shares

Fair Value(In thousands)Shares issued to employees

3,301,747

$
12,061Shares issued to non-employees

675,771


2,645Total shares issued

3,977,518

$
14,706Shares issued and included in the purchase price of Openera

1,996,471

$
7,814Shares issued and excluded from the purchase price of Openera

1,981,047


6,892Total shares issued

3,977,518

$
14,706


In
addition, the Company granted options to purchase 369,175 shares of its common stock to certain employees of Openera. The options vested 40% at the effective date of
the acquisition, and 20% each at 12, 24 and 30 month intervals subsequent to the effective date. Options to purchase 221,505 shares of the Company's common stock are subject to the employees'
continued employment with the Company over the 30-month period following the acquisition. The values of the unrestricted options have been excluded from the purchase price of the
acquisition. The fair value of the options was estimated using the Black-Scholes valuation model. The table below summarizes the allocation of the options granted in the purchase price:

Options

Fair Value(In thousands)Options granted and included in the purchase price of Openera

147,670

$
577Options granted and excluded from the purchase price of Openera

221,505


771Total options granted

369,175

$
1,348


64

---



The
value of the vested portion of the shares and options issued in connection with the acquisition was recorded as part of the purchase price. The unvested portion is
being amortized as compensation expense ratably over the 30-month period following the date of acquisition.

The
acquisition was accounted for as a purchase business combination. Accordingly, the results of the operations of Openera were included with those of the Company for periods subsequent
to the date of acquisition. Proforma results of operations are not presented as the acquisition of Openera was determined not to be significant to the Company's condensed consolidated financial
statements at the time of the transaction. The Company has allocated the purchase price based upon the fair values of the assets acquired and liabilities assumed on February 24, 2006. The
allocation of the purchase price related to deferred revenue was finalized in the first quarter of 2007.

The
following table presents the allocation of the purchase price and the lives of the acquired intangible assets.

Amount

Estimated Life(In thousands)

(In years)Consideration exchanged:Fair value of restricted shares issued

$
7,814Fair value of options issued


577Transaction costs


3618,752Liabilities assumed


2,775Total purchase price


11,527Less estimated fair value of identifiable assets acquired:Cash and cash equivalents


42Accounts receivable


592Prepaid expenses and other current assets


217Fixed assets


198Core technology


4,000

1.84.8Customer relationships


1,000

6.8Goodwill


5,469Other assets


9Total assets acquired

$
11,527


In
connection with the Openera acquisition, the Company assumed short-term debt of $0.7 million and repaid the obligation in March 2006. There
were no expenses associated with the retirement of the debt for the year ended December 31, 2006.

5Goodwill and Other Intangible Assets

The Company recorded goodwill and other intangible assets as a result of the acquisition of Openera. The following table sets forth the change in the carrying
amount of goodwill for the years ended December 31, 2007 and 2006, all of which is allocated to the LiveWire Mobile division:

Year Ended
December 31,2007

2006(In thousands)Goodwill at beginning of period

$
5,469

$
Additions to goodwill





5,468Effect of foreign exchange


(42
)

1Goodwill at end of period

$
5,427

$
5,469


Goodwill
is not deductible for tax purposes.

65

---



The
components of other intangible assets are as follows as of December 31, 2007:

Estimated
Useful Life

Gross
Carrying
Amount

Accumulated
Amortization

Net Carrying
Amount(In years)



(In thousands)Other intangible assets:Core technology

1.84.8

$
4,000

$
(2,176
)
$
1,824Customer relationships

6.8


1,000


(210
)

790Licenses

5


1,571





1,571Other intangible assets



$
6,571

$
(2,386
)
$
4,185


The
components of other intangible assets are as follows as of December 31, 2006:

Estimated
Useful Life

Gross
Carrying
Amount

Accumulated
Amortization

Net Carrying
Amount(In years)



(In thousands)Other intangible assets:Core technology

1.84.8

$
4,000

$
(1,118
)
$
2,882Customer relationships

6.8


1,000


(100
)

900Other intangible assets



$
5,000

$
(1,218
)
$
3,782


The
following table presents amortization expense of the acquired intangible assets for the years ended December 31, 2007 and 2006:

Year Ended
December 31,(In thousands)2007

2006Cost of revenues

$
1,058

$
1,118Selling, general and administrative


110


100Total amortization expense of intangible assets

$
1,168

$
1,218


There
was no intangible asset amortization for the year ended December 31, 2005. The following table summarizes the expected remaining amortization of the acquired intangible
assets as of December 31, 2007:

Fiscal Year

Expected
Amortization
Expense(In thousands)2008

$
1,3582009


1,0922010


8362011


4642012


435$
4,185


At
December 31, 2007, the Company's goodwill of $5.4 million and $2.6 million of other intangible assets were allocated to the LiveWire Mobile division. The
remaining other intangible assets of $1.6 million were allocated to the NMS Communications division.

66

---



6Restructuring and Other Related Charges

In the third quarter of 2006, in order to reduce operating costs, the Company eliminated 17 employee positions and closed its engineering facility in Red Bank,
New Jersey, which resulted in restructuring and other related charges of $1.3 million. These charges consisted of $0.8 million of employee severance-related costs, $0.4 million of
lease termination costs and $0.1 million of fixed asset write-offs.

In
the fourth quarter of 2006, in order to further reduce operating costs, the Company eliminated 40 employee positions, which resulted in restructuring charges of $1.9 million.
These charges primarily consisted of severance-related costs. In the fourth quarter of 2006, the Company also entered into an agreement to sublease to a third party office space located in Framingham,
Massachusetts, which was formerly used by the Company as supplementary conference, training and corporate office space (the "2006 sublease"). The Company exited this facility as of December 31,
2006. In 2001 and 2002, the Company recorded restructuring charges related to other exited space in this facility, equal to the difference between committed lease payments and the estimated sublease
rental income for such space. During the fourth quarter of 2006, the Company updated its analysis of the estimated sublease rental income based on the signing of the 2006 sublease, and other expected
market conditions. As a result, the Company recorded additional pre-tax restructuring costs of approximately $0.9 million. The total pre-tax restructuring charges the
Company recognized in 2006 related to these actions were $2.3 million of facility related charges.

