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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549





FORM 10-Q





(Mark One)

|x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------------

For the quarterly period ended June 30, 2009

OR



| ̈ | 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 001-33391





Veraz Networks, Inc.

(Exact name of registrant as specified in its charter)







|                                                               |  |                                        
|-------------------------------------------------------------- |  | ---------------------------------------
|Delaware                                                       |  | 94-3409691                             
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification Number)

926 Rock Avenue, Suite 20

San Jose, California 95131

(408) 750-9400

(Address, including zip code, and telephone number, including area code, of registrants executive offices)





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 past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to the filing requirements for the past 90 days.    YES  x    NO   ̈

Indicate by check mark whether the
Registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12
months (or for such shorter period that the registrant was required to submit and post such files).    Yes   ̈    No   ̈

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



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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).    YES   ̈    NO  x

As of July 31, 2009, 43,450,385 shares of the Registrants common stock were outstanding.









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VERAZ NETWORKS, INC AND SUBSIDIARIES

FORM 10-Q

For the Quarterly Period
Ended June 30, 2009

INDEX



|                                                                                              |  |   
|--------------------------------------------------------------------------------------------- |  | --
|PART I. FINANCIAL INFORMATION                                                                
|                                                                                              | 
|ITEM 1. FINANCIAL STATEMENTS                                                                  |  |   
|Unaudited Condensed Consolidated Balance Sheets                                               |  | 3 
|Unaudited Condensed Consolidated Statements of Operations                                     |  | 4 
|Unaudited Condensed Consolidated Statements of Cash Flows                                     |  | 5 
|Notes to Unaudited Condensed Consolidated Financial Statements                                |  | 6 
|ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |  | 18
|ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK                             |  | 27
|ITEM 4T. CONTROLS AND PROCEDURES                                                              |  | 27
|                                                                                             
|PART II. OTHER INFORMATION                                                                   
|                                                                                              | 
|ITEM 1. LEGAL PROCEEDINGS                                                                     |  | 28
|ITEM 1A. RISK FACTORS                                                                         |  | 28
|ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                   |  | 43
|ITEM 6. EXHIBITS                                                                              |  | 43
|SIGNATURES                                                                                    |  | 44



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VERAZ NETWORKS, INC AND SUBSIDIARIES

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Unaudited Condensed Consolidated
Balance Sheets

(in thousands)



|                                           |  |              |         |   |                  |   |         |  
|------------------------------------------ |  | ------------ | ------- | - | ---------------- | - | ------- | -
|                                           |  | June 30,2009 |         |   | December 31,2008 |  
|ASSETS                                     |  |              |         |   |                  |   |         |  
|Current assets:                            |  |              |         |   |                  |   |         |  
|Cash and cash equivalents                  |  | $            | 19,762  |   |                  | $ | 35,388  |  
|Restricted cash                            |  |              | 606     |   |                  |   | 604     |  
|Short-term investments                     |  |              | 16,156  |   |                  |   | 2,650   |  
|Accounts receivable, net                   |  |              | 30,491  |   |                  |   | 31,666  |  
|Inventories                                |  |              | 9,816   |   |                  |   | 12,284  |  
|Prepaid expenses                           |  |              | 2,134   |   |                  |   | 2,097   |  
|Deferred tax assets                        |  |              | 912     |   |                  |   | 945     |  
|Other current assets                       |  |              | 3,069   |   |                  |   | 3,674   |  
|Due from related parties                   |  |              | 722     |   |                  |   | 912     |  
|                                           |  |              |         |   |                  |   |         |  
|Total current assets                       |  |              | 83,668  |   |                  |   | 90,220  |  
|Property and equipment, net                |  |              | 3,976   |   |                  |   | 4,635   |  
|Other assets                               |  |              | 975     |   |                  |   | 345     |  
|                                           |  |              |         |   |                  |   |         |  
|Total assets                               |  | $            | 88,619  |   |                  | $ | 95,200  |  
|                                           |  |              |         |   |                  |   |         |  
|                                           |  |             
|LIABILITIES AND STOCKHOLDERS EQUITY       |  |              |         |   |                  |   |         |  
|Current liabilities:                       |  |              |         |   |                  |   |         |  
|Accounts payable                           |  | $            | 7,024   |   |                  | $ | 5,671   |  
|Accrued expenses                           |  |              | 11,809  |   |                  |   | 13,204  |  
|Income tax payable                         |  |              | 942     |   |                  |   | 354     |  
|Deferred revenue                           |  |              | 16,438  |   |                  |   | 17,177  |  
|Due to related parties                     |  |              | 2,827   |   |                  |   | 6,670   |  
|                                           |  |              |         |   |                  |   |         |  
|Total current liabilities                  |  |              | 39,040  |   |                  |   | 43,076  |  
|                                           |  |              |         |   |                  |   |         |  
|Stockholders equity:                      |  |              |         |   |                  |   |         |  
|Common stock                               |  |              | 43      |   |                  |   | 43      |  
|Additional paid-in capital                 |  |              | 131,272 |   |                  |   | 129,035 |  
|Deferred stock-based compensation          |  |              |        |   |                  |   | (32     | )
|Accumulated other comprehensive income     |  |              | 1,387   |   |                  |   | 268     |  
|Accumulated deficit                        |  |              | (83,123 | ) |                  |   | (77,190 | )
|                                           |  |              |         |   |                  |   |         |  
|Total stockholders equity                 |  |              | 49,579  |   |                  |   | 52,124  |  
|                                           |  |              |         |   |                  |   |         |  
|Total liabilities and stockholders equity |  | $            | 88,619  |   |                  | $ | 95,200  |  
|                                           |  |              |         |   |                  |   |         |  

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.



3



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VERAZ NETWORKS, INC AND SUBSIDIARIES

Unaudited Condensed Consolidated Statements of Operations

(in thousands, except per share data)



|                                                                                                                            |  |                            |        |   |                          |   |         |      |  |   |        |   |  |   |         |  
|--------------------------------------------------------------------------------------------------------------------------- |  | -------------------------- | ------ | - | ------------------------ | - | ------- | ---- |  | - | ------ | - |  | - | ------- | -
|                                                                                                                            |  | Three Months EndedJune 30, |        |   | Six Months EndedJune 30, |  
|                                                                                                                            |  | 2009                       |        |   | 2008                     |   |         | 2009 |  |   | 2008   |  
|Revenues:                                                                                                                   |  |                            |        |   |                          |   |         |      |  |   |        |   |  |   |         |  
|IP Products                                                                                                                 |  | $                          | 9,955  |   |                          | $ | 9,696   |      |  | $ | 23,005 |   |  | $ | 30,440  |  
|DCME Products                                                                                                               |  |                            | 710    |   |                          |   | 1,239   |      |  |   | 1,908  |   |  |   | 2,815   |  
|Services                                                                                                                    |  |                            | 6,155  |   |                          |   | 5,332   |      |  |   | 12,858 |   |  |   | 10,895  |  
|                                                                                                                            |  |                            |        |   |                          |   |         |      |  |   |        |   |  |   |         |  
|Total revenues                                                                                                              |  |                            | 16,820 |   |                          |   | 16,267  |      |  |   | 37,771 |   |  |   | 44,150  |  
|                                                                                                                            |  |                            |        |   |                          |   |         |      |  |   |        |   |  |   |         |  
|Cost of Revenues:                                                                                                           |  |                            |        |   |                          |   |         |      |  |   |        |   |  |   |         |  
|IP Products                                                                                                                 |  |                            | 4,517  |   |                          |   | 4,775   |      |  |   | 9,951  |   |  |   | 13,183  |  
|DCME Products                                                                                                               |  |                            | 245    |   |                          |   | 495     |      |  |   | 732    |   |  |   | 1,080   |  
|Services                                                                                                                    |  |                            | 2,961  |   |                          |   | 3,896   |      |  |   | 5,849  |   |  |   | 7,834   |  
|                                                                                                                            |  |                            |        |   |                          |   |         |      |  |   |        |   |  |   |         |  
|Total cost of revenues                                                                                                      |  |                            | 7,723  |   |                          |   | 9,166   |      |  |   | 16,532 |   |  |   | 22,097  |  
|                                                                                                                            |  |                            |        |   |                          |   |         |      |  |   |        |   |  |   |         |  
|Gross profit                                                                                                                |  |                            | 9,097  |   |                          |   | 7,101   |      |  |   | 21,239 |   |  |   | 22,053  |  
|                                                                                                                            |  |                            |        |   |                          |   |         |      |  |   |        |   |  |   |         |  
|Operating Expenses:                                                                                                         |  |                            |        |   |                          |   |         |      |  |   |        |   |  |   |         |  
|Research and development, net                                                                                               |  |                            | 4,343  |   |                          |   | 7,262   |      |  |   | 9,551  |   |  |   | 15,135  |  
|Sales and marketing                                                                                                         |  |                            | 5,637  |   |                          |   | 6,993   |      |  |   | 12,167 |   |  |   | 14,799  |  
|General and administrative                                                                                                  |  |                            | 2,967  |   |                          |   | 5,690   |      |  |   | 5,775  |   |  |   | 8,626   |  
|                                                                                                                            |  |                            |        |   |                          |   |         |      |  |   |        |   |  |   |         |  
|Total operating expenses                                                                                                    |  |                            | 12,947 |   |                          |   | 19,945  |      |  |   | 27,493 |   |  |   | 38,560  |  
|                                                                                                                            |  |                            |        |   |                          |   |         |      |  |   |        |   |  |   |         |  
|Loss from operations                                                                                                        |  |                            | (3,850 | ) |                          |   | (12,844 | )    |  |   | (6,254 | ) |  |   | (16,507 | )
|Other income, net                                                                                                           |  |                            | 682    |   |                          |   | 651     |      |  |   | 148    |   |  |   | 1,287   |  
|                                                                                                                            |  |                            |        |   |                          |   |         |      |  |   |        |   |  |   |         |  
|Loss before income taxes                                                                                                    |  |                            | (3,168 | ) |                          |   | (12,193 | )    |  |   | (6,106 | ) |  |   | (15,220 | )
|Income taxes benefit                                                                                                        |  |                            | (243   | ) |                          |   | (601    | )    |  |   | (173   | ) |  |   | (534    | )
|                                                                                                                            |  |                            |        |   |                          |   |         |      |  |   |        |   |  |   |         |  
|Net loss                                                                                                                    |  | $                          | (2,925 | ) |                          | $ | (11,592 | )    |  | $ | (5,933 | ) |  | $ | (14,686 | )
|                                                                                                                            |  |                            |        |   |                          |   |         |      |  |   |        |   |  |   |         |  
|Net loss per share  basic and diluted                                                                                      |  | $                          | (0.07  | ) |                          | $ | (0.28   | )    |  | $ | (0.14  | ) |  | $ | (0.35   | )
|                                                                                                                            |  |                            |        |   |                          |   |         |      |  |   |        |   |  |   |         |  
|Weighted average shares outstanding used in computing net loss per share  basic and diluted                                |  |                            | 43,390 |   |                          |   | 41,998  |      |  |   | 43,278 |   |  |   | 41,696  |  
|                                                                                                                            |  |                            |        |   |                          |   |         |      |  |   |        |   |  |   |         |  
|                                                                                                                            |  |                            |        |  
|Related Party Transactions                                                                                                  |  |                            |        |   |                          |   |         |      |  |   |        |   |  |   |         |  
|                                                                                                                           
|The Unaudited Condensed Consolidated Statements of Operations shown above include the following related party transactions: | 
|                                                                                                                            |  |                           
|                                                                                                                            |  | Three Months EndedJune 30, |        |   | Six Months EndedJune 30, |  
|                                                                                                                            |  | 2009                       |        |   | 2008                     |   |         | 2009 |  |   | 2008   |  
|Revenues:                                                                                                                   |  |                            |        |   |                          |   |         |      |  |   |        |   |  |   |         |  
|IP Products, related party sales                                                                                            |  | $                          |       |   |                          | $ | 5       |      |  | $ | 40     |   |  | $ | 59      |  
|Cost of Revenues:                                                                                                           |  |                            |        |   |                          |   |         |      |  |   |        |   |  |   |         |  
|IP Products, costs arising from related party purchases                                                                     |  |                            |       |   |                          |   |        |      |  |   |       |   |  |   | 184     |  
|DCME Products, costs arising from related party purchases                                                                   |  |                            | 222    |   |                          |   | 447     |      |  |   | 658    |   |  |   | 982     |  
|Services, costs arising from related party purchases                                                                        |  |                            |       |   |                          |   | 45      |      |  |   | 22     |   |  |   | 90      |  
|Operating Expenses:                                                                                                         |  |                            |        |   |                          |   |         |      |  |   |        |   |  |   |         |  
|Research and development                                                                                                    |  |                            | 36     |   |                          |   | 339     |      |  |   | 89     |   |  |   | 723     |  
|Sales and marketing                                                                                                         |  |                            | 105    |   |                          |   | 758     |      |  |   | 699    |   |  |   | 1,555   |  
|General and administrative                                                                                                  |  |                            | 78     |   |                          |   | 88      |      |  |   | 132    |   |  |   | 132     |  

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.



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VERAZ NETWORKS, INC AND SUBSIDIARIES

Unaudited Condensed Consolidated Statements of Cash Flows

(in thousands)



|                                                                                          |  |                           |         |   |      |   |         |  
|----------------------------------------------------------------------------------------- |  | ------------------------- | ------- | - | ---- | - | ------- | -
|                                                                                          |  | Six Months Ended June 30, |        
|                                                                                          |  | 2009                      |         |   | 2008 |  
|Cash flows from operating activities:                                                     |  |                           |         |   |      |   |         |  
|Net loss                                                                                  |  | $                         | (5,933  | ) |      | $ | (14,686 | )
|Adjustments to reconcile net loss to net cash (used in) provided by operating activities: |  |                           |         |   |      |   |         |  
|Depreciation                                                                              |  |                           | 1,387   |   |      |   | 1,749   |  
|Stock-based compensation                                                                  |  |                           | 2,204   |   |      |   | 2,303   |  
|Loss on disposal of assets                                                                |  |                           |        |   |      |   | 37      |  
|Provision for doubtful accounts                                                           |  |                           | 115     |   |      |   | 759     |  
|Amortization of debt issuance cost                                                        |  |                           |        |   |      |   | 129     |  
|Deferred income taxes                                                                     |  |                           | (575    | ) |      |   | (739    | )
|Non-cash restructuring charges                                                            |  |                           | (39     | ) |      |   |        |  
|Functional currency exchange (gains) losses                                               |  |                           | (358    | ) |      |   |        |  
|Net changes in operating assets and liabilities:                                          |  |                           |         |   |      |   |         |  
|Accounts receivable                                                                       |  |                           | 2,688   |   |      |   | 2,645   |  
|Inventories                                                                               |  |                           | 2,733   |   |      |   | (2,992  | )
|Prepaid expenses and other current assets                                                 |  |                           | 705     |   |      |   | 998     |  
|Due from related parties                                                                  |  |                           | 190     |   |      |   | (206    | )
|Accounts payable                                                                          |  |                           | 1,145   |   |      |   | (2,741  | )
|Accrued expenses                                                                          |  |                           | (1,535  | ) |      |   | (4,745  | )
|Income tax payable                                                                        |  |                           | 566     |   |      |   | (102    | )
|Deferred revenue                                                                          |  |                           | (1,200  | ) |      |   | 1,010   |  
|Due to related parties                                                                    |  |                           | (3,843  | ) |      |   | (915    | )
|                                                                                          |  |                           |         |   |      |   |         |  
|Net cash used in operating activities                                                     |  |                           | (1,750  | ) |      |   | (17,496 | )
|                                                                                          |  |                           |         |   |      |   |         |  
|                                                                                          |  |                          
|Cash flows from investing activities:                                                     |  |                           |         |   |      |   |         |  
|Restricted cash                                                                           |  |                           | (2      | ) |      |   | (8      | )
|Maturities and sales of short-term investments                                            |  |                           | 5,436   |   |      |   | 5,001   |  
|Purchases of short-term investments                                                       |  |                           | (18,939 | ) |      |   | (5,981  | )
|Purchases of property and equipment                                                       |  |                           | (609    | ) |      |   | (1,007  | )
|Other assets                                                                              |  |                           | (22     | ) |      |   | 4       |  
|                                                                                          |  |                           |         |   |      |   |         |  
|Net cash used in investing activities                                                     |  |                           | (14,136 | ) |      |   | (1,991  | )
|                                                                                          |  |                           |         |   |      |   |         |  
|                                                                                          |  |                          
|Cash flows from financing activities:                                                     |  |                           |         |   |      |   |         |  
|Proceeds from the exercise of stock options                                               |  |                           | 65      |   |      |   | 515     |  
|Repayment of loan                                                                         |  |                           |        |   |      |   | (1,779  | )
|                                                                                          |  |                           |         |   |      |   |         |  
|Net cash provided by (used in) financing activities                                       |  |                           | 65      |   |      |   | (1,264  | )
|                                                                                          |  |                           |         |   |      |   |         |  
|Effect of exchange rate changes                                                           |  |                           | 195     |   |      |   | (115    | )
|                                                                                          |  |                           |         |   |      |   |         |  
|Net decrease in cash and cash equivalents                                                 |  |                           | (15,626 | ) |      |   | (20,866 | )
|Cash and cash equivalents at beginning of period                                          |  |                           | 35,388  |   |      |   | 52,232  |  
|                                                                                          |  |                           |         |   |      |   |         |  
|Cash and cash equivalents at end of period                                                |  | $                         | 19,762  |   |      | $ | 31,366  |  
|                                                                                          |  |                           |         |   |      |   |         |  

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.