The
following table sets forth activity during the years ended December 31, 2005, 2006 and 2007, related to restructuring and other action taken in fiscal years 2001, 2002, 2003
and 2006:

|                                                   |  | Employee
Related |        | Facility
Related |   | Fixed Asset
Write-offs |   | Other |      | Total |  
|-------------------------------------------------- |  | ---------------- | ------ | ---------------- | - | ---------------------- | - | ----- | ---- | ----- | -
|
|Restructuring accrual balance at December 31, 2004 |  | $                | 102    |                  | $ | 1,196                  |   | $     |     |       | $
|Cash payments                                      |  |                  | (102   | )                |   | (280                   | ) |       |     |       |  
|                                                   |  |                  |        |                  |   |                        |   |       |      |       |  
|Restructuring accrual balance at December 31, 2005 |  | $                |       |                  | $ | 916                    |   | $     |     |       | $
|Restructuring and other related charges            |  |                  | 2,653  |                  |   | 2,710                  |   |       | 106  |       |  
|Cash payments                                      |  |                  | (1,862 | )                |   | (702                   | ) |       |     |       |  
|Reclassification of deferred rent                  |  |                  |       |                  |   | 617                    |   |       |     |       |  
|Write-off of property and equipment                |  |                  |       |                  |   |                       |   |       | (106 | )     |  
|                                                   |  |                  |        |                  |   |                        |   |       |      |       |  
|Restructuring accrual balance at December 31, 2006 |  | $                | 791    |                  | $ | 3,541                  |   | $     |     |       | $
|Cash payments                                      |  |                  | (711   | )                |   | (866                   | ) |       |     |       |  
|Adjustments                                        |  |                  | (80    | )                |   | 74                     |   |       |     |       |  
|                                                   |  |                  |        |                  |   |                        |   |       |      |       |  
|Restructuring accrual balance at December 31, 2007 |  | $                |       |                  | $ | 2,749                  |   | $     |     |       | $
|                                                   |  |                  |        |                  |   |                        |   |       |      |       |  

The
facility related obligation is expected to be settled over the next five years.

7Business and Credit Concentration

At December 31, 2007, two customers represented 14% and 11%, respectively, of the Company's outstanding accounts receivable balance. At December 31,
2006, one customer represented 17% of the Company's outstanding accounts receivable balance.

During
2007, one customer represented 10% of the Company's total revenues. During 2006 and 2005, one customer represented 15% and 24%, respectively, of the Company's total revenues.

67

---



8Marketable Securities

The Company's investments in marketable securities are classified as available-for-sale and are carried at fair value. The Company's
marketable securities consisted of the following:

December 31, 2007Amortized
Cost

Unrealized
Gains

Unrealized
Losses

Fair
Value(In thousands)Money market fund

$
5,826

$


$


$
5,826Certificate of deposit


2,702


1


(1
)

2,702U.S. government and agency bonds


6,560


5


(1
)

6,564Verso common stock


1,881





(54
)

1,827$
16,969

$
6

$
(56
)
$
16,919Included in cash and cash equivalents


6,926








6,926Marketable securities

$
10,043

$
6

$
(56
)
$
9,993


|
|

December 31, 2006Amortized
Cost

Unrealized
Gains

Unrealized
Losses

Fair
Value(In thousands)Money market mutual funds

$
5,268

$


$


$
5,268Certificate of deposit


2,000







$
2,000U.S. government and agency bonds


12,060


3





12,063$
19,328

$
3

$


$
19,331Included in cash and cash equivalents


12,247


2





12,249Marketable securities

$
7,081

$
1

$


$
7,082


At
December 31, 2007 and 2006, all marketable securities with the exception of the Verso common stock were due to mature within one year. There were no gross realized gains or
losses from the sale of securities for the years ended December 31, 2007, 2006 and 2005.

As
of December 31, 2007 and 2006, there was no other-than-temporary impairment of the Company's investments in marketable securities.

9Inventories

Inventories were comprised of the following:

December 31,
2007

December 31,
2006(In thousands)Raw materials

$
1,522

$
1,823Work in process





127Finished goods


3,236


7,373Inventory at customer sites


654


1,309$
5,412

$
10,632Write-down of inventory to lower of cost or market value


(2,692
)

(6,983
)Total inventory

$
2,720

$
3,649


Inventory
at customer sites represents products that have not yet been accepted by the customer. During the year ended December 31, 2007, the Company disposed of
$3.6 million of inventory previously written down to zero market value and wrote-down $0.2 million of inventory to lower of cost or market value.

68

---



10Property and Equipment

Property and equipment consisted of the following:

December 31,2007

2006(In thousands)Computer equipment

$
20,546

$
20,735Computer software


10,939


10,653Furniture and fixtures


3,100


2,954Machinery and equipment


2,594


2,456Leasehold improvements


5,952


6,250Software in process


28


Property and equipment, gross


43,159


43,048Less accumulated depreciation


(38,063
)

(36,423
)Property and equipment, net

$
5,096

$
6,625


Depreciation
expense related to property and equipment was $2.8 million for each of the years ended December 31, 2007, 2006 and 2005, respectively.

11Income Taxes

The domestic and foreign components of income (loss) from continuing operations before income taxes as shown in the consolidated statements of operations are as
follows:

Year Ended December 31,2007

2006

2005(In thousands)Domestic

$
(5,994
)
$
(5,365
)
$
17,880Foreign


(2,275
)

(2,317
)

(2,852
)$
(8,269
)
$
(7,682
)
$
15,028


The
domestic and foreign components of income tax expense related to continuing operations as shown in the consolidated statements of operations are as follows:

Year Ended December 31,2007

2006

2005(In thousands)Current income tax expense (benefit):Federal

$


$


$
State


12


21


20Foreign


348


356


501360


377


521Deferred income tax expense (benefit):Federal








State








Foreign


(54
)




Total income tax provision

$
306

$
377

$
521


69

---



The
total income tax expense (benefit) for the years ended December 31, 2007, 2006 and 2005 is as follows:

Year Ended December 31,2007

2006

2005(In thousands)Continuing operations

$
306

$
377

$
521Discontinued operations


(84
)

(139
)

(153
)Total income tax provision

$
222

$
238

$
368


Significant
components of the Company's deferred tax assets (liabilities) as of December 31, 2007 and 2006, are as follows:

Year Ended
December 31,2007

2006(In thousands)Deferred tax assets (liabilities):Net operating loss carryforwards

$
84,276

$
75,227Research and development tax credit carryforwards


10,468


9,772Capital loss carryforwards


3,040


2,966Inventories


543


512Fixed assets


855


854Intangible assets


48,030


52,886Accrued expenses


2,651


1,942Acquisition costs


298


2,121Other


1,387


292$
151,548

$
146,572Acquired intangible assets


(1,007
)

(1,419
)Fixed assets


(643
)

(644
)Less: valuation allowance:


(149,844
)

(144,509
)Net deferred taxes

$
54

$



For
U.S. federal income tax purposes, we had net operating loss carryforwards available to reduce taxable income of $201.2 million at December 31, 2007. Of
this amount $21.1 million relates to deductions from the exercise of stock options, of which $1.5 million is tracked separately and not included in the Company's deferred tax asset in
accordance with SFAS 123R. The future benefit from these deductions will be recorded as a credit to additional paid-in capital when realized. Under the provision of the Internal
Revenue Code Section 382, certain changes in the Company's ownership structure may result in a limitation on the amount of net operating loss carryforwards and research and development tax
credit carryforwards that may be used in future years. These carryforwards will begin to expire in 2008 if unutilized. The Company also had foreign net operating loss carryforwards of
$20.5 million. As of December 31, 2007, the Company had $6.5 million of tax credits in the U.S. that are comprised of federal research and development tax credits and state and
local
credits. These credits will begin to expire in 2008 if unutilized. In addition, the Company had Canadian investment tax credits of approximately $5.0 million. These credits begin to expire in
2014 if unutilized.

The
Company has established a valuation allowance against net deferred tax assets in certain jurisdictions including the United States, because the Company believes that it is more
likely than not that the tax assets in those jurisdictions will not be realized prior to their expiration. The Company will continue to assess the valuation allowance and to the extent it is
determined that such allowance is no

70

---



longer
required, the tax benefit of the remaining net deferred tax assets would be recognized in the future.

For
each of the years ended December 31, 2007, 2006 and 2005, our United States Federal statutory tax rate was 34% and our effective tax rate was (3.7)%, (5.0)% and 3.5%,
respectively, from continuing operations. Our effective tax rate varies from our statutory tax rate for the years ended December 31, 2007, 2006 and 2005 principally due to the following:

Continuing Operations
Year Ended
December 31,2007

2006

2005Computed expected tax expense at U.S. federal statutory rate

34.0
%
34.0
%
34.0
%State income taxes, net of U.S. federal tax expense (benefit)

48.4

(29.3
)
(4.0
)Tax rate and tax law differential of foreign operations

16.0

16.7

(8.1
)Other tax credits

6.9

8.6

(2.9
)Change in valuation allowance

(83.8
)
(5.6
)
(15.2
)Foreign loss disallowance

(21.0
)
(26.1
)
Other

(4.2
)
(3.3
)
(0.3
)Effective tax rate

(3.7
)
(5.0
)%
3.5
%


At
December 31, 2007, United States income taxes were not provided on permanently undistributed earnings for certain non-U.S. subsidiaries of
approximately $4.5 million. The Company will reinvest these earnings indefinitely in its operations outside the United States.

Effective
January 1, 2007, the Company adopted the provisions of FIN 48. As a result of the implementation of FIN 48, we recognized no material adjustment in the liability
for unrecognized income tax benefits.

Income
tax expense is primarily due to foreign income taxes incurred by foreign subsidiaries and additional accruals for uncertain tax positions, as discussed below. This income tax
expense is partially offset by tax credits earned for our research and development activities performed at our Canadian facility.

We
conduct business globally and, as a result, we or one or more of our subsidiaries files income tax returns in the U.S. federal jurisdiction and various state and foreign
jurisdictions. In the normal course of business we are subject to examination by taxing authorities throughout the world. With few exceptions, we are no longer subject to U.S. federal, state and
local, or non-U.S. income tax examinations for years before 1999.

During
the year ended December 31, 2007, we reached a final settlement with the French tax authorities related to audits for the tax years 2003 through 2004. The settlement of
$182,000 was finalized and paid in January 2008. As part of the settlement, the Company has agreed to adjust its gross net operating loss carryforwards and related valuation allowances from
$6.3 million to $1.6 million as of December 31, 2006. These gross net operating loss carryforwards had a full valuation allowance against them at December 31, 2007 and
2006. Based upon the settlement there was no material impact to net income, accumulated deficit or net deferred taxes in any historic periods.

71

---



A
reconciliation of the beginning and ending amount of unrecognized tax expense is as follows:

Year Ended December 31,
2007(In millions)Beginning balance, upon adoption as of January 1, 2007

$
0.4Additions:Tax positions for current year


Tax positions for prior years


0.2Reductions:Tax positions for current year


Tax positions for prior years


Ending balance, as of December 31, 2007

$
0.6


As
of December 31, 2007, the Company had accrued $0.6 million for uncertain tax positions, all of which will impact that Company's effective tax rate when
recognized. The $0.6 million of unrecognized tax expense represents tax positions for which the ultimate deductibility is highly uncertain. The Company does not anticipate that changes in its
unrecognized tax benefits will have a material impact on the consolidated statement of operations in 2008.

The
Company recognizes interest and penalties related to income taxes as a component of the provision for income taxes on the consolidated statement of operations. During 2007, the
Company recognized $52,000 in interest and penalties. As of December 31, 2007, the amount accrued for the payment of interest and penalties was $0.1 million.

12Accrued Expenses and Other Liabilities

Components of accrued expenses and other liabilities consist of the following:

December 31,2007

2006(In thousands)Accrued compensation and related expenses

$
2,198

$
2,664Income taxes payable


492


309Deferred rent


657


754Other liabilities


4,210


2,225$
7,557

$
5,952


13Indebtedness

Convertible Notes

Effective October 11, 2000, the Company issued $175.0 million of convertible subordinated notes (the "Notes"). The Notes were convertible into
shares of the Company's common stock at any time after 90 days following the last day of the original issuance of the notes and before the close of business on the business day immediately
preceding the maturity date, at a conversion price of $63.125 per share, subject to specified adjustments. The Notes bore interest at a rate of 5% per year which was payable twice annually on
April 15 and October 15 of each year, commencing on April 15, 2001. The Notes, which were unsecured obligations of the Company, matured on October 15, 2005 and were repaid
in full. The Company was subject to certain covenants under the related indenture. During 2005, the Company was in compliance with such covenants. In 2000, the Company incurred debt issuance costs
aggregating $5.7 million, which were deferred and amortized using the effective interest rate method as a component of interest expense over the term of the Notes.

72

---



For
the year ended December 31, 2005, the Company paid $20.9 million to extinguish $19.9 million of face value of the Notes and $1.0 million of related
interest. As a result, in the year ended December 31, 2005, the Company wrote off $0.1 million of unamortized debt issuance costs. In 2005, the Company did not incur any other related
losses or gains associated with the repayment of its debt.

Short-Term Debt

In connection with the Openera acquisition, the Company assumed short-term debt of $0.7 million and repaid the obligation in March 2006.

14Employee Retirement Plan

The Company has established an employee retirement plan under Section 401(k) of the Internal Revenue Code (the "401(k) plan") covering all eligible
full-time employees of the Company. Contributions to the 401(k) plan are made by the participants to their individual accounts through payroll withholding. Additionally, the 401(k) plan
provides for the Company to make contributions to the 401(k) plan in amounts at the discretion of management. The Company currently matches contributions each pay period at 50% of the employee's
contributions up to 6% of employee's compensation, not to exceed the federal limit of $15,500 per calendar year. The employer contribution
for the years ended December 31, 2007, 2006 and 2005 was $0.4 million, $0.6 million and $0.6 million, respectively.

15Equity

Stock Repurchase Program

During 2001, the Company's Board of Directors approved a stock repurchase program authorizing the Company to repurchase up to 2,500,000 shares of its outstanding
common stock for an aggregate purchase price not to exceed $5.0 million. As of December 31, 2006, the Company had repurchased 915,000 shares for an aggregate purchase price of
$4.7 million. The Company made no repurchases during 2005 or 2007.

In
July, 2006, the Company's Board of Directors authorized the repurchase of up to $20,000,000 of the Company's common stock by March 31, 2007 (the "July Program"). The July
Program superseded the stock repurchase program previously authorized by the Board of Directors in April, 2006, for the repurchase of up to 1,100,000 shares of the Company's common stock by
December 31, 2006 (the "April Program"). All repurchases under the July Program and the April Program were made in open-market transactions. As of December 31, 2007 the
Company had repurchased 7,613,773 shares of its outstanding common stock for an aggregate purchase price of $22.5 million, which included $0.2 million of broker fees.