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VERAZ NETWORKS, INC AND SUBSIDIARIES

Notes to Unaudited Condensed Consolidated Financial Statements

NOTE
1  THE COMPANY

Veraz Networks, Inc., or the Company, was incorporated under the laws of the State of Delaware on October 18,
2001. The Company is a provider of voice infrastructure solutions to established and emerging wireline and wireless service providers. Service providers use the Companys products to transport, convert and manage voice traffic over both legacy
Time-Division Multiplexing, or TDM and Internet Protocol, or IP, networks, while enabling voice over IP, or VoIP, and other multimedia services. The Companys ControlSwitch softswitch solution and I-Gate 4000 family of media gateway
products, enable service providers to deploy IP networks and efficiently migrate from their legacy circuit-switched networks to IP networks.

NOTE 2
 BASIS OF PRESENTATION

The unaudited condensed consolidated financial statements include the accounts of the Company and its
wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.

The accompanying
interim condensed consolidated financial statements as of June 30, 2009 and for the three and six months ended June 30, 2009 and 2008 are unaudited. These financial statements and notes should be read in conjunction with the audited
consolidated financial statements and related notes, together with managements discussion and analysis of financial condition and results of operations, contained in the Companys Annual Report on Form 10-K for the year ended
December 31, 2008.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States, or GAAP, pursuant to the rules and regulations of the Securities and Exchange Commission, or SEC. They do not include all of the financial information and footnotes required by GAAP for
complete financial statements. In the opinion of management, the unaudited condensed consolidated financial statements and notes have been prepared on the same basis as the audited consolidated financial statements in the Companys Annual
Report on Form 10-K for the year ended December 31, 2008, and include adjustments (consisting of normal recurring adjustments) necessary for the fair presentation of the Companys financial position as of June 30, 2009, results of
operations for the three and six months ended June 30, 2009 and 2008, and cash flows for the six months ended June 30, 2009 and 2008.

The Company has evaluated subsequent events, as defined by Statement of Financial Accounting Standards No. 165, Subsequent Events,or SFAS 165, through the date that the financial statements were issued on August 14, 2009
and determined that no subsequent events have occurred which would require disclosure or adjustment to the condensed consolidated financial statements.

NOTE 3  SIGNIFICANT ACCOUNTING POLICIES

The significant accounting policies of the Company are as follows:

(a) Use of Estimates

The preparation of condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions about future events. These
estimates and the underlying assumptions affect the amounts of assets and liabilities reported, disclosures about contingent assets and liabilities, and reported amounts of revenues and expenses. Such estimates include the valuation of accounts
receivable, inventories, and deferred tax assets, among others. These estimates and assumptions are based on managements best estimates and judgment. Management evaluates its estimates and assumptions on an ongoing basis using historical
experience and other factors, including the current economic environment, which management believes to be reasonable under the circumstances. The Company adjusts such estimates and assumptions when facts and circumstances dictate. Illiquid credit
markets, volatile equity, foreign currency, and energy markets, and declines in consumer spending have combined to increase the uncertainty inherent in such estimates and assumptions. As future events and their effects cannot be determined with
precision, actual results could differ significantly from these estimates. Changes in those estimates resulting from continuing changes in the economic environment will be reflected in the financial statements in future periods.

(b) Concentrations

Cash and
cash equivalents are maintained with several financial institutions. Deposits held with banks may exceed the amount of insurance provided on such deposits. Generally, these deposits may be redeemed upon demand and therefore bear minimal risk.



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Declining business and consumer confidence have resulted in an economic slowdown and a global recession.
Continuing market upheavals, including specifically the lack of credit currently available in the market, may have an adverse affect on the Company due to its dependence on capital budgets and confidence of the customers and some of the customers
are dependant on obtaining credit to finance purchases of the products. The revenues are likely to decline in such circumstances. Factors such as business investment, the volatility and strength of the capital markets all affect the business and
economic environment and, ultimately, the amount and profitability of the business. In an economic slowdown characterized by lower corporate earnings, lower business investment, fewer options to obtain credit, the demand for the Companys
products could be adversely affected. Adverse changes in the economy could affect earnings negatively and could have a material adverse effect on the business, results of operations and financial condition.

The Company performs credit evaluations of its customers and, with the exception of certain financing transactions, does not require collateral from its
customers. However, when the Company uses integrators or resellers affiliated with ECI Telecom, a related party, from time to time, prior to fulfillment of the Companys order for a particular customer, ECI Telecom has requested that the
Company obtain either a letter of credit or accounts receivable insurance to mitigate any collection risk (see Note 5).

Pursuant to a
master manufacturing and master agreement with ECI Telecom, a related party, the Company derives a portion of its revenues from sales of its line of voice compression telecommunications products, or Digital Circuit Multiplication Equipment, or DCME,
products (4% and 5% of revenues during the three and six months ended June 30, 2009, respectively and 8% and 6% of revenues during the three and six months ended June 30, 2008, respectively) and related services (5% and 4% of revenues
during the three and six months ended June 30, 2009, respectively, and 6% of revenues each during the three and six months ended June 30, 2008, respectively).

The Company receives certain of its components from other sole suppliers. Additionally, the Company relies on a limited number of contract manufacturers to provide manufacturing services for its products. The
inability of any contract manufacturer, supplier or ECI Telecom to fulfill supply requirements of the Company could materially impact the Companys future operating results.

The substantial majority of the manufacturing of the Companys hardware products occurs in Israel. In addition, a significant portion of the
Companys operations is located in Israel, which includes the Companys entire media gateway research and development team. The continued threat of terrorist activity or other acts of war or hostility against Israel have created
uncertainty throughout the Middle East. To the extent this results in a disruption of the Companys operations or delays of its manufacturing capabilities or shipments of its products, then the Companys business, operating results and
financial condition could be adversely affected.

One customer, Belgacom International Carrier Services, contributed to 11% of the
Companys revenues in the three months ended June 30, 2009. Two customers, Belgacom International Carrier Services and Sky2net Limited, together contributed 14% and 10% of the Companys revenues in the three months ended June 30,
2008. No customer contributed to 10% of the Companys revenues in the six months ended June 30, 2009 or 2008. No customer accounted for 10% or more of the Companys accounts receivable as of June 30, 2009 or December 31,
2008. To date, the Company has not experienced any material credit issues with Belgacom International Carrier Services or Sky2net Limited.

(c) Revenue Recognition

DCME product revenues consist of revenues from the sale of the DCME hardware products. IP
product revenues consists of revenues from the sale of the I-Gate 4000 family of media gateway hardware products, the ControlSwitch family of softswitch modules, and the Secure Communications Software. Services revenue consists of revenues from
separately-priced maintenance and extended warranty contracts, post-contract customer support, or PCS, installation training and other professional services.

Revenue from standalone sales of DCME products is recognized in accordance with SEC Staff Accounting Bulletin, or SAB, No. 104, Revenue Recognition,or SAB 104. When sales of DCME are bundled with
installation services, the hardware and services are accounted for as separate units of accounting as the deliverables meet the separation criteria in Emerging Issues Tax Force, or EITF, No. 00-21, Revenue Arrangements with Multiple
Deliverables,or EITF 00-21.Revenue for each deliverable is recognized in accordance with SAB 104.

All of the
Companys IP products may be sold in bundled arrangements that include PCS, installation, training, and other professional services. The Companys media gateway hardware, when sold in a bundled arrangement, is referred to as a static
trunking solution, and when sold in a bundled arrangement that includes the Companys softswitch module software is referred to as a VoIP solution. When the Companys Secure Communications Software is sold in a bundled arrangement with
DCME hardware, it is referred to as a Secure Communications solution.



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In sales of static trunking solutions, VoIP solutions or Secure Communications solutions, the software is
considered more than incidental to the arrangement and essential to the functionality of the hardware. Therefore, all revenue from these arrangements is recognized in accordance with AICPA Statement of Position 97-2, Software Revenue Recognition,or SOP 97-2, as amended by Statement of Position 98-9, Modification of SOP 97-2, Software Revenue Recognition, with Respect to Certain Transactions,orSOP 98-9.

In accordance with both SAB 104 and SOP 97-2, the Company recognizes revenue when all of the following criteria are met: (i) persuasive
evidence of an arrangement exists, (ii) delivery has occurred, (iii) the fee is fixed or determinable, and (iv) collectibility is probable. The Company evaluates each of the four criteria as follows:

(i) Persuasive evidence of an arrangement exists

The Companys customary practice is to have a written contract, which is signed by both the customer and the Company, or a purchase order or other written or electronic order documentation for those customers who have previously
negotiated a standard arrangement with the Company.

(ii) Delivery has occurred

Delivery of hardware and software products generally occurs at the point of shipment when title and risk of loss have passed to the customer. However,
initial VoIP solution arrangements typically require evidence of customer acceptance of the implementation of the VoIP solution in the customers network, including the ability of the network to carry live data traffic. As a result, delivery of
the software, hardware and services is not considered to have occurred until evidence of acceptance is received from the customer on the initial VOIP solution arrangement. Historically, the Company has successfully implemented all subsequent sales
of VOIP solutions. Accordingly, as of the beginning of January 2009, revenue recognition on subsequent sales of VOIP solutions after the initial arrangement have been accepted from the customer, typically occurs at the point of shipment when title
and risk of loss have passed to the customer since the additional equipment is merely an expansion of the customers already existing working network. The revenue impact related to subsequent sales of VOIP solutions on the financial statements
for the three and six months ended June 30, 2009 were zero and $0.2 million, respectively.

Revenue from sales of standalone services,
including training courses, is recognized when the services are completed.

(iii) The fee is fixed or determinable

The Company does not offer a right of return to its customers. Arrangement fees are generally due within one year or less from date of acceptance, or the
date of delivery if no acceptance, if required. Some arrangements may have payment terms extending beyond these customary payment terms and therefore the arrangement fees are considered not to be fixed or determinable. For multiple element
arrangements with payment terms that are considered not to be fixed or determinable, revenue is recognized equal to the cumulative amount due and payable after allocating a portion of the cumulative amount due and payable to any undelivered elements
(generally PCS) based on vendor specific objective evidence, or VSOE, after delivery and acceptance of the software, hardware, and services, and assuming all other revenue recognition criteria are satisfied. The Company defers the cost of inventory
when products have been shipped, but have not yet been installed or accepted, and expenses those costs in full in the same period that the deferred revenue is recognized as revenue (generally upon customer acceptance). In arrangements for which IP
revenue recognition is limited to amounts due and payable, all related inventory costs are expensed at the date of acceptance; this will initially result in lower or negative product margins and cause higher margins in subsequent periods, as
compared to similar arrangements with customary payment terms.

The Company sells its products through its direct sales force and channel
partners. For products sold through indirect channels, revenue is recognized either on a sell-in basis or when the channel partner sells the product to the end user, depending on the Companys experience with the individual channel partner.

(iv) Collectibility is probable

Collectibility is assessed on a customer-by-customer basis. The Company evaluates the financial position, payment history, and ability to pay of new customers, and of existing customers that substantially expand their commitments. If it is
determined prior to revenue recognition that collectibility is not probable, recognition of the revenue is deferred and recognized upon receipt of cash, assuming all other revenue recognition criteria are satisfied. In arrangements for which IP
revenue recognition is limited to amounts of cash received, all related inventory costs are expensed at the date of acceptance; this will initially result in lower or negative product margins and cause higher margins in subsequent periods, as
compared to similar arrangements with customary payment terms.



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For most arrangements, the Company has established VSOE for the related PCS based on stated renewal rates
and installation services based on the price charged when the same element is sold separately. Accordingly, the Company generally allocates revenue in multiple element arrangements using the residual method. For arrangements in which the Company is
unable to establish VSOE for its PCS, the entire arrangement fee is deferred and recognized ratably over the PCS term after delivery.

Revenues include amounts billed to customers in sales transactions for shipping and handling. Shipping and handling fees represented less than 1% of revenues in each of the six months ended June 30, 2009 and 2008. Shipping and handling
costs are included in cost of revenues.

For purposes of classification in the condensed consolidated statements of operations, revenue
from sales of static trunking solutions, VoIP solutions, and Secure Communications solutions is allocated between DCME Products, IP Products and Services, as applicable, based on VSOE for any elements for which VSOE exists or based on the relative
stated invoice amount for elements for which VSOE does not exist.

(d) Investments

All debt and marketable equity securities are classified as available-for-sale. Available-for-sale securities are carried at fair value with the
unrealized gains and losses, net of tax, reported in stockholders equity as a component of accumulated other comprehensive income (loss). Unrealized losses considered to be other than temporary are recognized in earnings currently. Realized
gains and losses on sales of available-for-sale securities are computed based upon initial cost adjusted for any other-than-temporary declines in fair value. Gains or losses on securities sold are based on the specific identification method.

(e) Government-Sponsored Research and Development

The Company records grants received from the Office of the Chief Scientist of the Israel Ministry of Industry and Trade, or OCS, as a reduction of
research and development expenses on a monthly basis, based on the estimated reimbursable cost incurred. Royalties payable to the OCS are classified as cost of revenues. Royalty expenses relating to OCS grants included in cost of IP product revenues
for each of the three months ended June 30, 2009 and 2008 amounted to $0.3 million. Royalty expenses relating to OCS grants included in cost of IP product revenues for the six months ended June 30, 2009 and 2008 amounted to $0.7 and $0.8
million, respectively. As of June 30, 2009 and December 31, 2008, the royalty payable amounted to $0.9 million and $1.2 million, respectively. The maximum amount of the contingent liability related to royalties payable to the Israeli
Government was approximately $15.4 million as of June 30, 2009.

(f) Comprehensive Loss

Statement of Financial Accounting Standard No. 130, Reporting Comprehensive Income, or SFAS 130, establishes standards for reporting and
displaying comprehensive income (loss) and its components in a full set of general-purposes financial statements.

The components of
comprehensive loss for the three and six months ended June 30, 2009 and 2008 were as follows (in thousands):



|                                         |  |                            |        |   |                          |   |         |      |  |   |        |   |  |   |         |  
|---------------------------------------- |  | -------------------------- | ------ | - | ------------------------ | - | ------- | ---- |  | - | ------ | - |  | - | ------- | -
|                                         |  | Three Months EndedJune 30, |        |   | Six Months EndedJune 30, |  
|                                         |  | 2009                       |        |   | 2008                     |   |         | 2009 |  |   | 2008   |  
|Net loss                                 |  | $                          | (2,925 | ) |                          | $ | (11,592 | )    |  | $ | (5,933 | ) |  | $ | (14,686 | )
|Foreign currency translation adjustments |  |                            | 952    |   |                          |   | (76     | )    |  |   | 1,118  |   |  |   | (115    | )
|                                         |  |                            |        |   |                          |   |         |      |  |   |        |   |  |   |         |  
|Total Comprehensive loss                 |  | $                          | (1,973 | ) |                          | $ | (11,668 | )    |  | $ | (4,815 | ) |  | $ | (14,801 | )
|                                         |  |                            |        |   |                          |   |         |      |  |   |        |   |  |   |         |  



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(g) Stock-Based Compensation

The Company accounts for stock-based compensation in accordance with Statement of Financial Accounting Standards No. 123 (revised 2004),
Share-Based Payment,or SFAS 123R. Under the provisions of SFAS 123R, stock-based compensation cost is estimated at the grant date based on the awards fair-value as calculated by the Black-Scholes option-pricing model and is recognized
as expense on a straight-line basis over the requisite service period. This model requires various judgment-based assumptions including expected volatility, forfeiture rates, and expected option life. Significant changes in any of these assumptions
could materially affect the fair value of stock-based awards granted in the future; specifically, any changes in assumptions for expected volatility and expected life significantly affect the grant date fair value. Changes in the expected dividend
rate and expected risk-free rate of return do not significantly impact the calculation of fair value, and determining these inputs is not highly subjective. The expected term represents the period that stock-based awards are expected to be
outstanding, giving consideration to the contractual terms of the stock-based awards, vesting schedules, and expectations of future employee behavior as influenced by changes to the terms of our stock-based awards. The Company determined the
expected term in accordance with the simplified method as described in SEC Staff Accounting Bulletin No. 107, Disclosure About Fair Value of Financial Instruments, or SAB 107, as amended by SEC Staff Accounting Bulletin
No. 110, Disclosure About Fair Value of Financial Instruments, or SAB 110. The computation of expected volatility is based on the historical and implied volatility of comparable companies from a representative peer group based on
industry and market capitalization data.

(h) Foreign Currency Translation

For foreign subsidiaries using the U.S. dollar as their functional currency, transactions and monetary balances denominated in non-dollar currencies
are remeasured into dollars using current exchange rates. Transaction gains or losses are recorded in other income (expense), net. For foreign subsidiaries using the local currency as their functional currency, assets and liabilities are translated
at exchange rates in effect at the balance sheet date and income and expenses are translated at average exchange rates. The effect of these translation adjustments are reported as a separate component of stockholders equity (See Comprehensive
Loss note 3(f) above).