Other Stock Repurchases

In May, 2006, the Company repurchased 275,212 shares of the Company's common stock in a private negotiated transaction for $0.8 million from an entity that
had acquired those shares at fair value in connection with the Company's acquisition of Openera. This transaction was not pursuant to the publicly announced stock repurchase program described above.

During
2007 and 2006, in conjunction with the exercise of stock options and issuance of stock under the employee stock purchase plan, the Company issued 201,722 and 338,533 treasury
shares, respectively.

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Preferred Stock

Under its restated certificate of incorporation the Company has authorized 3,000,000 shares of preferred stock, par value $0.05 per share. As of
December 31, 2007 and 2006, the Company had no shares of preferred stock issued and outstanding. In connection with its stockholder rights plan, 15,000 of such shares have been designated
"Series A Junior Preferred Stock", none of which are issued and outstanding. The Company's board of directors has the authority to issue preferred stock in one or more classes or series and to
fix the rights, preferences, privileges and restrictions thereof, including dividend rights, dividend rates, conversion rights, exchange rights, voting rights, terms of redemption, redemption prices,
liquidation preferences and the number of shares constituting any class or series or the designation of such class or series, without any further action by the stockholders.

Stockholders Rights Plan

The Company's Board of Directors adopted a Stockholders Rights Plan ("the Rights Plan") on December 23, 1998, under which a dividend of one Common Stock
Purchase Right (each a "Right") was declared for and attached to each outstanding share of the Company's Common Stock, $0.01 par value per share ("Common Stock") held by stockholders of record as of
January 4, 1999. The Rights Plan was amended on April 22, 1999. Shares of Common Stock issued after December 23, 1998 also contain such Rights. The Rights become exercisable
following the tenth day after a person or group (a) acquires beneficial ownership of 15% or more of the Company's outstanding shares of Common Stock; or (b) announces a tender of
exchange offer or exchange offer, the consummation of which would result in ownership by a person or group of 30% or more of the Company's Common Stock (an "Acquiring Person"). The plan entitles Right
holders to purchase a one-one thousandth of a share of the Company's Series A Junior Preferred Stock for $60 (the "Purchase Price"). Under some circumstances, the Plan entitles
Right holders (other than an Acquiring Person) to purchase Common Stock having a value equal to two times the Purchase Price of the Right for the Purchase Price, once the Rights become exercisable.
Under some circumstances, the Board of Directors of the Company may exchange the Rights at an exchange rate of one Share of Common Stock per Right. Rights are redeemable at the Company's option for
$0.01 per Right at any time after the acquisition of 15% or more of the Company's Common Stock. As of December 31, 2007, none of the Rights are exercisable. The Rights expire on the earliest of
(a) December 23, 2008, (b) exchange or redemption of the Rights as described above, or (c) consummation of a merger or consolidation or sale of assets resulting in
termination of the Rights.

16Commitments and Contingencies

The following table details our future contractual payment obligations.

Payments due by Period(In Thousands)

Total

Less than
1 year

1-3 years

3-5 years

More
than 5
years

All
OtherOperating lease obligations

$
15,877

$
4,247

$
6,548

$
4,493

$
589

$
Purchase obligations


3,808


3,808











Uncertain tax positions and related interest


714














714Total contractual obligations

$
20,399

$
8,055

$
6,548

$
4,493

$
589

$
714


Leases

The Company leases its current corporate office headquarters facilities under non-cancelable leases extending to May 31, 2012. The Company
occupies other facilities, which serve as sales offices throughout North America, Europe and Asia, under leases that expire within one to eight years. Rental expenses under all operating lease
agreements during the years ended December 31, 2007, 2006 and 2005 were approximately $3.0 million, $3.1 million and $4.5 million, respectively. The amounts presented in
the table above do not include future sublease income of $2.3 million which will be earned in the next five years.

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Purchase Commitments

The Company's agreement with Plexus requires that Plexus turn its NMS-related inventory eight times per year. If this condition is not met, the Company must
purchase enough material to bring Plexus up to eight turns. This is assessed on a quarterly basis. During 2007, 2006 and 2005, the Company had met the eight turn goal. As such, the Company does not
have any contractual obligations related to a commitment with Plexus at December 31, 2007. The Company can only ascribe value to such commitment when the Company has not met the condition as
determined at a specific point in time, based on future facts and circumstances. The Company has no such arrangements with its other third-party manufacturers.

Uncertain tax positions

As of December 31, 2007, the Company recorded a liability related to uncertain tax positions of $587,000 and related interest of $127,000. In January 2008,
the Company paid $182,000 of taxes and interest related to an uncertain tax position recorded in 2007. The Company is unable to reasonably estimate the timing of the remainder of uncertain tax
positions and related interest in individual years beyond 12 months due to uncertainties in the timing of the effective settlements of tax positions.

Litigation

The Company is party to various legal proceedings incidental to its business. However, the Company has no material legal proceedings currently pending.

Guarantees

The Company's products are generally sold with a 18-24 month warranty period. Parts and labor are covered under the terms of the warranty
agreement. The warranty provision is based on historical experience by product, configuration and geographic region. Current warranty provisions are related to the past one and a half to two years'
revenues and warranty consumption is associated with current and prior year's revenues.

Changes
in the aggregate warranty liability were as follows:

December 31,2007

2006

2005(In thousands)Beginning balance

$
285

$
370

$
342Provisions for warranty


263


44


196Expenditures


(148
)

(129
)

(168
)Ending balance

$
400

$
285

$
370


Indemnification

The Company enters into indemnification agreements with certain of its customers in its ordinary course of business. Pursuant to these agreements the Company
agrees that in the event its products infringe upon any proprietary right of a third party, the Company will indemnify its customer against any loss, expense or liability from any damages that may be
awarded against the customer. As described in FASB Staff Position FIN No. 45-1,Accounting for Intellectual Property Infringement Indemnifications under FIN
No. 45, Guarantor's Accounting and Disclosure Requirements for Guarantees, including Indirect Guarantees of Indebtedness of Others, indemnifications related to
infringement on intellectual property, such as the ones the Company has entered into, are considered guarantees and therefore within the scope of FIN 45. These arrangements have been recorded
at a fair value of zero as

75

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there
have been no claims brought against the Company under such arrangements in the past five years.

The
Company provides an indemnification, to the extent permitted by law, to its officers, directors, employees and agents for liabilities arising from certain events or occurrences while
the officer, director, employee, or agent, is or was serving at the Company's request in such capacity. As a matter of practice, the Company maintains directors and officer liability insurance
coverage.

17Segment and Geographic Information

Effective January 1, 2007, the Company consolidated two of its former reportable segments (Platform Solutions and Mobile Applications) into a single
segment (Technology and Mobile Applications), and re-organized its business primarily according to functional business area.

Effective
July 2, 2007, the Company reorganized its previously reported Technology and Mobile Applications segment into two separate business divisions: Communications Platforms
and Mobile Applications. The change in organization was the result of the Company's efforts to organize product development, sales, services and marketing teams to better align to serve each of these
divisions' distinct markets. During the fourth quarter of 2007, these divisions were renamed as the NMS Communications divisions (formerly Communications Platforms) and the LiveWire Mobile division
(formerly Mobile Applications). The Company's Network Infrastructure ("NI") division remained unchanged and continued to focus on solutions for the radio access network ("RAN") portion of mobile
operators' infrastructure. The NI division was sold to Verso Technologies, Inc. ("Verso") on December 21, 2007. Corporate and unallocated costs include general and administrative
functions and restructuring charges of the Company.

Prior
to 2007, the Company had organized into three business units, which constituted our reportable segments (Platforms Solutions, Mobile Applications, and NI). Accordingly, segment
revenue and operating income (loss) have been reclassified to conform to current period presentation.

As
of December 31, 2007, the Company had operations established in 12 countries outside the United States. Its products are sold throughout the world via the Company's direct
sales force and its channel partners. The Company is exposed to the risk of changes in social, political and economic conditions inherent in foreign operations, and the Company's results of operations
and the value of its foreign assets are affected by fluctuations in foreign currency exchange rates.

The
following table presents the Company's revenues, operating income (loss) from continuing operations and long-lived assets by reporting segment, and revenue and long-lived assets by
geographic region. Revenues by geographic region are presented by attributing revenues from external customers on the basis of where products are sold. For the years ended December 31, 2007 and
2006, the income

76

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(loss)
from continuing operations for the LiveWire Mobile division include all acquisition-related amortization expenses.

Year Ended December 31,2007

2006

2005(In thousands)RevenuesNMS Communications

$
69,229

$
87,076

$
101,790LiveWire Mobile


13,223


8,897


6,769Total revenues

$
82,452

$
95,973

$
108,559Operating income (loss) from continuing operationsNMS Communications

$
19,043

$
28,750

$
34,913LiveWire Mobile


(14,435
)

(16,318
)

(10,623
)Corporate and unallocated costs


(13,421
)

(21,058
)

(10,617
)Total operating income (loss) from continuing operations

$
(8,813
)
$
(8,626
)
$
13,673Revenues by geographic areaAmericas

$
32,894

$
40,420

$
40,868Europe, Middle East and Africa


21,055


25,388


23,660Asia


28,503


30,165


44,031Total revenues

$
82,452

$
95,973

$
108,559


The
following table includes information about the Company's long-lived assets by reportable segment and by geographic region as of:

December 31,2007

2006(In thousands)Long-lived assetsNMS Communications

$
2,283

$
882LiveWire Mobile


7,650


9,691Network Infrastructure





379Corporate and unallocated assets


4,775


4,924Total long-lived assets

$
14,708

$
15,876Long-lived assets by geographic areaAmericas

$
4,316

$
5,585Europe, Middle East and Africa


341


709Asia


439


331Total long-lived assets

$
5,096

$
6,625


18Discontinued Operations

On December 21, 2007, the Company entered into an Asset Purchase Agreement (the "Agreement") with Verso Technologies, Inc., a Minnesota corporation
("Verso"), to sell the Company's Network Infrastructure ("NI") division to Verso (the "Transaction"). The closing of the Transaction occurred on December 21, 2007 (the "Closing Date"). Under
the terms of the Agreement, Verso acquired the NI division and certain assets and liabilities of the NI division for consideration of $850,000 of cash and 5,374,033 shares of Verso common stock, which
had a fair market value of $1.8 million as of December 31, 2007. The Purchase Agreement contains customary representations,

77

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warranties,
covenants and agreements of the Company and Verso and the terms of the Transaction provide registration rights of the Company with respect to the Verso common stock issued in the
Transaction. As a result of the disposition of the NI division, the Company recognized a $1.6 million gain (net of income tax expense of $6,000) and the operating results of the NI Division
have been reclassified as a discontinued operation in the consolidated statement of operations. The NI division had revenues of $5.4 million, $3.6 million and $0.9 million for the
years ended December 31, 2007, 2006 and 2005, respectively. Net loss from the discontinued operations was $2.4 million (net of income tax benefit of $0.1 million),
$7.7 million (net of income tax benefit of $0.1 million) and $9.5 million (net of income tax benefit of $0.2 million) for the years ended December 31, 2007, 2006 and
2005, respectively.

19Subsequent Events

In January, 2008, the Company formed a wholly-owned subsidiary, LiveWire Mobile, Inc. ("LiveWire Mobile"), a Delaware Corporation.

On
March 16, 2008, LiveWire Mobile, the Company, and Quarry Acquisition Corp. ("Quarry"), a Delaware corporation and wholly-owned subsidiary of LiveWire, entered into an Agreement
and Plan of Merger (the "Merger Agreement") with Groove Mobile, Inc. ("Groove Mobile"), a Delaware corporation, and Charles River Ventures, LLC, as security holders' representative.
Pursuant to the Merger Agreement, Quarry was merged with and into Groove Mobile on March 17, 2008. After giving effect to the Merger, LiveWire Mobile was the sole stockholder of Groove Mobile.
At the effective time of the Merger, all outstanding shares of capital stock of Groove Mobile were converted into the right to receive cash consideration of $14.5 million (the "Merger
Consideration"). The Merger Agreement also required $1.15 million of the Merger Consideration to be held in an escrow account to settle certain claims for indemnification for breaches of or
inaccuracies in Groove Mobile's representations and warranties, covenants and agreements.

The
Company will account for the acquisition as a purchase, and accordingly, the Company will include the results of operations of Groove Mobile in its consolidated financial statements
for periods after the
closing date. Groove Mobile, whose operations are based in Bedford, Massachusetts, is a provider of mobile music solutions. The Company believes the acquisition will enable LiveWire Mobile to expand
its ability to offer a portfolio of managed services, including ringback tones, ringtones, and full track music and video downloads delivered though an integrated storefront.

78

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20Quarterly Information (Unaudited)

The following table sets forth certain unaudited consolidated quarterly statements of operations data for each of the Company's last eight quarters. In
management's opinion, this quarterly information reflects all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement for the periods presented. Such quarterly
results are not necessarily indicative of future results of operations and should be read in conjunction with the audited consolidated financial statements of the Company and the notes thereto
included elsewhere herein.

|                                                                                                                         |                                         | Quarter Ended            |       
|------------------------------------------------------------------------------------------------------------------------ | --------------------------------------- | ------------------------ | ------
|
|
|
|Revenues                                                                                                                 |                                         | $                        | 22,679
|Cost of revenues                                                                                                         |                                         |                          | 8,314 
|                                                                                                                         |                                         |                          |       
|Gross profit                                                                                                             |                                         |                          | 14,365
|Operating expenses:                                                                                                      |                                         |                          |       
|                                                                                                                         | Selling, general and administrative     |                          |       
|                                                                                                                         | Research and development                |                          |       
|                                                                                                                         | Restructuring and other related charges |                          |       
|                                                                                                                         |                                         |                          |       
|                                                                                                                         |                                         | Total operating expenses |       
|                                                                                                                         |                                         |                          |       
|Operating income (loss)                                                                                                  |                                         |                          | (756  
|Other income (expense), net                                                                                              |                                         |                          | 181   
|                                                                                                                         |                                         |                          |       
|Income (loss) from continuing operations before income taxes                                                             |                                         |                          | (575  
|Income tax expense (benefit)                                                                                             |                                         |                          | (13   
|                                                                                                                         |                                         |                          |       
|Income (loss) from continuing operations                                                                                 |                                         |                          | (562  
|                                                                                                                         |                                         |                          |       
|Loss from discontinued operations (net of income tax benefit of $17, $24, $25, $24, $34, $33, $34 and $38, respectively) |                                         |                          | (689  
|Gain on disposal of discontinued operations (net of income tax expense of $6)                                            |                                         |                          | 1,631 
|                                                                                                                         |                                         |                          |       
|Net income (loss)                                                                                                        |                                         | $                        | 380   
|                                                                                                                         |                                         |                          |       
|Net income (loss) from continuing operations per common sharebasic and diluted                                          |                                         | $                        | (0.01 
|                                                                                                                         |                                         |                          |       
|Net income (loss) per common sharebasic and diluted                                                                     |                                         | $                        | 0.01  
|                                                                                                                         |                                         |                          |       