(i) Foreign Currency Forward Contracts

The Company enters into forward foreign exchange contracts in which the counterparty is generally a bank. The Company purchases forward foreign exchange
contracts to mitigate the risk of changes in foreign exchange rates on certain expenses denominated in New Israeli Shekels. Although the Company believes that these contracts are effective as hedges from an economic perspective, they do not qualify
for hedge accounting under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities,or SFAS 133, as amended. Any derivative that is either not designated as a hedge, or is so designated but is ineffective per
SFAS 133, is recorded at fair value and changes in fair value are recognized in other income (expense), as they are incurred. As of June 30, 2009, the Company had $5.9 million in outstanding forward contracts for the purchase of new
Israeli shekels. The outstanding forward contracts generally have maturities of approximately one to six months from the date into which they were entered and are entered into at or near the end of the quarter. Currently, the outstanding contracts
expire at various dates between July 2009 and December 2009. During the three and six months ended June 30, 2009, the benefit of the forward contracts recorded in other income, net was a total of $0.1 million. During the three and six months
ended June 30, 2008, the Company did not purchase any forward contracts.

(j) Recent Accounting Pronouncements

In December 2007, the Financial Accounting Standards Board, or FASB, issued Statement of Financial Accounting Standard
No. 141 (revised 2007), Business Combinations,or SFAS 141(R). Under SFAS 141(R), an entity is required to recognize the assets acquired, liabilities assumed, contractual contingencies, and contingent consideration at their fair value on
the acquisition date. It further requires that acquisition-related costs be recognized separately from the acquisition and expensed as incurred; that restructuring costs generally be expensed in periods subsequent to the acquisition date; and that
changes in accounting for deferred tax asset valuation allowances and acquired income tax uncertainties after the measurement period be recognized as a component of provision for taxes. In addition, acquired in-process research and development is
capitalized as an intangible asset and amortized over its estimated useful life. The Company has adopted SFAS 141(R) accounting treatment for business combinations on a prospective basis for new acquisitions beginning in the first quarter of
fiscal year 2009.



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In March 2008, the FASB issued Statement of Financial Accounting Standard No. 161, Disclosures
about Derivative Instruments and Hedging Activities, orSFAS 161. SFAS 161 requires companies with derivative instruments to disclose information that should enable financial statement users to understand how and why a company uses derivative
instruments, how derivative instruments and related hedged items are accounted for under SFAS 133, Accounting for Derivative Instruments and Hedging Activities,and how derivative instruments and related hedged items affect a
companys financial position, financial performance and cash flows. SFAS 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The Company adopted SFAS 161 beginning in the
first quarter of 2009 and it requires enhanced disclosures, without a change to existing standards relative to measurement and recognition. The Companys adoption of SFAS 161 did not have any effect on its earnings or financial position.

FASB Staff Position, or FSP, FSP FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability
Have Significantly Decreased and Identifying Transactions That Are Not Orderly orFSP FAS 157-4. FSP FAS 157-4 relates to determining fair values when there is no active market or where the price inputs being used represent distressed sales. It
reaffirms the need to use judgment to ascertain if a formerly active market has become inactive and in determining fair values when markets have become inactive. The Companys adoption of FSP FAS 157-4 did not have a material impact on the
Companys financial condition or operating results.

FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of
Other-Than-Temporary Impairments. This FSP is intended to bring consistency to the timing of impairment recognition, and provide improved disclosures about the credit and noncredit components of impaired debt securities that are not expected to
be sold. The FSP also requires interim disclosures regarding expected cash flows, credit losses, and an aging of securities with unrealized losses. As of June 30, 2009, the unrealized losses were zero. FSP No. 115-2 and 124-2 is effective
for interim and annual periods ending after June 15, 2009 and was adopted by the Company in the second quarter of 2009. The adoption of the statements did not have an impact on the Companys financial condition or operating results.

FSP FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments. This FSP relates to fair value
disclosures for financial instruments that are not currently reflected on the balance sheet at fair value. Prior to issuing this FSP, fair values for these assets and liabilities were only disclosed once a year. The FSP now requires these
disclosures on a quarterly basis, providing qualitative and quantitative information about fair value estimates for all those financial instruments not measured on the balance sheet at fair value. The Companys adoption of FSP FAS 107-1 and APB
28-1did not have a material impact on the Companys financial condition or operating results.

In May 2009, the FASB issued Statement
of Financial Accounting Standard No. 165, Subsequent Events, or FAS 165.The statement incorporates accounting and disclosure requirements related to subsequent events into the U.S. generally accepted accounting principles, making
management responsible for subsequent-events accounting and disclosure. The statement is effective for interim and annual periods ending after June 15, 2009. The adoption of this statement did not have any material impact on its financial
condition or operating results for the quarter ended June 30, 2009.

In June 2009, the FASB issued Statement of Financial Accounting
Standard No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principlesa replacement of FASB Statement No. 162,or FAS 162 for financial statements issued for interim and
annual periods ending after September 15, 2009. The Codification brings together in one place all authoritative GAAP previously in levels A through D of the GAAP hierarchy that has been issued by a standard setter, for example, FASB Statements,
FASB Interpretations, EITF Abstracts, FASB Staff Positions, and AICPA Accounting and Auditing Guides. The Company does not currently believe adoption of this accounting pronouncement will have a material impact on the Companys financial
condition or operating results.



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NOTE 4  FINANCIAL INSTRUMENTS

Assets are measured and recorded at fair value on a recurring basis for cash, cash equivalents, and short-term available-for-sale securities, excluding accrued interest components, were presented on the Companys
consolidated condensed balance sheets as of June 30, 2009 and December 31, 2008. A summary of cash, cash equivalents, and short-term available-for-sale securities as of June 30, 2009 and December 31, 2008 were as follows
(in thousands):



|                                |  |                       |   |  |               |        |                          |   |                  |  |   |       
|------------------------------- |  | --------------------- | - |  | ------------- | ------ | ------------------------ | - | ---------------- |  | - | ------
|Security Description            |  | Percentage ofholdings |   |  | AmortizedCost |        | UnrealizedGains (Losses) |   | Fair MarketValue
|June 30, 2009                   |  |                       |   |  |               |        |                          |   |                  |  |   |       
|Cash and Cash equivalents:      |  |                       |   |  |               |        |                          |   |                  |  |   |       
|Money market funds              |  | 54                    | % |  | $             | 3,584  |                          | $ |                 |  | $ | 3,584 
|U.S. Treasury bills             |  | 46                    | % |  |               | 3,074  |                          |   |                 |  |   | 3,074 
|                                |  |                       |   |  |               |        |                          |   |                  |  |   |       
|Total cash and cash equivalents |  | 100                   | % |  | $             | 6,658  |                          | $ |                 |  | $ | 6,658 
|                                |  |                       |   |  |               |        |                          |   |                  |  |   |       
|                                |  |                       |   | 
|Short-term investments:         |  |                       |   |  |               |        |                          |   |                  |  |   |       
|U.S. Treasury bills             |  | 100                   | % |  | $             | 16,149 |                          | $ | 7                |  | $ | 16,156
|                                |  |                       |   |  |               |        |                          |   |                  |  |   |       
|Total short-term investments    |  | 100                   | % |  | $             | 16,149 |                          | $ | 7                |  | $ | 16,156
|                                |  |                       |   |  |               |        |                          |   |                  |  |   |       
|                                |  |                       |   | 
|December 31, 2008               |  |                       |   |  |               |        |                          |   |                  |  |   |       
|Cash and Cash equivalents:      |  |                       |   |  |               |        |                          |   |                  |  |   |       
|Money market funds              |  | 92                    | % |  | $             | 20,918 |                          | $ |                 |  | $ | 20,918
|U.S. Treasury bills             |  | 8                     | % |  |               | 1,700  |                          |   |                 |  |   | 1,700 
|                                |  |                       |   |  |               |        |                          |   |                  |  |   |       
|Total cash and cash equivalents |  | 100                   | % |  | $             | 22,618 |                          | $ |                 |  | $ | 22,618
|                                |  |                       |   |  |               |        |                          |   |                  |  |   |       
|                                |  |                       |   | 
|Short-term investments:         |  |                       |   |  |               |        |                          |   |                  |  |   |       
|U.S. Treasury bills             |  | 100                   | % |  | $             | 2,650  |                          | $ |                 |  | $ | 2,650 
|                                |  |                       |   |  |               |        |                          |   |                  |  |   |       
|Total short-term investments    |  | 100                   | % |  | $             | 2,650  |                          | $ |                 |  | $ | 2,650 
|                                |  |                       |   |  |               |        |                          |   |                  |  |   |       

Cash equivalents consist of instruments with remaining maturities of three months or less at the
date of purchase.

Short-term investments held by the Company are debt securities classified as available-for-sale. The Company invests in
publicly traded, highly liquid securities of entities with credit ratings of A, or better. Unrealized gains and losses, net of related income taxes, on available-for-sale securities are included as a separate component of stockholders equity.
Contractual maturities of available-for-sale securities at June 30, 2009 are due within 12 months.

In accordance with FSP FAS
115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments, the gross unrealized losses and fair value for those investments that were in an unrealized loss position that have been in a continuous loss position as
of June 30, 2009 was immaterial and at December 31, 2008 was zero.

The before-tax net unrealized holding gains (losses) on
available-for-sale investments that have been included in accumulated other comprehensive income (loss) and the before-tax net gains (losses) reclassified from accumulated other comprehensive income (loss) into earnings were
immaterial for all periods presented.

Fair Value Measurements of Financial Instruments

The Companys investment portfolio manager utilizes a third party pricing services, Interactive Data Corporation, to determine the fair value of the
Companys securities subject to SFAS 157. The Company measures its fixed income available-for-sale securities assets at fair value on a recurring basis and has determined that these financial assets were level 1 and level 2 in the fair value
hierarchy. The following table sets forth the Companys financial assets that were accounted for at fair value as of June 30, 2009 (in thousands):



|                                           |  |       |        |                                                             |   |                                            |  |                                        |        |  |   |  
|------------------------------------------ |  | ----- | ------ | ----------------------------------------------------------- | - | ------------------------------------------ |  | -------------------------------------- | ------ |  | - | -
|                                           |  |       |        | Fair Value at Reporting Date Using                         
|                                           |  | Total |        | Quoted prices inactive markets foridentical assets(Level 1) |   | Significant otherobservableinputs(Level 2) |  | Significantunobservableinputs(Level
3)
|Assets:                                    |  |       |        |                                                             |   |                                            |  |                                        |        |  |   |  
|Fixed income available-for-sale securities |  | $     | 19,230 |                                                             | $ |                                           |  | $                                      | 19,230 |  | $ | 
|Money market funds                         |  |       | 3,584  |                                                             |   | 3,584                                      |  |                                        |       |  |   | 
|                                           |  |       |        |                                                             |   |                                            |  |                                        |        |  |   |  
|                                           |  | $     | 22,814 |                                                             | $ | 3,584                                      |  | $                                      | 19,230 |  | $ | 
|                                           |  |       |        |                                                             |   |                                            |  |                                        |        |  |   |  



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NOTE 5  RELATED PARTY TRANSACTIONS

ECI Telecom:

As a result of
the acquisition of Veraz Networks Ltd. and Veraz Networks International in December 2002, at June 30, 2009 ECI Telecom held approximately 26% of the Companys outstanding common stock.

The Company is the exclusive worldwide distributor of a line of voice compression telecommunications products, or DCME, for ECI Telecom under the DCME
Master Manufacturing and Distribution Agreement (DCME Agreement), which was executed in December 2002, and certain agreements relating to third party intellectual property and quality assurance and quality control services. Under the DCME Agreement,
ECI Telecom manufactures or subcontracts the manufacture of all DCME equipment sold by the Company and also provides certain supply, service and warranty repairs. The DCME Agreement is automatically renewed for successive one-year periods unless
earlier terminated and was renewed for the period ending December 31, 2009. The DCME Agreement may only be terminated by ECI Telecom in the event the Company projects DCME revenues of less than $1.0 million in a calendar year, the Company
breaches a material provision of the agreement and fails to cure such breach within 30 days, or the Company becomes insolvent. As result of the DCME agreement with ECI Telecom, the Company does not currently have an independent ability to produce
DCME products and have not entered into arrangements with any third party that would enable the Company to obtain DCME or similar products in the event that ECI Telecom ceases to provide DCME products to the Company. Should ECI Telecom become unable
or unwilling to fulfill its obligations under the DCME Agreement for any reason or if the DCME Agreement is terminated, the Company will need to take remedial measures to manufacture DCME or similar products, which could be expensive, and if such
efforts fail, the Companys business would be materially harmed.

The Company pays ECI Telecom a purchase price for the DCME product
that is computed as a percentage of revenue. The percentage of revenue that the Company pays has remained unchanged during the six months ended June 30, 2009 and year ended 2008. From time to time, prior to fulfillment of the Companys
order for a particular customer, ECI Teleocm has requested that the Company obtain either a letter of credit or accounts receivable insurance to mitigate any collection risk. Amounts recorded under this arrangement are included in DCME Products,
costs of revenue in the condensed consolidated statements of operations.

The Company has historically also contracted with ECI Telecom for
the use of certain of its European subsidiaries for selling and support activities, including for the use of office space and certain employee related expenses and other general administrative expenses. The Company records revenue related to sales
to the subsidiaries either on a sell-in basis or when a binding sales agreement with an end-user has been made, depending on the Companys experience with the individual integrator or reseller. Revenues generated from sales under these
arrangements are included in DCME Product revenues, in the condensed consolidated statements of operations, depending on the nature of the products sold. The Company also reimburses these subsidiaries for certain operating expenses, such as local
sales and marketing support. The Company has also historically contracted with ECI Telecom and certain of its European subsidiaries for local support, technology and administrative services. The Company allocates such expenses between research and
development, sales and marketing, and general and administrative, in the condensed consolidated statements of operations.

The Company had
appointed ECI Telecom as an agent for selling IP and DCME products and services in Russia and other countries from the former Soviet Union. The Company compensated ECI Telecom for agent services in Russia by paying a commission based on sales.
Further, the Company had appointed ECI 2005, an affiliate of ECI Telecom, as a partner to provide services directly to customers in Russia. Effective as of April 30, 2009, ECI Telecom and the Company mutually agreed to terminate the appointment
of ECI Telecom as a selling agent and the appointment of ECI 2005 as partner to provide services. Following termination of the appointment of ECI Telecom as selling agent, the Company is still obligated to pay ECI Telecom agent fees related to
certain specified accounts for any sales completed by October 31, 2009. The Companys Russian customers purchased installation, training and maintenance services from ECI 2005. To the extent ECI 2005 needed assistance in providing
installation, training and maintenance services to its customers in Russia, these services were available from the Company. The Company also reimbursed ECI 2005 for the costs associated with the services activity. In November 2007, the Company
entered into a sublease agreement with ECI 2005 for office space located in Moscow. The sublease term was for an eleven month period, and the monthly rent was equal to approximately $15,000. The sublease was extended and finally termed as of
March 31, 2009. ECI 2005 rent was included in services and cost of revenues in the condensed consolidated statements of operations for the three and six months ended June 30, 2009.

In January 2008, the Company entered into a sublease agreement with ECI Telecom that commenced on May 1, 2008 for office space
of 5,950 square feet in Florida. The Company has the right to terminate this sublease on the date immediately preceding the fourth, sixth or eighth annual anniversary of the commencement date and the 12thanniversary if this sublease is extended pursuant to its terms. The monthly rent for this sublease is approximately
$13,000. For the three and six months ended June 30, 2009, ECI Telecom rent is included in general and administrative expense in the condensed consolidated statements of operations. Additionally, the Company entered into a consulting agreement
with ECI Telecom for ECI personnel to provide certain logistical support services at the Florida facility but has terminated that agreement effective as of June 30, 2009.



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Effective June 30, 2009, the Company and ECI Telecom entered into a Settlement Agreement and General
Release (Settlement Agreement) relating to a variety of outstanding commercial issues between the parties. The Settlement Agreement effected a mutual release of both the outstanding commercial issues that gave rise to the notice of default and
certain other claims as of the date of the Settlement Agreement. ECI Telecom had previously provided the Company with a purported notice of default under the DCME Agreement as ECI Telecom believed that the Company was past due on payments, and owed
additional royalties on sales of DCME related products among other items and these matters were resolved pursuant to the Settlement Agreement. The Settlement Agreement did not materially impact the Companys financial statements.

Persistent Systems Pvt Ltd:

On October 1, 2003, the Company entered into a Contractor Agreement with Persistent Systems Pvt. Ltd., or Persistent. Under the Contractor Agreement, Persistent provided independent contract research and development employees located
at Persistents facility in Pune, India. At the end of the initial two-year period of the Contractor Agreement, the Company exercised its option under the contract to convert some of the Persistent employees performing services under the
Contractor Agreement into full-time Veraz employees. In May of 2006, the Company entered into an addendum to the Contractor Agreement formalizing the transfer arrangements of certain employees of Persistent during the period ending in December 2006.
In November of 2005, Promod Haque, the Companys Chairman, joined the board of directors of Persistent when Norwest Venture Partners, with whom Mr. Haque is affiliated, made an equity investment in Persistent that resulted in Norwest
Venture Partners owning greater than 10% of Persistents outstanding capital stock. In 2008, as part of the restructuring activity, the Company cancelled most of the contracted services with Persistent, but has retained some services for a
limited transition period. During the three months ended June 30, 2009 and 2008, the Company incurred related party research and development expenses owed to Persistent under the Contractor Agreement of $9,000 and $0.3 million, respectively.
During the six months ended June 30, 2009 and 2008, the Company incurred related party research and development expenses owed to Persistent under the Contractor Agreement of $43,000 and $0.7 million, respectively. As of June 30, 2009 and
December 31, 2008, the Company had related party payables to Persistent in the amount of approximately $29,000 and $37,000, respectively.

NOTE 6
 INVENTORIES

The following tables provide details of inventories as of June 30, 2009 and December 31, 2008 (in
thousands):



|                                        |  |              |       |                  |   |       
|--------------------------------------- |  | ------------ | ----- | ---------------- | - | ------
|                                        |  | June 30,2009 |       | December 31,2008
|Finished products                       |  | $            | 2,159 |                  | $ | 4,217 
|Work in process at customers locations |  |              | 4,153 |                  |   | 5,060 
|Raw material and components             |  |              | 3,504 |                  |   | 3,007 
|                                        |  |              |       |                  |   |       
|                                        |  | $            | 9,816 |                  | $ | 12,284
|                                        |  |              |       |                  |   |       

Inventories are stated at the lower of cost or market value on a first-in, first-out basis. The
Company periodically reviews its inventories and reduces the carrying value to the estimated market value, if lower, based upon assumptions about future demand and market conditions.

When the Companys products have been shipped, but not yet installed or accepted, the revenue associated with the product has been deferred as a
result of not meeting the revenue recognition criteria for delivery (see Note 3(c)). During the period between product shipment and acceptance, the Company recognizes all labor-related expenses as incurred but defers the cost of the related
equipment in accordance with AICPA Accounting Research Bulletin (ARB) No. 43, Restatement and Revision of Accounting Research Bulletins, Chapter 4: Inventory Pricing, or APB 43, and classifies the deferred costs as Work in process
at customers locations within the inventories line item. These deferred costs are then expensed in the same period that the deferred revenue is recognized as revenue (generally upon customer acceptance). In arrangements for which revenue
recognition is limited to amounts due and payable, or of cash received, all related inventory costs are expensed at the date of customer acceptance.

NOTE 7  STOCK-BASED COMPENSATION

The following table summarizes the effects of stock-based compensation resulting
from the application of SFAS 123R (in thousands):



|                                       |  |                            |       |                          |   |       |  |      |       |  |   |      
|-------------------------------------- |  | -------------------------- | ----- | ------------------------ | - | ----- |  | ---- | ----- |  | - | -----
|                                       |  | Three Months EndedJune 30, |       | Six Months EndedJune 30,
|                                       |  | 2009                       |       | 2008                     |   | 2009  |  | 2008
|Cost of revenues                       |  | $                          | 246   |                          | $ | 242   |  | $    | 507   |  | $ | 455  
|Research and development               |  |                            | 360   |                          |   | 413   |  |      | 742   |  |   | 758  
|Sales and marketing                    |  |                            | 278   |                          |   | 335   |  |      | 582   |  |   | 666  
|General and administrative             |  |                            | 168   |                          |   | 233   |  |      | 373   |  |   | 424  
|                                       |  |                            |       |                          |   |       |  |      |       |  |   |      
|Total stock-based compensation expense |  | $                          | 1,052 |                          | $ | 1,223 |  | $    | 2,204 |  | $ | 2,303
|                                       |  |                            |       |                          |   |       |  |      |       |  |   |      



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Stock Options:

During the three and six months ended June 30, 2009, the Company granted zero stock options. During the three and six months ended June 30, 2008, the Company granted zero and 120,000 stock options,
respectively.

During each of the three months ended June 30, 2009 and 2008, the compensation expense on stock options, including
deferred stock-based compensation, amounted to $0.4 million. During the six months ended June 30, 2009 and 2008, the compensation expense on stock options, including deferred stock-based compensation, amounted to $0.8 million and $0.9 million,
respectively.

Restricted Stock Awards:

During the three months ended June 30, 2009 and 2008, the Company granted 8,175 and 10,000 restricted stock units, or RSUs, respectively. For the three months ended June 30, 2009 and 2008, the weighted
average grant date fair value per share of RSUs granted was $0.90 and $1.97, respectively. During the six months ended June 30, 2009 and 2008, the Company granted 491,750 and 1,059,105 of RSUs, respectively. For the six months ended
June 30, 2009 and 2008, the weighted-average grant date fair value per share of RSUs granted was $0.48 and $4.83, respectively.

During the three months ended June 30, 2009 and 2008, the compensation expense on restricted stock based awards amounted to $0.7 million and $0.8 million, respectively. During the six months ended June 30, 2009 and 2008, the
compensation expense on restricted stock based awards amounted to $1.5 million and $1.4 million, respectively.

Restricted stock activity
as of June 30, 2009 was as follows:



|                               |  |                 |   |  |                                      |     
|------------------------------ |  | --------------- | - |  | ------------------------------------ | ----
|                               |  | Number ofShares |   |  | WeightedAverage GrantDate Fair Value
|Nonvested at December 31, 2008 |  | 1,616,030       |   |  | $                                    | 3.75
|Granted                        |  | 491,750         |   |  | $                                    | 0.48
|Vested                         |  | (502,727        | ) |  | $                                    | 4.83
|Forfeited or expired           |  | (18,500         | ) |  | $                                    | 4.55
|                               |  |                 |   |  |                                      |     
|Nonvested at June 30, 2009     |  | 1,586,553       |   |  | $                                    | 2.39
|                               |  |                 |   |  |                                      |     

As of June 30, 2009, 1,586,553 million shares of restricted stock based awards were
outstanding and unvested, with an aggregate intrinsic value of $1.3 million.

Most of the RSUs vest over four years in equal installments
on each of the first through fourth anniversaries of the vesting commencement date. Upon vesting, the RSUs will convert into an equivalent number of shares of common stock. The amount of the expense related to RSUs is based on the closing market
price of the Companys common stock on the date of grant and is amortized on a straight-line basis over the requisite service period.

Stock Award Activity:

A summary of the Companys stock award activity and related information for the six months ended
June 30, 2009 is set forth in the following table:



|                                                     |  |                                   |   |  |                             |   |  |                              |      |                                           |      |                         |   |        
|---------------------------------------------------- |  | --------------------------------- | - |  | --------------------------- | - |  | ---------------------------- | ---- | ----------------------------------------- | ---- | ----------------------- | - | -------
|                                                     |  | Number ofSharesAvailable forGrant |   |  | Number ofOptionsOutstanding |   |  | WeightedAverageExercisePrice |      | WeightedAverageContractualLife (in years) |      | AggregateIntrinsicValue
|Balance at December 31, 2008                         |  | 320,161                           |   |  | 6,094,423                   |   |  | $                            | 1.54 |                                           | 6.69 |                         | $ | 127,358
|Authorized                                           |  | 1,285,651                         |   |  |                             |   |  |                              |      |                                           |      |                         |   |        
|Restricted stock units granted                       |  | (491,750                          | ) |  |                             |   |  |                              |      |                                           |      |                         |   |        
|Restricted stock units cancelled and forfeited       |  | 18,500                            |   |  |                             |   |  |                              |      |                                           |      |                         |   |        
|Options granted                                      |  |                                  |   |  |                             |   |  |                              |      |                                           |      |                         |   |        
|Options exercised                                    |  |                                  |   |  | (87,933                     | ) |  | $                            | 0.35 |                                           |      |                         |   |        
|Options cancelled and forfeited                      |  | 88,229                            |   |  | (88,229                     | ) |  | $                            | 1.64 |                                           |      |                         |   |        
|                                                     |  |                                   |   |  |                             |   |  |                              |      |                                           |      |                         |   |        
|Balance at June 30, 2009                             |  | 1,220,791                         |   |  | 5,918,261                   |   |  | $                            | 1.55 |                                           | 6.30 |                         | $ | 739,753
|Options vested and expected to vest at June 30, 2009 |  |                                   |   |  | 5,858,531                   |   |  | $                            | 1.55 |                                           | 6.28 |                         | $ | 739,753
|Options exercisable at June 30, 2009                 |  |                                   |   |  | 4,487,968                   |   |  | $                            | 1.33 |                                           | 5.53 |                         | $ | 739,753



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##### Table of Contents

NOTE 8  NET LOSS ALLOCABLE TO COMMON STOCKHOLDERS PER SHARE

Net loss allocable to common stockholders per share is computed in accordance with Statement of Financial Accounting Standard No. 128, Earnings
per Share, or SFAS 128, by dividing the net loss allocable to common stockholders by the weighted average number of shares of common stock outstanding. The Company has outstanding stock options and restricted stock units, which have not been
included in the calculation of diluted net loss allocable to common stockholders per share because to do so would be anti-dilutive. As such, the numerator and the denominator used in computing both basic and diluted net loss allocable to common
stockholders per share for each period are the same.

Basic and diluted net loss per share were calculated as follows (in thousands, except
per share data):



|                                                                     |  |                            |        |   |                          |   |         |      |  |   |        |   |  |   |         |  
|-------------------------------------------------------------------- |  | -------------------------- | ------ | - | ------------------------ | - | ------- | ---- |  | - | ------ | - |  | - | ------- | -
|                                                                     |  | Three Months EndedJune 30, |        |   | Six Months EndedJune 30, |  
|                                                                     |  | 2009                       |        |   | 2008                     |   |         | 2009 |  |   | 2008   |  
|Numerator:                                                           |  |                            |        |   |                          |   |         |      |  |   |        |   |  |   |         |  
|Net loss                                                             |  | $                          | (2,925 | ) |                          | $ | (11,592 | )    |  | $ | (5,933 | ) |  | $ | (14,686 | )
|Denominator:                                                         |  |                            |        |   |                          |   |         |      |  |   |        |   |  |   |         |  
|Basic weighted-average shares:                                       |  |                            |        |   |                          |   |         |      |  |   |        |   |  |   |         |  
|Weighted-average shares used in computing basic net loss per share   |  |                            | 43,390 |   |                          |   | 41,998  |      |  |   | 43,278 |   |  |   | 41,696  |  
|                                                                     |  |                            |        |   |                          |   |         |      |  |   |        |   |  |   |         |  
|Basic net loss per common share                                      |  | $                          | (0.07  | ) |                          | $ | (0.28   | )    |  | $ | (0.14  | ) |  | $ | (0.35   | )
|                                                                     |  |                            |        |   |                          |   |         |      |  |   |        |   |  |   |         |  
|                                                                     |  |                            |        |  
|Diluted weighted-average shares:                                     |  |                            |        |   |                          |   |         |      |  |   |        |   |  |   |         |  
|Weighted-average shares used in computing diluted net loss per share |  |                            | 43,390 |   |                          |   | 41,998  |      |  |   | 43,278 |   |  |   | 41,696  |  
|                                                                     |  |                            |        |   |                          |   |         |      |  |   |        |   |  |   |         |  
|Diluted net loss per common share                                    |  | $                          | (0.07  | ) |                          | $ | (0.28   | )    |  | $ | (0.14  | ) |  | $ | (0.35   | )
|                                                                     |  |                            |        |   |                          |   |         |      |  |   |        |   |  |   |         |  
|Anti-dilutive shares excluded from net loss per share calculation    |  |                            | 9,200  |   |                          |   | 3,079   |      |  |   | 11,604 |   |  |   | 3,574   |  
|                                                                     |  |                            |        |   |                          |   |         |      |  |   |        |   |  |   |         |  

NOTE 9  SEC INVESTIGATION

On April 3, 2008, the Company received a letter from the SEC informing it that the SEC was conducting a confidential inquiry, or SEC Inquiry, and
requesting that the Company voluntarily produce documents in connection with the SEC Inquiry. On April 5, 2008, the Companys Board of Directors appointed a special committee, or Special Committee, consisting entirely of independent
directors to cooperate with the SEC in connection with the SEC Inquiry and to oversee an independent investigation into the matters raised by the SEC Inquiry. Keker & Van Nest LLP, or Independent Counsel, was retained as independent counsel
to conduct an investigation. Keker & Van Nest LLP had not previously represented the Company in any matters. On July 17, 2008, Independent Counsel reported their findings to representatives of the SEC and, on July 21, 2008,
provided to the SEC copies of certain documents collected by Independent Counsel during the course of its independent investigation. The Company provided all the requested documents to SEC. As a result of the SEC Inquiry, the Company was not able to
file timely its quarterly report on Form 10-Q for the first quarter ended March 31, 2008 and, on May 21, 2008, the Company received a notification letter from NASDAQ stating that its common stock may be subject to delisting in accordance
the NASDAQ rules. The Companys management attended a hearing on July 24, 2008 to request that NASDAQ grant the Companys request for an extension of time in which to comply with the NASDAQ listing standards. On July 29, 2008,
the Company filed its quarterly report on Form 10-Q for the quarter ended March 31, 2008 and now believes it is in compliance with all SEC filing requirements. Additionally, on August 6, 2008, the Company received notification from
NASDAQ informing the Company that the NASDAQ hearing panel had determined to continue listing the Companys common stock on the NASDAQ.

During the course of the SEC inquiry, the Company became aware of allegations of misconduct relating to the Companys business practices in the Asia Pacific region that, if true, may constitute violations of the U.S. Foreign Corrupt
Practices Act, or FCPA. These potential FCPA violations include alleged misconduct related to a Chinese customer and an Indonesian customer. In addition, the Special Committee was informed and made the Company aware of allegations of possible fraud
perpetrated against the Company and violations of the Companys Code of Conduct and Ethics, or Policy. The allegations of possible fraud and violations of the Policy involve payments from a reseller to certain non-management employees (whose
employment has since been terminated) and other potentially inappropriate commercial relationships between non-management employees and a reseller.

On January 27, 2009, the Company received a subpoena from the SEC requesting documents related to the Companys business practices in Vietnam. In connection with such investigation, the Company is producing documents and providing
testimony relevant to the SECs investigation. The level of sales to customers in Vietnam has historically been a minor percentage of the Companys overall business and represented zero, 1% and 1% of the Company total revenues during the
three and six months ended June 30, 2009 and the year ended December 31, 2008, respectively.



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At the current time, the Company cannot determine the probability of or quantify the amount of any fines
or penalties associated with the SEC matters discussed above.

There were no expenses incurred related to SEC investigation in the three
and six months ended June 30, 2009. During the three and six months ended June 30, 2008, the Company had incurred SEC investigation expenses of $2.1 million each, respectively. To date, the Company has incurred expenses related to the SEC
investigation of approximately $2.5 million.

NOTE 10  INCOME TAXES

The Company recorded an income taxes benefit of $(0.2) million and $(0.6) million for the three months ended June 30, 2009 and 2008, respectively.
The Company recorded income taxes benefit of $(0.2) million and $(0.5) million for the six months ended June 30, 2009 and 2008, respectively. The tax benefit during the three and six months ended June 30, 2009 and 2008 were primarily
attributable to the Companys loss on operations in Israel. The Company has performed an assessment of the realizability of these deferred tax assets and believes it is more likely than not that this operation will generate sufficient future
taxable income to support the realization of these deferred tax assets.

The Company files U.S. federal income tax returns as well as
income tax returns in various states and foreign jurisdictions. The Company may be subject to examination for calendar years from 2003 through 2008. Additionally, any net operating losses that were generated in those years may also be subject to
examination in the tax year the net operating loss is utilized. In addition, the Company may be subject to examination in the following foreign jurisdictions for the years specified: Brazil for 2006 through 2008, France for 2006 through 2008, India
for 2005 through 2008, Israel for 2003 through 2008, Singapore for 2005 through 2008, Russia for 2006 and 2008, and the United Kingdom for 2005 through 2008.

The American Recovery and Reinvestment Act of 2009, or Recovery Act was signed into law on February 17, 2009, and among other things extended the ability to claim additional first year depreciation, extended the
ability to trade bonus and accelerated depreciation for otherwise deferred tax credits, and reduced the limitation on remuneration paid to executives from $1 million to $0.5 million. The change in the law for the amount of remuneration paid to
executives will have no impact to our tax expense during 2009 and the refundable credit may provide an immaterial benefit during the year as assets are placed into service.

On February 20, 2009, California also enacted new legislation, which among other things provides for the election of single factor apportionment
formula beginning in 2011. This legislation had no impact to the Company during the three months ended June 30, 2009 because of the valuation allowance recorded against our state deferred tax assets.