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VALUATION AND QUALIFYING ACCOUNTS

Schedule II
(In thousands)

Allowance for Doubtful Accounts

|         |  | Balance at
Beginning of Year |       | Additions |   | Deductions(1) |  | Balance at
End of Year
|-------- |  | ---------------------------- | ----- | --------- | - | ------------- |  | ----------------------
|12/31/07 |  | $                            | 829   |           | $ | 36            |  | $                     
|12/31/06 |  | $                            | 794   |           | $ | 64            |  | $                     
|12/31/05 |  | $                            | 1,004 |           | $ | 23            |  | $                     

---

Deferred Tax Asset Valuation Allowance

|         |  | Balance at
Beginning of Year |          | Additions |   | Deductions |   | Balance at
End of Year |      
|-------- |  | ---------------------------- | -------- | --------- | - | ---------- | - | ---------------------- | -----
|12/31/07 |  | $                            | (144,509 | )         | $ | (5,335     | ) | $                      |     
|12/31/06 |  | $                            | (147,286 | )         | $ |           |   | $                      | 2,777
|12/31/05 |  | $                            | (153,481 | )         | $ |           |   | $                      | 6,195

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ITEM 9.    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

None.

ITEM 9A.    CONTROLS AND PROCEDURES

A.    Evaluation of Disclosure Controls and Procedures

Based on the evaluation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934, as amended (the "Exchange Act")) required by Exchange Act Rules 13a-15(b) or 15d-15(b), our Chief Executive Officer and our Chief Financial Officer
have concluded that as of December 31, 2007, the end of the period covered by this report, our disclosure controls and procedures were effective.

B.    Management's Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control system was designed to
provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

Our
internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of our assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors, and
(iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial
statements.

Because
of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods
are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Our
management assessed the effectiveness of our internal control over financial reporting as of December 31, 2007. In making this assessment, management used the criteria set
forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) inInternal ControlIntegrated Framework. Based on our
assessment, management concluded that, as of December 31, 2007, our internal control over financial reporting was effective based on those criteria.

The
effectiveness of the Company's internal control over financial reporting as of December 31, 2007 has been audited by PricewaterhouseCoopers LLP, an independent
registered public accounting firm, as stated in their report which appears herein.

C.    Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and
15d-15(f), that occurred during the fiscal quarter ended December 31, 2007 that have materially affected, or are reasonably likely to materially affect, our internal control over
financial reporting.

ITEM 9B.    OTHER INFORMATION

None.

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PART III

ITEM 10.    DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The following table lists our directors as of December 31, 2007:

|Name                       |  | Age |  | Position                                         
|-------------------------- |  | --- |  | -------------------------------------------------
|Robert P. Schechter        |  | 59  |  | Chairman of the Board and Chief Executive Officer
|Ofer Gneezy(1)             |  | 56  |  | Director                                         
|W. Frank King, Ph.D.(1)(3) |  | 68  |  | Director                                         
|Pamela D. A. Reeve(1)(3)   |  | 58  |  | Director                                         
|Ronald W. White(2)         |  | 67  |  | Director                                         

---

Each
member of our board of directors is elected at the annual meeting of stockholders and holds office for three years and until his or her successor is elected and qualified.

Robert P. Schechterhas served as our Chief Executive Officer since 1995 and as Chairman of the Board since 1996. Mr. Schechter
served as our President from 1995 to 2007. From 1987 to 1994, Mr. Schechter held various senior executive positions with Lotus Development Corporation and from 1980 to 1987 he was a partner of
Coopers and Lybrand LLP. Mr. Schechter is also a director of Moldflow Corporation, a provider of software solutions for optimizing the design and manufacture of plastic products, Unica
Corporation, a developer of Enterprise Marketing Management Software solutions and Soapstone Networks, Inc., a provider of carrier-class routing solutions for the Internet.

Ofer Gneezyhas served as our director since 2000. Mr. Gneezy was a co-founder, and has been, since 1996, President,
Chief Executive Officer and a Director of iBasis, Inc., a provider of Internet-based communications services for international carriers. From 1994 to 1996, Mr. Gneezy served as President
of Acuity Imaging, Inc., a multinational company focused on the industrial automation industry. From 1980 to 1994, he was an executive of Automatix Inc. (a predecessor to Acuity
Imaging), an industrial automation company, most recently serving as its President and Chief Executive Officer.

W. Frank King, Ph.D.has served as our director since 1997. Dr. King has been, since 1998, a private investor. From 1992 to 1998,
he was Chief Executive Officer and a director of PSW Technologies, Inc., a provider of software services. From 1988 to 1992, Dr. King was a Senior Vice President of Development of Lotus
Development Corporation, and for the previous 19 years served in various positions with IBM Corporation, including his last position as Vice President Development for the entry system division.
He is a director of eOn Communications Corporation, a provider of telecommunications applications; and iBasis, Inc., a provider of Internet-based communications services.

Pamela D. A. Reevehas served as our director since 1997. Since 2006, Ms. Reeve has served as the Chief Executive Officer of
openairboston.net, the Boston wireless initiative to build a wireless network in the city of Boston. From 1993 to 2004 she served as Chief Executive Officer and a director and, from 1989 to 1993, as
President, Chief Operating Officer and a director of Lightbridge, Inc., a provider of products and services which enable wireless telecommunications carriers to improve customer acquisition and
retention processes, and the leading internet payment gateway. From 1978 to 1989, she was with The Boston Consulting Group, a management consulting firm. Ms Reeve is a director of American
Tower Corporation, a provider of infrastructure facilities and services to the wireless, internet and broadcasting industries.

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Ronald W. Whitehas served as our director since 1988. Mr. White has been, since 2002, a consultant and private investor. Since
2007, he has been the managing director of the Olympus Angels, an organization providing funding for firms with significant growth potential. From 1997 until 2002, Mr. White was a partner of
Argo Global Capital, a venture capital firm. From 1983 until 2002, he was a partner of Advanced Technology Development Fund, also a venture capital firm.