NOTE 11  SEGMENT AND GEOGRAPHIC INFORMATION

Statement of Financial Accounting Standard No. 131, Disclosures about Segments of an Enterprise and Related Information, or SFAS 131, establishes standards for reporting information about operating segments. Operating segments
are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision making group, in deciding how to allocate resources and in assessing
performance. The Companys chief operating decision maker is the Companys Chief Executive Officer. The Chief Executive Officer reviews financial information presented on a consolidated basis, accompanied by information about revenue by
geographic region for purposes of allocating resources and evaluating financial performance. The Company has one business activity and there are no segment managers who are held accountable for operations, operating results and plans for levels or
components below the consolidated unit level. Accordingly, the Company is considered to be in a single reporting segment and operating unit structure. Revenue by geography is based on the billing address of the customer. The following table sets
forth revenue and long-lived assets by geographic area (in thousands):



|                                                               |  |          |        |          |   |        |  |      |        |  |   |       
|-------------------------------------------------------------- |  | -------- | ------ | -------- | - | ------ |  | ---- | ------ |  | - | ------
|                                                               |  | June 30, |        | June 30,
|                                                               |  | 2009     |        | 2008     |   | 2009   |  | 2008
|Revenues:                                                      |  |          |        |          |   |        |  |      |        |  |   |       
|Europe, Middle East and Africa                                 |  | $        | 7,618  |          | $ | 8,287  |  | $    | 16,263 |  | $ | 23,312
|North America                                                  |  |          | 2,544  |          |   | 3,412  |  |      | 5,714  |  |   | 7,956 
|Asia Pacific and India                                         |  |          | 2,383  |          |   | 1,715  |  |      | 7,931  |  |   | 7,153 
|Caribbean and Latin America                                    |  |          | 4,275  |          |   | 2,853  |  |      | 7,863  |  |   | 5,729 
|                                                               |  |          |        |          |   |        |  |      |        |  |   |       
|                                                               |  | $        | 16,820 |          | $ | 16,267 |  | $    | 37,771 |  | $ | 44,150
|                                                               |  |          |        |          |   |        |  |      |        |  |   |       
|Foreign countries which contributed more than 10% of revenues: |  |          | Brazil |          |   | Russia |  |      | Brazil |  |   | Russia



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##### Table of Contents

|                        |  |                            |        |                          |   |        |  |      |        |  |   |       
|----------------------- |  | -------------------------- | ------ | ------------------------ | - | ------ |  | ---- | ------ |  | - | ------
|                        |  | Three Months EndedJune 30, |        | Six Months EndedJune 30,
|                        |  | 2009                       |        | 2008                     |   | 2009   |  | 2008
|Sales originating from: |  |                            |        |                          |   |        |  |      |        |  |   |       
|United States           |  | $                          | 6,385  |                          | $ | 7,527  |  | $    | 14,517 |  | $ | 21,137
|Israel                  |  |                            | 6,161  |                          |   | 7,704  |  |      | 14,321 |  |   | 19,550
|Other foreign countries |  |                            | 4,274  |                          |   | 1,036  |  |      | 8,933  |  |   | 3,463 
|                        |  |                            |        |                          |   |        |  |      |        |  |   |       
|                        |  | $                          | 16,820 |                          | $ | 16,267 |  | $    | 37,771 |  | $ | 44,150
|                        |  |                            |        |                          |   |        |  |      |        |  |   |       



|                        |  |              |       |                  |   |      
|----------------------- |  | ------------ | ----- | ---------------- | - | -----
|                        |  | June 30,2009 |       | December 31,2008
|Long-lived assets, net: |  |              |       |                  |   |      
|United States           |  | $            | 1,186 |                  | $ | 1,588
|Israel                  |  |              | 2,329 |                  |   | 2,613
|Other foreign countries |  |              | 461   |                  |   | 434  
|                        |  |              |       |                  |   |      
|                        |  | $            | 3,976 |                  | $ | 4,635
|                        |  |              |       |                  |   |      



|ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|------- | -------------------------------------------------------------------------------------

The following discussion and analysis should be read in conjunction with our Condensed Consolidated Financial Statements and Notes thereto included in Part 1, Item 1 of this Quarterly Report on Form 10-Q and
our Consolidated Financial Statements and Notes thereto for the year ended December 31, 2008, in our Annual Report on Form 10-K, filed with the Securities and Exchange Commission on March 12, 2009. The discussion in this Quarterly Report
on Form 10-Q contains forward-looking statements that involve risks and uncertainties, such as statements of our future financial operating results, sufficiency of our cash resources, revenue estimations, plans, objectives, expectations and
intentions. In some cases, you can identify forward-looking statements by terms such as anticipates, believes, could, estimates, expects, intends, may,
plans, potential, predicts, projects, should, will, would and similar expressions intended to identify forward-looking statements. Forward-looking statements reflect
our current views with respect to future events, are based on assumptions and are subject to risks, uncertainties and other important factors. Our actual results could differ materially from those discussed here. See Risk Factors in
Item 1A of Part II for factors that could cause future results to differ materially from any results expressed or implied by these forward-looking statements. Given these risks, uncertainties and other important factors, you should not place
undue reliance on these forward-looking statements, which speak only as of the date hereof. Except as required by law, we assume no obligation to update any forward- looking statements publicly, or to update the reasons actual results could differ
materially from those anticipated in any forward-looking statements, even if new information becomes available in the future.

Overview

We are a leading global provider of voice infrastructure solutions for established and emerging wireline and wireless service
providers. Service providers use our products to transport, convert and manage data and voice traffic both over legacy TDM networks and IP networks, while enabling VoIP and other multimedia services. Our product portfolio consists of bandwidth
optimization and NGN switching solutions. Our bandwidth optimization products consist of our I-Gate 4000 family of media gateways, our Secure Communication software, and our DTX-600 DCME product for voice compression over legacy TDM networks. Our
NGN switching solution consists of our ControlSwitch, an IP softswitch and service delivery platform comprised of numerous IMS-compatible software modules, our Network-adaptive Border Controller, our I-Gate 4000 EDGE SIP Gateway, and our I-Gate 4000
family of media gateways. Our portfolio of products can significantly reduce the cost to build and operate voice services compared to traditional alternatives and other NGN solutions. In addition, our products offer a standards-compliant platform
that enables service providers to increase their revenues through the rapid creation and delivery of new services. We also offer services consisting of hardware and software maintenance and support, installation, training and other professional
services.

We outsource the manufacturing of our hardware products. Our I-Gate 4000 media gateways are manufactured for us by Flextronics.
We buy our DCME products from ECI Telecom Ltd. which subcontracts the manufacturing to Flextronics. This enables us to focus mainly on the design, development, sales and marketing of our products and lowers our capital requirements. However, our
ability to bring new products to market, fulfill customer orders and achieve long-term growth depends on our ability to maintain sufficient technical personnel and obtain necessary external subcontractor capacity.

We sell our products primarily through a direct sales force and also through indirect sales channels.



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Other Matters

On April 3, 2008, we received a letter from the SEC informing us that the SEC was conducting a confidential informal inquiry into the Company. In response to the inquiry, our Board of Directors appointed a special investigation
committee composed of independent directors to cooperate with the SEC in connection with such inquiry and to perform our own investigation of the matters surrounding the inquiry. The special investigation committee, in turn, retained independent
counsel to perform an internal investigation. On July 17, 2008, Independent Counsel reported their findings to representatives of the SEC and subsequently provided all the requested documents to the SEC. On January 27, 2009, we received a
subpoena from the SEC indicating that it had commenced a formal investigation into matters related to our business practices in Vietnam. In connection with such subpoena, we are producing documents and providing testimony relevant to the SECs
investigation. The level of sales to customers in Vietnam has historically been a minor percentage of the our overall business and represented zero, 1% and 1% of our total revenues during the three and six months ended June 30, 2009 and the
fiscal year ended December 31, 2008, respectively.

At the current time, we cannot determine the probability of or quantify the amount
of any fines or penalties associated with the SEC matters discussed above. For more information regarding the SEC matters discussed above, see Note 9 to our condensed consolidated financial statements elsewhere in this Quarterly Report.

We are the exclusive worldwide distributor of a line of voice compression telecommunications products, or DCME, for ECI Telecom under the DCME
Agreement, which was executed in December 2002, and certain agreements relating to third party intellectual property and quality assurance and quality control services. Under the DCME Agreement, ECI Telecom manufactures or subcontracts the
manufacture of all DCME equipment sold by us and also provides certain supply, service and warranty repairs. The DCME Agreement is automatically renewed for successive one-year periods unless earlier terminated and was renewed for the period ending
December 31, 2009. Effective June 30, 2009, the Company and ECI Telecom entered into a Settlement Agreement and General Release (Settlement Agreement) relating to a variety of outstanding commercial issues between the parties. The Settlement
Agreement effected a mutual release of both the outstanding commercial issues that gave rise to the notice of default and certain other claims as of the date of the Settlement Agreement. ECI Telecom had previously provided the Company with a
purported notice of default under the DCME Agreement as ECI Telecom believed that the Company was past due on payments, and owed additional royalties on sales of DCME related products among other items and these matters were resolved pursuant to the
Settlement Agreement. The Settlement Agreement did not materially impact the Companys financial statements.

Critical Accounting Policies and
Estimates

There have been no significant changes to our critical accounting policies and estimates during the three and six months
ended June 30, 2009, as compared to the previous disclosures in managements discussion and analysis of financial condition and results of operations included in our Annual Report on Form 10-K, filed with the Securities and Exchange
Commission on March 12, 2009.

Results of Operations

Comparison of Three Months Ended June 30, 2009 and 2008

Revenues (amount in thousands).



|                               |  |                             |        |                           |        |   |  |                         |                           |  |            |   |  |   |       |   |  |     |   
|------------------------------ |  | --------------------------- | ------ | ------------------------- | ------ | - |  | ----------------------- | ------------------------- |  | ---------- | - |  | - | ----- | - |  | --- | --
|                               |  | Three Months Ended June 30, |        |                           |        |   |  |                         |                          
|                               |  | 2009                        |        |                           | 2008   |   |  |                         |                           |  |            |  
|                               |  |                             |        | Percentageof TotalRevenue |        |   |  |                         | Percentageof TotalRevenue |  |            |   |  |   |       |  
|                               |  |                             |        |                           |        |   |  | Period-to-Period Change |                          
|                               |  | Amount                      |        |                           | Amount |   |  | Amount                  |                           |  | Percentage |  
|Revenues:                      |  |                             |        |                           |        |   |  |                         |                           |  |            |   |  |   |       |   |  |     |   
|IP Products                    |  | $                           | 9,955  |                           | 59     | % |  | $                       | 9,696                     |  | 60         | % |  | $ | 259   |   |  | 3   | % 
|DCME Products                  |  |                             | 710    |                           | 4      |   |  |                         | 1,239                     |  | 7          |   |  |   | (529  | ) |  | (43 | ) 
|Services                       |  |                             | 6,155  |                           | 37     |   |  |                         | 5,332                     |  | 33         |   |  |   | 823   |   |  | 15  |   
|                               |  |                             |        |                           |        |   |  |                         |                           |  |            |   |  |   |       |   |  |     |   
|Total revenues                 |  | $                           | 16,820 |                           | 100    | % |  | $                       | 16,267                    |  | 100        | % |  | $ | 553   |   |  | 3   | % 
|                               |  |                             |        |                           |        |   |  |                         |                           |  |            |   |  |   |       |   |  |     |   
|Revenue by Geography:          |  |                             |        |                           |        |   |  |                         |                           |  |            |   |  |   |       |   |  |     |   
|Europe, Middle East and Africa |  | $                           | 7,618  |                           | 45     | % |  | $                       | 8,287                     |  | 51         | % |  | $ | (669  | ) |  | (8  | )%
|North America                  |  |                             | 2,544  |                           | 15     |   |  |                         | 3,412                     |  | 21         |   |  |   | (868  | ) |  | (25 | ) 
|Asia Pacific and India         |  |                             | 2,383  |                           | 14     |   |  |                         | 1,715                     |  | 10         |   |  |   | 668   |   |  | 39  |   
|Caribbean and Latin America    |  |                             | 4,275  |                           | 26     |   |  |                         | 2,853                     |  | 18         |   |  |   | 1,422 |   |  | 50  |   
|                               |  |                             |        |                           |        |   |  |                         |                           |  |            |   |  |   |       |   |  |     |   
|Total revenues                 |  | $                           | 16,820 |                           | 100    | % |  | $                       | 16,267                    |  | 100        | % |  | $ | 553   |   |  | 3   | % 
|                               |  |                             |        |                           |        |   |  |                         |                           |  |            |   |  |   |       |   |  |     |   



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IP product revenues marginally increased by 3% as compared with the same period of 2008. Our revenues are
impacted by the timing and amount of bookings that convert into revenue in a period as well as bookings from prior periods which convert into revenue in the same period. Our bookings are affected by a number of factors, including the slowdown in
capital spending in some regions that have placed orders in the past and increased competition in some regions, particularly in the North America region and the Europe, Middle East and Africa region, particularly Russia. As the market continues to
demand more sophisticated communications products, we expect that IP revenues as a percentage of total revenue will continue to increase while concurrently DCME product revenues will continue to decline.

DCME product revenues decreased 43% in the second quarter of 2009 over the same period last year and was the result of the expected continuing decline in
the size of the overall DCME market as customers migrate from traditional voice networks utilizing DCME products over to those using IP products. At this late stage of the product life cycle of this legacy product, the rate of decline of DCME
product revenues will vary from quarter to quarter. We expect our DCME product sales to further decline over time, while there will be some periods where the DCME sales could be higher or lower than our expectations.

Total services revenues increased 15% in the second quarter of 2009 over the same period last year. Our IP services revenues increased to $5.4 million in
the second quarter of 2009 from $4.3 million in the second quarter of 2008 due primarily to increased support and maintenance revenue from a larger IP customer installation base. This increase in IP services revenue was offset by a decrease in DCME
services revenues of $0.2 million, from $1.0 million to $0.8 million in the three months ended June 30, 2008 and 2009, respectively. Over time, as with the DCME product revenues, we expect DCME services revenues to decrease as new DCME
implementations continue to decrease and customers migrate to IP networks.

Revenue by Geography

The Caribbean and Latin America region was primarily responsible for the increase in total revenue for the second quarter as we expanded our products into
new countries within the region, particularly Brazil which increased total revenues by 175% in the second quarter of 2009 over the same period last year. The Asia Pacific and India region also increased total revenues by $0.7 million as a result of
continuing market penetration with new and existing customers. While certain regions experienced a revenue increase, we also experienced a corresponding combined decrease in revenues of $1.5 million in the North America, Europe, Africa and the
Middle East regions. The decrease in the Middle East region was primarily due to a decline in revenues from Russia of 75% for the quarter ended June 30, 2009 compared to the same period of 2008. The regional decreases were as a result of the
global recession, which hit customer purchasing patterns in the more established regions of our business particularly in the second quarter of 2009 and from increased competition in certain markets, which is Africa and Latin America. During the
three months ended June 30, 2009, revenues were 15% from North America and 85% international as compared to 21% from North America and 79% international during the three months ended June 30, 2008. Our geographic mix of revenues will vary
significantly on a quarterly basis, dependant on the timing of the completion of projects.

Cost of Revenues and Gross Profit (amount in thousands).



|                       |  |                             |       |                           |        |   |  |                         |                           |  |            |   |  |   |        |   |  |     |   
|---------------------- |  | --------------------------- | ----- | ------------------------- | ------ | - |  | ----------------------- | ------------------------- |  | ---------- | - |  | - | ------ | - |  | --- | --
|                       |  | Three Months Ended June 30, |       |                           |        |   |  |                         |                          
|                       |  | 2009                        |       |                           | 2008   |   |  |                         |                           |  |            |  
|                       |  |                             |       | Percentageof TotalRevenue |        |   |  |                         | Percentageof TotalRevenue |  |            |   |  |   |        |  
|                       |  |                             |       |                           |        |   |  | Period-to-Period Change |                          
|                       |  | Amount                      |       |                           | Amount |   |  | Amount                  |                           |  | Percentage |  
|Cost of Revenues:      |  |                             |       |                           |        |   |  |                         |                           |  |            |   |  |   |        |   |  |     |   
|IP Products            |  | $                           | 4,517 |                           | 45     | % |  | $                       | 4,775                     |  | 49         | % |  | $ | (258   | ) |  | (5  | )%
|DCME Products          |  |                             | 245   |                           | 35     |   |  |                         | 495                       |  | 40         |   |  |   | (250   | ) |  | (51 | ) 
|Services               |  |                             | 2,961 |                           | 48     |   |  |                         | 3,896                     |  | 73         |   |  |   | (935   | ) |  | (24 | ) 
|                       |  |                             |       |                           |        |   |  |                         |                           |  |            |   |  |   |        |   |  |     |   
|Total cost of revenues |  | $                           | 7,723 |                           | 46     | % |  | $                       | 9,166                     |  | 56         | % |  | $ | (1,443 | ) |  | (16 | )%
|                       |  |                             |       |                           |        |   |  |                         |                           |  |            |   |  |   |        |   |  |     |   
|Gross Profit:          |  |                             |       |                           |        |   |  |                         |                           |  |            |   |  |   |        |   |  |     |   
|IP Products            |  | $                           | 5,438 |                           | 55     | % |  | $                       | 4,921                     |  | 51         | % |  | $ | 517    |   |  | 11  | % 
|DCME Products          |  |                             | 465   |                           | 65     |   |  |                         | 744                       |  | 60         |   |  |   | (279   | ) |  | (38 | ) 
|Services               |  |                             | 3,194 |                           | 52     |   |  |                         | 1,436                     |  | 27         |   |  |   | 1,758  |   |  | 122 |   
|                       |  |                             |       |                           |        |   |  |                         |                           |  |            |   |  |   |        |   |  |     |   
|Total gross profit     |  | $                           | 9,097 |                           | 54     | % |  | $                       | 7,101                     |  | 44         | % |  | $ | 1,996  |   |  | 28  | % 
|                       |  |                             |       |                           |        |   |  |                         |                           |  |            |   |  |   |        |   |  |     |   

Cost of Revenues. The total cost of revenues decreased by $1.4 million from the combined
effect of higher margins for our products and services, as well as, lower allocated overhead costs as a result of our restructuring activities in the third quarter of 2008.



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While services revenues increased 15%, the cost of services revenues decreased 24% compared to the same
period in 2008. The decrease was a result of lower salaries and related costs of $0.2 million due to lower headcount from the restructuring activities in the third quarter of 2008, decreased outside consulting and professional services of $0.4
million, reduced travel related costs of $0.2 million and a benefit of $0.2 million from lower overhead allocations. The cost of services revenues will vary from period to period depending on the timing of projects being implemented, which may not
be in the same period in which the corresponding revenue is recognized.

Gross Margin.Gross margin, which is gross profit as a
percentage of revenue, increased to 54% from 44% for the three months ended June 30, 2009 and 2008, respectively. This increase is primarily attributable to the higher margins attained in services revenues in the current quarter, which
increased from 27% in the three months ended June 30, 2008 to 52% in the three months ended June 30, 2009.

Overall IP product
gross margin may fluctuate on a sequential quarter over quarter basis due to changes in the IP product mix and the timing of the recognition of revenue and the associated costs. Typically, IP product revenues from expansion sales will have higher
gross margins than revenues from initial VoIP solution deployments.

DCME product gross margins have remained relatively flat in the second
quarter of 2009 over the same period last year because our hardware costs are a fixed percentage of our customer order amounts, and we anticipate this trend to continue.

The increase in services gross margin in the second quarter of 2009 compared to the same period of 2008 was attributable to higher service revenue mainly from maintenance support due to our increased customer
installation base, our reduced cost structure in 2009 over 2008, and the normal recognition timing differences that occur between services expenses and services revenues.

We expect services expenses to remain fairly constant in the following quarters, with margins continuing to improve as a result of growing services and maintenance revenue throughout the remainder of the year.

Operating Expenses (amount in thousands).



|                              |  |                             |        |                           |        |   |  |                         |                           |  |            |   |  |   |        |   |  |     |   
|----------------------------- |  | --------------------------- | ------ | ------------------------- | ------ | - |  | ----------------------- | ------------------------- |  | ---------- | - |  | - | ------ | - |  | --- | --
|                              |  | Three Months Ended June 30, |        |                           |        |   |  |                         |                          
|                              |  | 2009                        |        |                           | 2008   |   |  |                         |                           |  |            |  
|                              |  |                             |        | Percentageof TotalRevenue |        |   |  |                         | Percentageof TotalRevenue |  |            |   |  |   |        |  
|                              |  |                             |        |                           |        |   |  | Period-to-Period Change |                          
|                              |  | Amount                      |        |                           | Amount |   |  | Amount                  |                           |  | Percentage |  
|Operating Expenses:           |  |                             |        |                           |        |   |  |                         |                           |  |            |   |  |   |        |   |  |     |   
|Research and development, net |  | $                           | 4,343  |                           | 26     | % |  | $                       | 7,262                     |  | 45         | % |  | $ | (2,919 | ) |  | (40 | )%
|Sales and marketing           |  |                             | 5,637  |                           | 34     |   |  |                         | 6,993                     |  | 43         |   |  |   | (1,356 | ) |  | (19 | ) 
|General and administrative    |  |                             | 2,967  |                           | 18     |   |  |                         | 5,690                     |  | 35         |   |  |   | (2,723 | ) |  | (48 | ) 
|                              |  |                             |        |                           |        |   |  |                         |                           |  |            |   |  |   |        |   |  |     |   
|Total operating expenses      |  | $                           | 12,947 |                           | 77     | % |  | $                       | 19,945                    |  | 123        | % |  | $ | (6,998 | ) |  | (35 | )%
|                              |  |                             |        |                           |        |   |  |                         |                           |  |            |   |  |   |        |   |  |     |   

Research and development expenses, net.Research and development expenses consist primarily
of salaries and related compensation for our engineering personnel responsible for design, development, testing and certification of our products. Our research and development efforts have been partially financed through grants from the Office of
the Chief Scientist of the Israel Ministry of Industry and Trade, or OCS. We record grants received from the OCS as a reduction of research and development expenses. Grants received from the OCS were $0.7 million in each of the three months ended
June 30, 2009 and 2008. Of the $2.9 million decrease in research and development expenses, $1.5 million is attributed to decreased employee and related expenses, and $1.0 million pertains to a decrease in outside professional services,
allocated overhead costs, facilities and travel costs. The primary driver of the employee related cost decrease resulted from headcount reductions as part of our restructuring activities in the third quarter of 2008. Headcount associated with
research and development activities decreased 48% as of June 30, 2009 as compared to the same period of 2008. In addition, a $0.3 million reduction was realized in the second quarter of 2009 in research and development expenses from purchasing
less equipment supplies and a decline in depreciation expense from a reduction in capital equipment purchases.

We expect research and
development expenses to remain approximately at the current expenditure levels on an absolute basis during the remaining quarters of 2009, and to decrease as a percentage of total revenues as revenues increase throughout the last half of the year.



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Sales and marketing expenses.Sales and marketing expenses consist primarily of salaries and
related compensation for our personnel, as well as marketing expenses, including attendance at trade shows, participation in trade associations and promotional activities. The $1.4 million decrease in sales and marketing expenses was a result of
lower employee related expenses due to the restructuring that occurred in the third quarter of 2008, including reduction in salaries and benefits of $0.3 million and travel expenses of $0.4 million. Spending on outside services was reduced by $0.4
million as we reduced our outside sales and marketing support services, including certain ECI Telecoms sales and marketing support services. Expenses were $0.2 million lower due to fewer deals that involved sales agents, particularly in
Russia. Also, spending on marketing programs was reduced by $0.3 million. These expense reductions were partially offset by an increase of $0.2 million for customer equipment testing.

We expect sales and marketing expenses to increase throughout the year as sales personnel meet their maximum annual commission tiers. However, sales and
marketing expenses will also be impacted by the nature of sales arrangements which may include agent commissions and related expenses that will increase or decrease expenses based on the usage of third party agents.

General and administrative expenses.General and administrative expenses consist primarily of salaries and related compensation costs for our
executive management, finance personnel, legal and professional services, travel and related expenses, insurance and other overhead costs. Of the $2.7 million decrease in general and administrative expenses, $2.1 million of the difference was a
result of SEC Investigation expenses that were incurred in the second quarter of 2008 and no such SEC Inquiry expense in the second quarter of 2009. The SEC investigation costs in 2008 related to legal fees, costs for our independent auditors as
well as other consultants. Other decreases in general and administrative expenses were $0.3 million in salaries, benefits and related employee costs and $0.2 million in facilities. We do not anticipate incurring expenses from the ongoing SEC
investigation in 2009 to be at the same extent that we did in 2008.

We expect expenses and costs associated with our general and
administrative functions to remain flat on an absolute basis, and to decrease as a percentage of total revenues as revenues increase throughout remainder of the year.

Other income, net.Other income, net consists primarily of interest income earned on cash, cash equivalents and short term investments, foreign currency exchange gains (losses) and collection fees offset by
interest expense and bank charges. Other income, net remained flat at $0.7 million in each of the three months ended June 30, 2009 and 2008. The other income, net was primarily due to a $0.3 million increase in foreign currency exchange gains
on certain balance sheet items that are denominated in foreign currency, as well as less $0.2 million interest income resulting from lower interest rates, and lower cash, cash equivalents and short term investment balances.

Income taxes benefit. Income taxes provided a benefit of $0.2 million and $0.6 million for the three months ended June 30, 2009 and 2008,
respectively. During the three months ended June 30, 2009 the tax benefit attributable to our loss on operations in Israel of $0.6 million was partially offset by a provision of $0.4 million for our other foreign operations which were
profitable. The tax benefit during the three months ended June 30, 2008 was primarily attributable to our loss on operations in Israel. We have performed an assessment of the realizability of our deferred tax assets and believe it is more
likely than not that these operations will generate sufficient future taxable income to support the realization of our deferred tax assets.

Net loss.Net loss was $2.9 million and $11.6 million for the three months ended June 30, 2009 and 2008, respectively. The net loss improved in the three months ended June 30, 2009 compared to the same period of 2008,
primarily from the reduction of operating expenses of $7.0 million from expense control monitoring and the restructuring actions taken in 2008.



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##### Table of Contents

Comparison of Six Months Ended June 30, 2009 and 2008

Revenues (amount in thousands).



|                               |  |                           |        |                           |        |   |  |                         |                           |  |            |   |  |   |        |   |  |     |   
|------------------------------ |  | ------------------------- | ------ | ------------------------- | ------ | - |  | ----------------------- | ------------------------- |  | ---------- | - |  | - | ------ | - |  | --- | --
|                               |  | Six Months Ended June 30, |        |                           |        |   |  |                         |                          
|                               |  | 2009                      |        |                           | 2008   |   |  |                         |                           |  |            |  
|                               |  |                           |        | Percentageof TotalRevenue |        |   |  |                         | Percentageof TotalRevenue |  |            |   |  |   |        |  
|                               |  |                           |        |                           |        |   |  | Period-to-Period Change |                          
|                               |  | Amount                    |        |                           | Amount |   |  | Amount                  |                           |  | Percentage |  
|Revenues:                      |  |                           |        |                           |        |   |  |                         |                           |  |            |   |  |   |        |   |  |     |   
|IP Products                    |  | $                         | 23,005 |                           | 61     | % |  | $                       | 30,440                    |  | 69         | % |  | $ | (7,435 | ) |  | (24 | )%
|DCME Products                  |  |                           | 1,908  |                           | 5      |   |  |                         | 2,815                     |  | 6          |   |  |   | (907   | ) |  | (32 | ) 
|Services                       |  |                           | 12,858 |                           | 34     |   |  |                         | 10,895                    |  | 25         |   |  |   | 1,963  |   |  | 18  |   
|                               |  |                           |        |                           |        |   |  |                         |                           |  |            |   |  |   |        |   |  |     |   
|Total revenues                 |  | $                         | 37,771 |                           | 100    | % |  | $                       | 44,150                    |  | 100        | % |  | $ | (6,379 | ) |  | (14 | )%
|                               |  |                           |        |                           |        |   |  |                         |                           |  |            |   |  |   |        |   |  |     |   
|Revenue by Geography:          |  |                           |        |                           |        |   |  |                         |                           |  |            |   |  |   |        |   |  |     |   
|Europe, Middle East and Africa |  | $                         | 16,263 |                           | 43     | % |  | $                       | 23,312                    |  | 53         | % |  | $ | (7,049 | ) |  | (30 | )%
|North America                  |  |                           | 5,714  |                           | 15     |   |  |                         | 7,956                     |  | 18         |   |  |   | (2,242 | ) |  | (28 | ) 
|Asia Pacific and India         |  |                           | 7,931  |                           | 21     |   |  |                         | 7,153                     |  | 16         |   |  |   | 778    |   |  | 11  |   
|Caribbean and Latin America    |  |                           | 7,863  |                           | 21     |   |  |                         | 5,729                     |  | 13         |   |  |   | 2,134  |   |  | 37  |   
|                               |  |                           |        |                           |        |   |  |                         |                           |  |            |   |  |   |        |   |  |     |   
|Total revenues                 |  | $                         | 37,771 |                           | 100    | % |  | $                       | 44,150                    |  | 100        | % |  | $ | (6,379 | ) |  | (14 | )%
|                               |  |                           |        |                           |        |   |  |                         |                           |  |            |   |  |   |        |   |  |     |   

IP product revenues decreased 24% on lower bookings in the first half of 2009, as compared with
the same period of 2008. The decrease in IP product bookings was a result of the slowdown of the global economy. In addition, less revenue was recognized from prior years bookings on VOIP solutions in the first half of 2009, as compared to
2008. The IP revenues were also impacted as fewer projects were completed and accepted in the first half of 2009 than in the same period of 2008. The timing and amount of bookings is affected by a number of factors, including the slowdown in capital
spending in some regions that have placed orders in the past and increased competition in some regions, particularly in the North America region and the Europe, Middle East and Africa region, and specifically Russia. As the market continues to
demand more sophisticated communications products, we expect that IP revenues as a percentage of total revenue will continue to increase while concurrently DCME product revenues will continue to decline.

DCME product revenues decreased 32% in the first half of 2009 over the same period last year and was the result of the expected continuing decline in the
size of the overall DCME market as customers migrate from traditional voice networks utilizing DCME products over to those increasingly using IP products. At this late stage of the product life cycle of this legacy product, the rate of decline of
DCME product revenues will vary from quarter to quarter. We still expect our DCME product sales to continue to decline over time, while there will be some periods where the DCME sales could be higher or lower than our expectations.

Services revenues increased 18% in the second quarter of 2009 over the same period last year. Our IP services revenues increased to $11.2 million in the
first half of 2009 from $8.4 million in the first half of 2008 due to recognition of revenues from large deals on completed and accepted projects for professional services, and increased support and maintenance from a larger IP customer installation
base. This increase in IP services revenue was offset by a decrease in DCME services revenues of $0.8 million, from $2.5 million to $1.7 million in the six months ended June 30, 2008 and 2009, respectively. Over time, as with the DCME product
revenues, we expect DCME services revenues to decrease as new DCME implementations continue to decrease and customers migrate to next generation networks.

Revenue by Geography:

The decrease in total revenues of $6.4 million primarily resulted from a decrease in sales in the
Europe, Middle East and Africa region, particularly in Russia as it declined 66% for the quarter ended June 30, 2009 compared to the same period of 2008. The other decrease in North America region was due to the economic downturn. There was a
$0.8 million increase in the Asia Pacific and India region as a result of continuing market penetration with new and existing customers which occurred mainly in the second quarter of 2009. The Caribbean and Latin America region experienced a
significant increase due to the expansion of our products into new countries in the region, particularly Brazil which increased total revenues by 298% in the first half of 2009 over the same period last year. During the six months ended
June 30, 2009, revenues were 15% from North America and 85% international as compared to 18% from North America and 82% international during the six months ended June 30, 2008. The geographic mix of revenues will vary significantly on a
quarterly basis, dependant on the timing of the completion of projects.



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##### Table of Contents

Cost of Revenues and Gross Profit (amount in thousands).



|                   |  |                           |        |                           |        |   |  |                         |                           |  |            |   |  |   |        |   |  |     |   
|------------------ |  | ------------------------- | ------ | ------------------------- | ------ | - |  | ----------------------- | ------------------------- |  | ---------- | - |  | - | ------ | - |  | --- | --
|                   |  | Six Months Ended June 30, |        |                           |        |   |  |                         |                          
|                   |  | 2009                      |        |                           | 2008   |   |  |                         |                           |  |            |  
|                   |  |                           |        | Percentageof TotalRevenue |        |   |  |                         | Percentageof TotalRevenue |  |            |   |  |   |        |  
|                   |  |                           |        |                           |        |   |  | Period-to-Period Change |                          
|                   |  | Amount                    |        |                           | Amount |   |  | Amount                  |                           |  | Percentage |  
|Cost of Revenues:  |  |                           |        |                           |        |   |  |                         |                           |  |            |   |  |   |        |   |  |     |   
|IP Products        |  | $                         | 9,951  |                           | 43     | % |  | $                       | 13,183                    |  | 43         | % |  | $ | (3,232 | ) |  | (25 | )%
|DCME Products      |  |                           | 732    |                           | 38     |   |  |                         | 1,080                     |  | 38         |   |  |   | (348   | ) |  | (32 | ) 
|Services           |  |                           | 5,849  |                           | 45     |   |  |                         | 7,834                     |  | 72         |   |  |   | (1,985 | ) |  | (25 | ) 
|                   |  |                           |        |                           |        |   |  |                         |                           |  |            |   |  |   |        |   |  |     |   
|Total revenues     |  | $                         | 16,532 |                           | 44     | % |  | $                       | 22,097                    |  | 50         | % |  | $ | (5,565 | ) |  | (25 | )%
|                   |  |                           |        |                           |        |   |  |                         |                           |  |            |   |  |   |        |   |  |     |   
|Gross Profit:      |  |                           |        |                           |        |   |  |                         |                           |  |            |   |  |   |        |   |  |     |   
|IP Products        |  | $                         | 13,054 |                           | 57     | % |  | $                       | 17,257                    |  | 57         | % |  | $ | (4,203 | ) |  | (24 | )%
|DCME Products      |  |                           | 1,176  |                           | 62     |   |  |                         | 1,735                     |  | 62         |   |  |   | (559   | ) |  | (32 | ) 
|Services           |  |                           | 7,009  |                           | 55     |   |  |                         | 3,061                     |  | 28         |   |  |   | 3,948  |   |  | 129 |   
|                   |  |                           |        |                           |        |   |  |                         |                           |  |            |   |  |   |        |   |  |     |   
|Total gross profit |  | $                         | 21,239 |                           | 56     | % |  | $                       | 22,053                    |  | 50         | % |  | $ | (814   | ) |  | (4  | )%
|                   |  |                           |        |                           |        |   |  |                         |                           |  |            |   |  |   |        |   |  |     |   

Cost of Revenues. The decrease in sales of IP and DCME products resulted in a corresponding
decrease in cost of product revenues, combined also with higher direct margins on revenues. Although overall cost of revenues decreased primarily as a result of the decrease in total revenues, we continue to incur the fixed overhead costs. The
overall decrease in cost of revenues includes the benefit from a correction of an error of $0.2 million that was corrected in the six months ended June 30, 2009 but related to the prior year. We do not believe that correcting the error in
first quarter of 2009 is material to the first half or the expected results for the year 2009.