The
following table lists our executive officers as of December 31, 2007:

|Name                |  | Age |  | Position                                                                              
|------------------- |  | --- |  | --------------------------------------------------------------------------------------
|Robert P. Schechter |  | 59  |  | Chairman of the Board and Chief Executive Officer                                     
|Herbert Shumway     |  | 60  |  | Senior Vice President of Finance and Operations, Chief Financial Officer and Treasurer
|Steve Gladstone     |  | 54  |  | President, NMS Communications division                                                
|Joel Hughes         |  | 43  |  | President, LiveWire Mobile division                                                   
|Todd D. Donahue     |  | 34  |  | Vice President of Finance, Chief Accounting Officer and Controller                    

Robert P. Schechterhas served as our Chief Executive Officer since 1995 and as Chairman of the Board since 1996. Mr. Schechter
served as our President from 1995 to 2007. From 1987 to 1994, Mr. Schechter held various senior executive positions with Lotus Development Corporation and from 1980 to 1987 he was a partner of
Coopers and Lybrand LLP. Mr. Schechter is also a director of Moldflow Corporation, a provider of software solutions for optimizing the design and manufacture of plastic products, Unica
Corporation, a developer of Enterprise Marketing Management Software solutions and Soapstone Networks, Inc., a provider of carrier-class routing solutions for the Internet.

Herbert Shumwayhas served as our Senior Vice President of Finance and Operations, Chief Financial Officer and Treasurer since 2005. Prior
to that, Mr. Shumway served as the Company's Vice President, Operations, which included Corporate Quality, Technical Services, and Information Technology from 2000 to 2005. Mr. Shumway
has over 20 years experience in the high-tech industry, including executive positions in operations and business development with Compaq Computer and Digital Equipment Corporation.

Steve Gladstonehas served as President of our NMS's Communications division since December 2007. Mr. Gladstone joined us in July
2007, as Vice President and General Manager of the Company's former Communications Platforms division. Widely acknowledged as an industry pioneer and innovator, at Wang Labs in the early 1980's,
Mr. Gladstone was part of the team that introduced one of the industry's
earliest commercial voicemail systems. In 1991, Mr. Gladstone founded Hammer Technologies, now Empirix, and built it into the world-wide market share leader in VoIP and enhanced services
testing and monitoring. Prior to that, Mr. Gladstone held various marketing and management roles at prominent PBX manufacturers and telecom research firms.

Joel Hugheshas served as the President of our LiveWire Mobile division since December 2007. Mr. Hughes was the Senior Vice
President and General Manager of the Company's former Mobile Applications division. Mr. Hughes joined us early in 2006 when we acquired Openera Technologies, an IMS handset applications
provider, where he was President and Chief Executive Officer. Prior to Openera, Mr. Hughes founded SnowShore Networks, a pioneering IP media server company, and served as President and Chief
Executive Officer from 2000 to 2004 before it was acquired by Brooktrout in 2004.

Todd D. Donahuehas served as our Vice President of Finance, Chief Accounting Officer and Controller since he joined NMS in February 2007.
Prior to joining NMS, Mr. Donahue served in senior finance and operations roles at Aspen Technology, Inc., a global software and solutions provider, including as Vice President of Product
Operations and Vice President of Finance. His prior experience

83

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includes
senior finance positions at Corechange, Inc., and Ardent Software, Inc., which was acquired by Informix. Mr. Donahue began his career at Deloitte and Touche LLP in assurance and advisory
services.

The
information appearing under the captions "Board of Directors and Committee Meetings" and "Section 16 Reporting" will be contained in our definitive proxy statement for our
2008 Annual Meeting of Stockholders and is incorporated herein by reference.

We
have adopted a written code of business ethics, that applies to our principal executive officer, principal financial or accounting officer, or person serving similar functions, and
all of our other employees and members of our Board of Directors. The text of our code of ethics is available on our website atwww.nmss.com.We did not
waive any provisions of the code of business ethics during the year ended December 31, 2007. If we amend, or grant a waiver under our code of business ethics that applies to our principal
executive officer, principal financial or accounting officer, or persons performing similar functions, we intend to post information about such amendment or waiver on our website at www.nmss.com.

ITEM 11.    EXECUTIVE COMPENSATION

The information appearing under the captions "Board of Directors and Committee Meetings," "Compensation Committee Report," "Executive Compensation," and
"Compensation Committee Interlocks and Insider Participation" will be contained in our definitive proxy statement for our 2008 Annual Meeting of Stockholders and is incorporated herein by reference.
The proxy statement will be filed with the Securities and Exchange Commission (the "SEC") not later than 120 days after the close of the fiscal year.

ITEM 12.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The information appearing under the caption "Stock Ownership of Directors, Executive Officers and Principal Stockholders" will be contained in our definitive
proxy statement for our 2008 Annual Meeting of Stockholders and is incorporated herein by reference. The proxy statement will be filed with the SEC not later than 120 days after the close of
the fiscal year.

ITEM 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

The information appearing under the captions "Board of Directors and Committee Meetings" and "Related Person Transactions" will be contained in our definitive
proxy statement for our 2008 Annual Meeting of Stockholders and is incorporated herein by reference. The proxy statement will be filed with the SEC not later than 120 days after the close of
the fiscal year.

ITEM 14.    PRINCIPAL ACCOUNTING FEES AND SERVICES

The information appearing under the caption "Information Regarding Independent Registered Public Accounting Firm" is incorporated herein by reference and will be
contained in our definitive proxy
statement for our 2008 Annual Meeting of Stockholders. The proxy statement will be filed with the SEC not later than 120 days after the close of the fiscal year.

84

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PART IV

ITEM 15.    EXHIBITS, FINANCIAL STATEMENT SCHEDULES





Page No.Schedule IIValuation and Qualifying Accounts

80




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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.

| |  | NMS COMMUNICATIONS CORPORATION
| |  | ------------------------------
| |  | By:                           

Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities and on the
dates indicated.

|Name                                        |  | Title                                                                                                                |  | Date         
|------------------------------------------- |  | -------------------------------------------------------------------------------------------------------------------- |  | -------------
|                                            |  |                                                                                                                      |  |              
|/s/ROBERT P. SCHECHTERRobert P. Schechter   |  | Chief Executive Officer and
Chairman of the Board of Directors
(Principal Executive Officer)                         |  | April 1, 2008
|/s/HERBERT SHUMWAYHerbert Shumway           |  | Senior Vice President of Finance and Operations, Chief Financial Officer and Treasurer
(Principal Financial Officer) |  | April 1 2008 
|/s/TODD D. DONAHUETodd D. Donahue           |  | Vice President of Finance, Chief Accounting Officer and Controller (Principal Accounting Officer)                    |  | April 1, 2008
|/s/OFER GNEEZYOfer Gneezy                   |  | Director                                                                                                             |  | April 1, 2008
|/s/W. FRANK KING, PH.D.W. Frank King, Ph.D. |  | Director                                                                                                             |  | April 1, 2008
|/s/PAMELA D. A. REEVEPamela D. A. Reeve     |  | Director                                                                                                             |  | April 1, 2008
|/s/RONALD W. WHITERonald W. White           |  | Director                                                                                                             |  | April 1 2008 

86

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Exhibit Index

The Company will furnish to any stockholder who so requests, a copy of this annual report on Form 10-K, including a copy of any exhibit listed
below, provided that the Company may require payment of a reasonable fee not to exceed our cost of furnishing such exhibit.