Although services revenues increased 18%,
the cost of services revenues decreased 25% compared to the same period in 2008. The decrease was a result of lower salaries and related costs of $0.5 million due to lower headcount from the restructuring activities in the third quarter of 2008,
decreased outside professional services of $0.7 million, reduced travel related costs of $0.4 million and a benefit from lower overhead allocations of $0.3 million. The cost of services revenues will vary from period to period depending on the
timing of projects being implemented, which may not be in the same period in which the corresponding revenue is recognized. We expect cost of service revenues to slightly increase as services revenue increases throughout the year.

Gross Margin.Gross margin, which is gross profit as a percentage of revenue, increased to 56% from 50% for the six months ended June 30,
2009 and 2008, respectively. This increase is primarily attributable to the higher margins attained on services revenues in the first half of the year, which increased from 28% in the six months ended June 30, 2008 to 55% in the six months
ended June 30, 2009.

Overall IP product gross margin may fluctuate on a sequential quarter over quarter basis due to changes in the
IP product mix and the timing of the recognition of revenue and the associated costs. Typically, IP product revenues from expansion sales will have higher gross margins than revenues from initial VoIP solution deployments.

DCME product gross margins have remained relatively flat in the first half of 2009 over the same period last year because our hardware costs are a fixed
percentage of our customer order amounts, and we anticipate this trend to continue.

The increase in services gross margin in the first
half of 2009 compared with to the same period of 2008 was attributable to higher services revenue mainly from maintenance support due to our increased customer installation base, the timing of services expenses, which may not be in the same period
as when the services revenues are recognized and our reduced cost structure in 2009 over 2008. We expect our services margins to improve during the second half of 2009 over the corresponding periods in 2008 due to expected growth in our services
revenue in the second half of 2009 as compared to the same period in 2008.



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Operating Expenses (amount in thousands).



|                              |  |                           |        |                           |        |   |  |                         |                           |  |            |   |  |   |         |   |  |     |   
|----------------------------- |  | ------------------------- | ------ | ------------------------- | ------ | - |  | ----------------------- | ------------------------- |  | ---------- | - |  | - | ------- | - |  | --- | --
|                              |  | Six Months Ended June 30, |        |                           |        |   |  |                         |                          
|                              |  | 2009                      |        |                           | 2008   |   |  |                         |                           |  |            |  
|                              |  |                           |        | Percentageof TotalRevenue |        |   |  |                         | Percentageof TotalRevenue |  |            |   |  |   |         |  
|                              |  |                           |        |                           |        |   |  | Period-to-Period Change |                          
|                              |  | Amount                    |        |                           | Amount |   |  | Amount                  |                           |  | Percentage |  
|Operating Expenses:           |  |                           |        |                           |        |   |  |                         |                           |  |            |   |  |   |         |   |  |     |   
|Research and development, net |  | $                         | 9,551  |                           | 25     | % |  | $                       | 15,135                    |  | 34         | % |  | $ | (5,584  | ) |  | (37 | )%
|Sales and marketing           |  |                           | 12,167 |                           | 32     |   |  |                         | 14,799                    |  | 34         |   |  |   | (2,632  | ) |  | (18 | )%
|General and administrative    |  |                           | 5,775  |                           | 15     |   |  |                         | 8,626                     |  | 20         |   |  |   | (2,851  | ) |  | (33 | )%
|                              |  |                           |        |                           |        |   |  |                         |                           |  |            |   |  |   |         |   |  |     |   
|Total operating expenses      |  | $                         | 27,493 |                           | 72     | % |  | $                       | 38,560                    |  | 88         | % |  | $ | (11,067 | ) |  | (29 | )%
|                              |  |                           |        |                           |        |   |  |                         |                           |  |            |   |  |   |         |   |  |     |   

Research and development expenses, net.Research and development expenses consist primarily
of salaries and related compensation for our engineering personnel responsible for design, development, testing and certification of our products. Our research and development efforts have been partially financed through grants from the OCS. We
record grants received from the OCS as a reduction of research and development expenses. Grants received from the OCS was $1.3 million in the six months ended June 30, 2008 compared to $1.1 million for the six months ended June 30, 2009.
The decrease in expense reduction for OCS grant monies received was offset by a decrease in employee and related expenses of $3.0 million and consulting expenses of $1.3 million. The primary driver of the employee related cost decrease resulted from
headcount reductions as part of our restructuring activities in the third quarter of 2008. Headcount associated with research and development activities decreased 48% as of June 30, 2009 as compared to the same period of 2008. Decreases in
direct equipment supplies and depreciation expenses, facilities and lower allocated overhead costs contributed an additional $1.3 million in expense reductions.

We expect research and development expenses to remain approximately at the current expenditure levels on an absolute basis during the remaining quarters of 2009, and to decrease as a percentage of total revenues as
revenues increase throughout the year.

Sales and marketing expenses.Sales and marketing expenses consist primarily of salaries and
related compensation for our personnel, as well as marketing expenses, including attendance at trade shows, participation in trade associations and promotional activities. The $2.6 million decrease in sales and marketing expenses was primarily as a
result of $0.8 million of travel, $0.6 million due to less deals agent commissions particularly in Russia, which has higher agent fees than other regions. Other decreases in sales and marketing expenses were $0.6 million in outside consulting
expenses as a result of cost containment measures, $0.4 million of marketing programs, $0.2 million of recruiting, and $0.1 million of facilities and telecommunications. These expenses decreases were partially offset by an increase in equipment
testing costs of $0.2 million.

We expect sales and marketing expenses to increase throughout the year as sales personnel meet their higher
annual commission tiers. However, sales and marketing expenses will also be impacted by nature of sales arrangements which may include agent commissions and related expenses that will increase or decrease expenses based on the usage of third party
agents.

General and administrative expenses.General and administrative expenses consist primarily of salaries and related
compensation costs for our executive management, finance personnel, legal and professional services, travel and related expenses, insurance and other overhead costs. The general and administrative expenses decreased $2.9 million from $8.6 million in
the six months ended June 30, 2008 to $5.8 million in the six months ended June 30, 2009. Of the $2.9 million decrease in general and administrative expenses, $2.1 million was a result of no SEC investigation costs in the first half of
2009. The SEC investigation costs in 2008 related to legal fees, costs for our independent auditors as well as other consultants. Other decreases in general and administrative expenses were a reduction in allowances for doubtful accounts of $0.7
million, and a decrease of $0.2 million in salaries and benefits. We do not anticipate the expenses from the ongoing SEC investigation in 2009 to the same extent that we experienced in 2008.

We expect expenses and costs associated with our general and administrative functions to remain flat on an absolute basis, and to decrease as a
percentage of total revenues as revenues increase throughout the year.

Other income, net.Other income, net consists primarily of
interest income earned on cash, cash equivalents and short term investments, foreign currency exchange gains (losses) and collection fees offset by interest expense and bank charges. Other income, net, was $0.1 million in the six months ended
June 30, 2009, as compared with other income, net of $1.3 million in the six months ended June 30, 2008. The decrease was primarily due to lower foreign currency exchange gains of $0.6 million in the first six months of 2009, on certain
balance sheet items that are denominated in foreign currency, as well as a decrease of $0.6 million in interest income resulting from lower interest rates, and lower cash, cash equivalents and short term investment balances due to significant use of
cash for normal operating activities.



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Income taxes benefit. Income taxes provided a benefit of $0.2 million and $0.5 million in the six
months ended June 30, 2009 and 2008, respectively. During the six months ended June 30, 2009 the tax benefit attributable to our loss on operations in Israel of $0.6 million was partially offset by a provision of $0.5 million for our other
foreign operations which were profitable. The tax benefit during the six months ended June 30, 2008 were primarily attributable to the Companys loss on operations in Israel. We have performed an assessment of the realizability of our
deferred tax assets and believe it is more likely than not that these foreign operations will generate sufficient future taxable income to support the realization of our deferred tax assets.

Net loss.Net loss was $5.9 million and $14.7 million for the six months ended June 30, 2009 and 2008, respectively. The net loss decreased
in the six months ended June 30, 2009 as compared to the six months ended June 30, 2008, due to decrease in operating expenses of $11.1 million from expense control monitoring and the restructuring actions taken in 2008.

Liquidity and Capital Resources

At June 30,
2009, we had unrestricted cash, cash equivalents and short-term investments of $35.9 million, a decrease from $38.0 million from December 31, 2008.

We anticipate our cash and related balances to increase in aggregate for the next 12 months as revenues increase and operating expenses decrease moderately from savings due to the restructuring completed in 2008. As a
result, we believe that our existing cash, cash equivalents and short-term investments will meet our normal operating and capital expenditure needs for at least the next twelve months.

Operating Activities

Net cash used in our operating activities was $1.8 million and $17.5
million during the six months ended June 30, 2009 and 2008, respectively.

Net cash used in our operating activities in the six months
ended June 30, 2009 was primarily attributable to our net loss of $5.9 million. The amount of cash used related to a decrease in deferred revenues of $1.2 million and decreases in accrued payroll and expenses of $1.5 million, offset by a
decreases in inventories of $2.7 million, accounts receivable of $2.7 million, prepaid expenses and other current assets of $0.7 million and related party, net, by $3.7 million. Further, we incurred non-cash costs of $1.4 million for depreciation
and $2.2 million of stock-based compensation. Our working capital decreased to $44.7 million as of June 30, 2009, from $47.1 million as of December 31, 2008.

Net cash used in our operating activities in the six months ended June 30, 2008 was primarily attributable to our net loss of $14.7 million. We also had an increase in inventories of $3.0 million and decreases in
accounts payable, accrued payroll and expenses in the aggregate amount of $7.5 million. The amount of cash used was offset by a decrease in accounts receivable of $2.6 million, prepaid expenses and other current assets of $1.0 million and an
increase in deferred revenue of $1.0 million. The net cash used in our operating activities were related to our decrease in revenues and the increase in operating expenses. Further, we incurred non-cash expenses of $1.7 million and $2.3 million of
depreciation and stock-based compensation, respectively. Our working capital decreased to $49.3 million as of June 30, 2008, from $60.7 million as of December 31, 2007.

Investing Activities

Net cash used in our investing activities was $14.1 million and $2.0
million during the six months ended June 30, 2009 and 2008.

Investing activities in the six months ended June 30, 2009 consisted
primarily of net purchases of short-term investments of $13.5 million, as well as purchases of property and equipment of $0.6 million.

Investing activities in the six months ended June 30, 2008 consisted primarily of net purchases of short-term investments of $1.0 million as well as purchases of property and equipment of $1.0 million.

Financing Activities

Net cash provided by our
financing activities was $65,000 for the six months ended June 30, 2009 for proceeds received from the exercise of stock options.

Net
cash used in our financing activities in the six months ended June 30, 2008 of $1.3 million was due to repayments of a loan in the amount of $1.8 million offset by proceeds received from the exercise of stock options in the amount of $0.5
million.



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Off-Balance Sheet Arrangements

At June 30, 2009, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have
been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.



|ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|------- | ----------------------------------------------------------

Foreign Currency Risk

The majority of our revenues, costs of sales and expenses, including subcontractor
manufacturing expenses, are denominated in U.S. dollars. However, we do maintain sales and business operations in foreign countries, and part of our revenue is derived from customers in foreign countries. As such, we have exposure to adverse changes
in exchange rates associated with operating expenses, including personnel, facilities and other expenses, of our foreign operations and sales to our customers. If the exchange rate between the U.S. dollar and the New Israeli Shekel and Brazilian
Real would have fluctuated by 10%, in the six months ended June 30, 2009, the effect of our local currency expenses, excluding the impact of any foreign currency forward contracts, would have increased or decreased by $0.9 million.

We are also impacted by assets or liabilities that are denominated in a currency other than a subsidiarys functional currency. Our intercompany
short-term loan with our Brazilian subsidiary is denominated in U.S. dollars, while the Brazilian subsidiarys functional currency is the Brazilian Real. The impact of a change in the foreign exchange rate between the U.S. dollar and the
Brazilian Real during the six months ended June 30, 2009 resulted in the decrease in the amounts payable in Brazilian Real from December 31, 2008, therefore a gain of $0.3 million at June 30, 2009 is recorded in other income. We also
had foreign currency risk related to cash, and accounts receivable that are denominated in local currency for subsidiaries with U.S. dollar functional currencies. At June 30, 2009, we had in cash and accounts receivable amounts in Russian
Rubles, Euros, Indian Rupees and New Israeli Shekel. Due to the impact of changes in foreign currency exchange rates between the U.S. Dollar and these other currencies, we recorded in other income (expense) a net amount of $(0.2) million.

Interest Rate Sensitivity

We
had cash, cash equivalents, restricted cash, and short-term investments totaling $36.5 million at June 30, 2009. These amounts were invested primarily in money market funds and treasury securities. The unrestricted cash and cash equivalents are
held for working capital purposes. We do not enter into investments for trading or speculative purposes. Due to the short-term nature of these investments, we do not believe that a 10% change in interest rates would have a material impact on our
financial position and results of operations. However, declines in interest rates and cash balances will reduce future investment income.

Forward
Contracts

In general, we have operating expenses in foreign currencies and the changes in exchange rates, and in particular a
strengthening or weakening of the U.S. dollar will affect our operating expenses as it is expressed in U.S. dollars when there has been significant volatility in foreign currency exchange rates.

We may enter into foreign currency forward contracts with financial institutions to protect against foreign exchange risks associated with certain
expenses in New Israeli Shekels. Generally, our practice is to hedge a majority of our material foreign exchange exposures, typically for thirty days. A majority of our revenue, expense, and capital purchasing activities are transacted in U.S.
dollars. However, we may choose not to hedge certain foreign exchange exposures for a variety of reasons, including but not limited to immateriality, accounting considerations, and the prohibitive economic cost of hedging particular exposures. Our
forward contracts reduce, but do not always entirely eliminate, the impact of currency exchange rate movements. During the second quarter of 2009, we purchased forward foreign exchange contracts to mitigate the risk of changes in foreign exchange
rates on 75% of the identified New Israeli Shekel expenses. During the six months ended June 30, 2009, the benefit of the forward contracts recorded in other income, net was $0.1 million, respectively.



|ITEM 4T. | CONTROLS AND PROCEDURES
|-------- | -----------------------

Evaluation of Disclosure Controls
and Procedures

We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act)
that are designed to provide reasonable assurance that the information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the
Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding
required disclosure.



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Our management evaluated (with the participation of our Chief Executive Officer and Chief Financial
Officer) our disclosure controls and procedures, and concluded that our disclosure controls and procedures were effective as of June 30, 2009, subject to the limitations described below, to provide reasonable assurance that the information
required to be disclosed by us in reports that we file or submit under the Exchange Act, is recorded, processed, summarized, and reported within the time periods specified in Securities and Exchange Commission rules and forms, and that such
information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Limitations of Disclosure Controls and Procedures and Internal Control Over Financial Reporting

Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our
internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.
Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of
controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected.

Changes in
Internal Control Over Financial Reporting

There have been no changes in our internal control over financial reporting during the
quarter ended June 30, 2009 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION



|ITEM 1. | LEGAL PROCEEDINGS
|------- | -----------------

From time to time we are
involved in legal proceedings arising in the ordinary course of our business. We believe there is no litigation pending that could have, individually or in the aggregate, a material adverse effect on our results of operations or financial condition.



|ITEM 1A. | RISK FACTORS
|-------- | ------------

The risk factors set forth below
include any material changes to, and supersede the description of, the risk factors disclosed in Item 1A of our Annual Report on Form 10-K. Our business faces significant risks, and the risks described below may not be the only risks we face.
It is not possible to predict or identify all such factors and, therefore, you should not consider the following risks to be a complete statement of all the potential risks or uncertainties that we face. If any of these risks occur, our business,
results of operations or financial condition could suffer, the market price of our common stock could decline and you could lose all or part of your investment in our common stock.

Difficult conditions in the domestic and international economies generally may materially adversely affect our business and results of operations and we do not expect these conditions to improve in the near future.

Declining business and consumer confidence and increased unemployment have resulted in an economic slowdown and a global recession.
Continuing market upheavals, including specifically the lack of credit currently available in the market, may have an adverse affect on us because we are dependent on capital budgets and confidence of our customers, and some of our customers are
dependant on obtaining credit to finance purchases of our products. Our revenues are likely to decline in such circumstances. Factors such as business investment, and the volatility and strength of the capital markets affect the business and
economic environment and, ultimately, the amount and profitability of our business. In an economic slowdown characterized by higher unemployment, lower family income, lower corporate earnings, lower business investment, more volatile capital
markets, fewer options to obtain credit and lower consumer spending, the demand for our products could be adversely affected. Adverse changes in the economy and continuing recession, particularly in Russia and domestically, could affect earnings
negatively and could have a material adverse effect on our business, results of operations, and financial condition.



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We received a letter regarding a confidential informal inquiry by the SEC, or SEC Inquiry, and in January 2009
received a subpoena from the SEC as well. Cooperation with such governmental actions has and will continue to cost significant amounts of money and management resources and may result in charges filed against us and in fines or penalties.