|No.     |  | Title                                                                                                                                                                                                                                                                                                    
|------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|2.6*    |  | Merger Agreement dated as of May 18, 2000 by and among the Registrant, 3758982 Canada Inc., Michel Laurence, Michel Brule, Stephane Tremblay, and Investissements Novacap Inc. (incorporated by reference to
the Registrant's Form 8-K filed July 7, 2000).                                              
|2.7*    |  | Asset Purchase Agreement dated October 15, 2001 by and between the Registrant and Lucent Technologies Inc. (incorporated by reference to the Registrant's Form 10-Q for the quarter ended September 30,
2001).                                                                                           
|2.8*    |  | Agreement and Plan of Merger dated as of February 13, 2006 by and among the Registrant, Openera Technologies, Inc. and the other parties thereto (incorporated by reference to the Registrant's Form 8-K filed
February 17, 2006).                                                                       
|2.9*    |  | Asset Purchase Agreement dated December 20, 2007 by and between Registrant and Verso Technologies, Inc. (incorporated by reference to the Registrant's Form 8-k filed December 28, 2007)                                                                                                                 
|2.10*   |  | Agreement and Plan of Merger by and among NMS Communications Corporation, LiveWire Mobile, Inc., Quarry Acquisition Corp., Groove Mobile, Inc. and the Securityholders' Representative named therein, dated
March 16, 2008 (incorporated by reference to the Registrant's Form 8-K filed March 19, 2008).
|3.1*    |  | Fourth Restated Certificate of Incorporation of the Registrant (incorporated by reference to the Registrant's registration statement on Form S-1 (#33-72596)).                                                                                                                                           
|3.2*    |  | By-laws of Registrant, as amended (incorporated by reference to the Registrant's registration statement on Form S-1 (#33-72596)).                                                                                                                                                                        
|3.4*    |  | Certificate of Amendment to Fourth Restated Certificate of Incorporation of the Registrant (incorporated by reference to the Registrant's Form 8-K filed May 9, 2001).                                                                                                                                   
|4.1*    |  | Specimen Certificate for the Common Stock (incorporated by reference to the Registrant's registration statement on Form S-1 (#33-72596)).                                                                                                                                                                
|10.1#*  |  | Employment agreement dated as of June 28, 2005 by and between the Registrant and Herbert Shumway (incorporated by reference to the Registrant's Form 8-K filed July 5, 2005).                                                                                                                            
|10.3#*  |  | Severance Protection Agreement dated as of May 17, 2005 by and between the Registrant and Herbert Shumway (incorporated by reference to the Registrant's Form 8-K filed May 25, 2005).                                                                                                                   
|10.12#* |  | 1993 Employee Stock Option Plan, as amended and restated (incorporated by reference to the Registrant's registration statement on Form S-8 (333-57141)).                                                                                                                                                 
|10.13#* |  | 2003 Employee Stock Purchase Plan, as amended and restated (incorporated by reference to the Registrant's registration statement on Form S-8 (333-106820)).                                                                                                                                              
|10.14#* |  | 1993 Non-Employee Directors Stock Option Plan, as amended and restated (incorporated by reference to the Registrant's registration statement on Form S-8 (333-40940)).                                                                                                                                   
|10.15#* |  | Openera Technologies, Inc., 2005 Equity Incentive Plan. (incorporated by reference to the Registrants' Form 10-K for the year ended December 31, 2005).                                                                                                                                                  
|10.19#* |  | 1995 Non-Statutory Stock Option Plan, as amended and restated (incorporated by reference to the Registrant's registration statement on Form S-8 (333-40940)).                                                                                                                                            
|10.20*  |  | Lease Amendment between the Registrant and National Development of New England, LLC dated October 1996 (incorporated by reference to the Registrant's Form 10-K for the year ended December 31,
1996).                                                                                                   
|10.23#* |  | 2000 Equity Incentive Plan, as amended and restated (incorporated by reference to the Registrant's registration statement on Form S-8 (333-106820), as amended).                                                                                                                                         
|10.24#* |  | Form of Non-Statutory Stock Option Agreement (incorporated by reference to the Registrant's Form 10-Q for the quarter ended March 31, 2005).                                                                                                                                                             

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|10.27*  |  | Form of Incentive Stock Option Agreement (incorporated by reference to the Registrant's Form 10-Q for the quarter ended March 31, 2005).                                                                                                                                                             
|------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.27*  |  | Lease Agreement between the Registrant and National Development of New England, LLC dated April 1, 2000 (incorporated by reference to the Registrant's Form 10-Q for the quarter ended March 31, 2001).                                                                                              
|10.29*  |  | Supply Agreement, dated November 30, 2001, between the Registrant and Lucent Technologies, Inc. (incorporated by reference to the Registrant's Form 8-K filed December 14, 2001).                                                                                                                    
|10.30*  |  | Intellectual Property Agreement, dated November 30, 2001, by and among the Registrant and Lucent Technologies, Inc. and Lucent Technologies GRL Corporation relating to the sale of Lucent's Voice Quality Business
(incorporated by reference to the Registrant's Form 8-K filed December 14, 2001).
|10.31*  |  | Form of NMS Communications Corporation Non-Qualified Stock Option Agreement for Openera Technologies, Inc. 2005 Equity Incentive Plan (incorporated by reference to the Registrant's Form 10-Q for the quarter ended June 30,
2006).                                                                 
|10.32#* |  | Offer Letter from NMS Communications Corporation to Todd Donahue, entered into as of January 12, 2007 (incorporated by reference to the Registrant's Form 8-K filed January 19, 2007).                                                                                                               
|10.33*  |  | Sublease dated December 28, 2006 between NMS Communications Corporation and Genzyme Corporation (incorporated by reference to the Registrant's Form 10-K for the year ended December 31, 2006).                                                                                                      
|10.34#* |  | 2006 Management Bonus Program (incorporated by reference to the Registrant's Form 10-K for the year ended December 31, 2006).                                                                                                                                                                        
|10.35#  |  | 2nd Half 2007 Management Bonus Program.                                                                                                                                                                                                                                                              
|10.36#  |  | Severance Protection Agreement dated as of July 2, 2007 by and between the Registrant and Steven Gladstone.                                                                                                                                                                                          
|10.37#  |  | Severance Protection Agreement dated as of October 1, 2007 by and between the Registrant and Todd Donahue.                                                                                                                                                                                           
|21.1    |  | Subsidiaries of the Company.                                                                                                                                                                                                                                                                         
|23.1    |  | Consent of Independent Registered Public Accounting Firm.                                                                                                                                                                                                                                            
|31.1    |  | Chief Executive Officer certification required by Rule 13a-14(a) (17 CFR 240.13a-14(a)) or Rule 15d-14(a) (17 CFR 240.15d-14(a)).                                                                                                                                                                    
|31.2    |  | Chief Financial Officer certification required by Rule 13a-14(a) (17 CFR 240.13a-14(a)) or Rule 15d-14(a) (17 CFR 240.15d-14(a)).                                                                                                                                                                    
|32.1    |  | Chief Executive Officer certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                      
|32.2    |  | Chief Financial Officer certification 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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