On April 3, 2008, we received a letter from the SEC informing us that the SEC is conducting a confidential informal inquiry into the
Company. In response to the inquiry, our Board of Directors appointed a special investigation committee composed of independent directors to cooperate with the SEC in connection with such inquiry and to perform our own investigation of the matters
surrounding the inquiry. The special investigation committee, in turn, retained independent legal counsel to perform an internal investigation. We have incurred, and continue to incur, significant costs related to the SEC Inquiry, which had a
material adverse effect on our financial condition and results of operations in 2008 and may, in future quarters, also have a material adverse effect on our financial condition and results of operations. Further, the SEC Inquiry has caused and may
continue to cause, a diversion of our managements time and attention which could also have a material adverse effect on our financial condition and results of operations.

Further, on January 27, 2009, we received a subpoena from the SEC requesting the production of certain documents relating to the Companys
business practices in Vietnam. We are in the process of responding to this subpoena.

As a result of the SEC Inquiry and the subpoena,
criminal or civil charges could be filed against us and we could be required to pay significant fines or penalties in connection with the SEC Inquiry or other governmental investigations. Any criminal or civil charges by the SEC or other
governmental agency or any fines or penalties imposed by the SEC could materially harm our business, results of operations, financial position and cash flows.

If we fail to comply with the listing requirements of NASDAQ, the price of our common stock and our ability to access the capital markets could be negatively impacted, and our business will be harmed.

Our common stock is currently listed on The NASDAQ Global Market, or NASDAQ. Our stock has traded below $1.00 per share over the last twelve months. The
NASDAQ listing standards provide, among other things, that a company may be delisted if the bid price of its stock drops below $1.00 for a period of 30 consecutive business days. Announcements by us of potential or pending NASDAQ delisting
actions could further depress our stock price and market value and our stock price will need to trade above $1.00 on a sustained basis to remain listed. If our stock price trades below $1.00 for a sustained period, we may seek to implement a reverse
stock split. Reverse stock splits frequently result in a loss in stockholder value as the actual post-split price is often lower than the pre-split price, adjusted for the split. If we fail to comply with the listing standards, our common stock may
be delisted and traded on the over-the-counter bulletin board network. Moving our listing off the NASDAQ could adversely affect the liquidity of our common stock and the delisting of our common stock would significantly affect the ability of
investors to trade our securities and could significantly negatively affect the value and liquidity of our common stock. In addition, the delisting of our common stock could adversely affect our ability to raise capital on terms acceptable to us or
at all. Delisting from NASDAQ could also have other negative results, including the potential loss of confidence by suppliers and employees, the loss of institutional investor interest, and fewer business development opportunities. In addition, we
would be subject to a number of restrictions regarding the registration and qualification of our common stock under federal and state securities laws.

The demand for our solutions depends in large part on continued capital spending in the telecommunications equipment industry. A decline in demand, or a decrease or delay in capital spending by service providers, could have a material
adverse effect on our results of operations. Recent turmoil in the worlds credit markets may have an adverse impact on the capital spending in the markets we serve and, as a result, could have a material adverse effect on our business and our
results of operations.

We are exposed to the risks associated with the volatility of the U.S. and global economies. In October
2008, the global financial markets experienced significant losses due to the failure of many financial institutions. The governments of the United States and several foreign countries instituted bailout plans to assist many financial institutions
through the economic crisis. This crisis results in decreased visibility regarding whether or when there will be sustained growth periods for sales of our products and uncertainty regarding the amount of sales, since our customers may rely on
lending arrangements and/or have limited resources to finance capital technology expenditures. In addition, it is expected that this crisis and economic uncertainty will result in decreased consumer spending, which will likely reduce the need for
our products from customers. Slow or negative growth in the global economy may continue to materially and adversely affect our business, financial condition, and results of operations for the foreseeable future. Our results of operations would be
further adversely affected if we were to experience lower-than-anticipated order levels, cancellations of orders in backlog, extended customer delivery requirements, or pricing pressure as a result of the slowdown.

In addition to the potential decline in capital spending resulting from the volatility in the capital markets, capital spending in the telecommunications
equipment industry has in the past, and may in the future, fluctuate significantly based on numerous factors, including:



| |  |  | capital spending levels of service providers;
| | - |  | ---------------------------------------------



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| |  |  | competition among service providers;
| | - |  | ------------------------------------



| |  |  | pricing pressures in the telecommunications equipment market;
| | - |  | -------------------------------------------------------------



| |  |  | end user demand for new services;
| | - |  | ---------------------------------



| |  |  | service providers emphasis on generating revenues from traditional infrastructure instead of migrating to emerging networks and technologies;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | lack of or evolving industry standards;
| | - |  | ---------------------------------------



| |  |  | consolidation in the telecommunications industry; and
| | - |  | -----------------------------------------------------



| |  |  | changes in the regulation of communications services.
| | - |  | -----------------------------------------------------

We cannot make assurances of the rate or extent to which the telecommunications equipment industry will grow, if at all. Demand for our solutions and our IP products in particular will depend on the magnitude and
timing of capital spending by service providers as they extend and migrate their networks. Furthermore, industry growth rates may not be as forecast, resulting in spending on product development well ahead of market requirements. The
telecommunications equipment industry from time to time has experienced, and appears to be currently experiencing, a downturn. In response to the current downturn, service providers have slowed their capital expenditures, and may also cancel or
delay new developments, reduce their workforces and inventories and take a cautious approach to acquiring new equipment and technologies, which could have a negative impact on our business. A continued downturn in the telecommunications industry may
cause our operating results to fluctuate from period to period, which also may increase the volatility of the price of our common stock and harm our business.

Our success depends in large part on continued migration to an IP network architecture for interactive communications. If the migration to IP networks does not occur or if it occurs more slowly than we expect, our operating results
would be harmed.

Our IP products are used by service providers to deliver premium interactive communications over IP networks. Our
success depends on the continued migration of service providers networks to a single IP network architecture, which depends on a number of factors outside of our control. For example, existing networks include switches and other equipment that
may have remaining useful lives of twenty or more years, and therefore may continue to operate reliably for a lengthy period of time. Other factors that may delay or speed the migration to IP networks include service providers concerns
regarding initial capital outlay requirements, available capacity on legacy networks, competitive and regulatory issues, and the implementation of an enhanced services business model. As a result, service providers may defer investing in products
such as ours that are designed to migrate interactive communications to IP networks. If the migration to IP networks does not occur for these or other reasons, or if it occurs more slowly than we expect, our operating results will be harmed.

Although we undertook a restructuring initiative in 2008 to streamline our operations and to reduce our overall cash burn rate, we have not had
sustained profits and our losses could continue.

In the six months ended June 30, 2009 and the year ended December 31,
2008, we used $1.8 million and $15.8 million, respectively to fund our operating activities and we have never generated sufficient cash to fund our operations. During the third quarter of 2008, we undertook a significant restructuring initiative
involving the elimination of approximately 160 positions through layoffs from all departments throughout our organization, but primarily in the research and development and services organizations, and in our India operations. The objective of the
restructuring was to reduce our overall cash burn rate and streamline our operations while maintaining core research and development capability. There can be no assurance that we will be able to reduce spending as planned or that unanticipated costs
will not occur. Our restructuring efforts to focus on key products may not prove successful due to a variety of factors, including, without limitation, risks that a smaller workforce may have difficulty successfully completing research and
development efforts and adequately monitoring our development and commercialization efforts. In addition, we may, in the future, decide to restructure operations and further reduce expenses by taking such measures as additional reductions in our
workforce and reductions in other spending. Any restructuring places a substantial strain on remaining management and employees and on operational resources, and there is a risk that our business will be adversely affected by the diversion of
management time to the restructuring efforts. There can be no assurance that following this restructuring we will have sufficient cash resources to allow us to fund our operations as planned.

We have not had sustained profits and our losses could continue.

We have experienced significant losses in the past and never sustained profits. For the fiscal years ended December 31, 2005 and 2006, we recorded net losses of approximately $14.3 million and $13.7 million,
respectively. For the year ended December 31, 2007, we achieved net income of approximately $3.4 million and for the year ended December 31, 2008, we recorded net losses of approximately $21.0 million. For the first half of 2009, we
recorded a loss of $5.9 million. As of December 31, 2007 and 2008, our accumulated deficit was $56.2 million and $77.2 million, respectively. We have never generated sufficient cash to fund our operations and can give no assurance that we will
generate net income.



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We face intense competition from the leading telecommunications networking companies in the world as well as from
emerging companies. If we are unable to compete effectively, we might not be able to achieve sufficient market penetration, revenue growth, or profitability.

Competition in the market for our products, and especially our IP products is intense. This market has historically been dominated by established telephony equipment providers such as Alcatel-Lucent, Ericsson LM
Telephone Co., and Nokia-Siemens Networks, all of which are our direct competitors. We also face competition from other telecommunications and networking companies, including Cisco Systems, Inc., and Sonus Networks, Inc. While some of the
established competitors are exiting the market, we are seeing increasingly intense competition from Huawei, who leverages its broad product portfolio and significant financial resources to compete with us for our switching business.

Many of our current and potential competitors have significantly greater selling and marketing, technical, manufacturing, financial, governmental, and
other resources available to them, allowing them to offer a more diversified bundle of products and services. In some cases, our competitors have undercut the pricing of our products or provided more favorable financing terms, which has made us
uncompetitive or forced us to reduce our average selling prices, negatively impacting our margins. Further, some of our competitors sell significant amounts of other products to our current and prospective customers. In addition, some potential
customers when selecting equipment vendors to provide fundamental infrastructure products prefer to purchase from larger, established vendors. Our competitors broad product portfolios, coupled with already existing relationships, may cause our
customers or potential customers to buy our competitors products or harm our ability to attract new customers.

To compete
effectively, we must deliver innovative products that:



| |  |  | provide extremely high reliability, compression rates, and voice quality;
| | - |  | -------------------------------------------------------------------------



| |  |  | scale and deploy easily and efficiently;
| | - |  | ----------------------------------------



| |  |  | interoperate with existing network designs and other vendors equipment;
| | - |  | ------------------------------------------------------------------------



| |  |  | support existing and emerging industry, national, and international standards;
| | - |  | ------------------------------------------------------------------------------



| |  |  | provide effective network management;
| | - |  | -------------------------------------



| |  |  | are accompanied by comprehensive customer support and professional services;
| | - |  | ----------------------------------------------------------------------------



| |  |  | provide a cost-effective and space efficient solution for service providers; and
| | - |  | --------------------------------------------------------------------------------



| |  |  | offer a broad array of services.
| | - |  | --------------------------------

If
we are unable to compete successfully against our current and future competitors, we could experience reduced gross profit margins, price reductions, order cancellations, and loss of customers and revenues, each of which would adversely impact our
business.

We currently conduct a significant amount of business with ECI Telecom Ltd., or ECI. If our relationship with ECI is adversely affected
for any reason our business could be harmed and our results of operations would likely be negatively affected.

At the time we
entered into our agreements with ECI, ECI was our affiliate. Additionally, the agreements were negotiated in the overall context of the 2002 acquisition of certain assets and businesses from ECI. As a result, the terms of our agreements with ECI may
be more or less favorable to us than if they had been negotiated with unaffiliated third parties. Conflicts of interest may arise between ECI and us with respect to any number of matters, including indemnification obligations we have to each other,
labor, tax, employee benefit, and other matters arising from the 2002 share acquisition transaction, intellectual property matters and overlapping business opportunities. ECI may make strategic choices that are not in the best interest of the
company or its stockholders. For example, other than restrictions with respect to ECIs exploitation of DCME products, nothing prohibits ECI from competing with us in other matters or offering VoIP products which compete with ours. We may not
be able to resolve any potential conflicts that may arise between ECI and us, and even if we are able to do so, the resolution may be less favorable than if we were dealing with an unaffiliated third party.



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ECI also owns the technology underlying our DCME product lines. Pursuant to the DCME Master Manufacturing
and Distribution Agreement, or the DCME Agreement, we have secured the right to act as exclusive worldwide distributor of ECIs DCME line of products. Under the DCME Agreement, ECI provides certain supply, service, and warranty obligations, and
manufactures or subcontracts the manufacture of all DCME equipment sold by us. The DCME Agreement may only be terminated by ECI in the event we project DCME revenues of less than $1 million in a calendar year, we breach a material
provision of the DCME Agreement and fail to cure such breach within 30 days, or we become insolvent. Upon the occurrence of one of these events and the election by ECI to terminate the DCME Agreement, ECI would be under no obligation to continue to
contract with us. If the value of the shares held by ECI declines, either by disposition of the shares or a decline in our stock price, ECI may be less likely to enter into agreements with us on reasonable terms or at all. Accordingly, in the event
of the occurrence of one of these termination events, we cannot assure you that the DCME Agreement will be extended or renewed at all or on reasonable commercial terms. We do not currently have an independent ability to produce DCME products and
have not entered into arrangements with any third party that would enable us to obtain DCME or similar products in the event that ECI ceases to provide us with DCME products. Should ECI become unable or unwilling to fulfill its obligations under the
DCME Agreement for any reason or if the DCME Agreement is terminated, we will need to take remedial measures to manufacture DCME or similar products, which could be expensive. If such efforts fail, our business would be materially harmed. In the
event of the occurrence of one of these termination events, we cannot assure you that the DCME Agreement will be extended or renewed at all or on reasonable commercial terms.

If the value of the shares held by ECI declines, either by disposition of the shares or a decline in our stock price, ECI may be less likely to enter
into agreements with us on reasonable terms or at all.

In addition, our relationship with ECI could be adversely affected by divestment of
its shares of our common stock or by declines in our stock price.

ECI beneficially owns a significant percentage of our common stock, which will
allow ECI to significantly influence us and matters requiring stockholder approval and could discourage potential acquisitions of our company.

ECI owns approximately 26% of our outstanding common stock. As a result of its ownership in us, ECI is able to exert significant influence over actions requiring the approval of our stockholders, including change of
control transactions and any amendments to our certificate of incorporation. Because of the nature of our business relationship with ECI and the size and nature of ECIs ownership position in us, the interests of ECI may be different than those
of our other stockholders. In addition, the significant ownership percentage of ECI could have the effect of delaying or preventing a change in control of our company or otherwise discouraging a potential acquirer from obtaining control of our
company. In 2007, ECI was acquired by affiliates of the Swarth Group and certain other funds that have appointed Ashmore Investment Management Limited as their investment manager which maintains dispositive and/or voting power. In addition, ECI is
no longer traded on NASDAQ. As a result of the change in ownership, the investment objectives of ECI may have changed as compared to the investment objectives when ECI was a publicly-traded company. The possible change in investment objectives may
affect whether, or for how long, ECI will continue to hold our shares and any sales may be difficult and may depress the price of our stock.

Our
revenue and operating results may be adversely impacted if sales of our IP products and other products are unstable, if revenue from our DCME products continues to fluctuate and if the mix between new sales and expansion sales changes substantially.

Our DCME products incorporate mature technologies that we expect to be in lower demand by our customers in the future. While we are
actively pursuing new customers for our DCME products and seeking to increase sales of our additional product offerings to these customers, including our IP products, we believe that there are fewer opportunities for new DCME sales, and we expect
DCME sales to continue to decrease over the foreseeable future. If the decrease in DCME revenues occurs more rapidly than we anticipate and/or the sales of our other products, including our IP products, do not make up for the decline in revenues,
our business and results of operations will be harmed. Additionally, we believe that the mix between new IP product sales and expansion sales in any given quarter may fluctuate and our gross margins could be adversely impacted. Further, if our
expected DCME sales decrease below $1 million in a calendar year ECI may terminate the DCME Agreement.

The largest customers in the
telecommunications industry have substantial negotiating leverage, which may require that we agree to terms and conditions that are less advantageous to us than the terms and conditions of our existing customer relationships, or risk limiting our
ability to sell our products to these large service providers, thereby harming our operating results.

Large telecommunications
service providers have substantial purchasing power and leverage negotiating contractual terms and conditions relating to their purchase of our products from them. As we seek to sell more products to these large telecommunications providers, we may
be required to agree to less favorable terms and conditions in order to complete such sales, which may result in lower margins, affect the timing of the recognition of the revenue derived from these sales, and the amount of deferred revenues, each
of which may have an adverse effect on our business and financial condition.



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In addition, our future success depends in part on our ability to sell our products to large service
providers operating complex networks that serve large numbers of subscribers and transport high volumes of traffic. The communications industry historically has been dominated by a relatively small number of service providers. While deregulation and
other market forces have led to an increasing number of service providers in recent years, large service providers continue to constitute a significant portion of the market for communications equipment. If we fail to sell additional IP products to
our large customers or to expand our customer base to include additional customers that deploy our products in large-scale networks serving significant numbers of subscribers, our revenue growth will be limited.

Consolidation or downturns in the telecommunications industry may affect demand for our products and the pricing of our products, which could limit our growth and
may harm our business.

The telecommunications industry, which includes all of our customers, has experienced increased
consolidation in recent years, and we expect this trend to continue. Consolidation among our customers and prospective customers may cause delays or reductions in capital expenditure plans and/or increased competitive pricing pressures as the number
of available customers declines and their relative purchasing power increases in relation to suppliers. The occurrence of any of these factors, separately or in combination, may lead to decreased sales or slower than expected growth in revenues and
could harm our business and operations.

The communications industry is cyclical and reactive to general economic conditions. In the recent
past, worldwide economic downturns, pricing pressures, and deregulation have led to consolidations and reorganizations. These downturns, pricing pressures and restructurings have been causing delays and reductions in capital and operating
expenditures by many service providers. These delays and reductions, in turn, have been reducing demand for communications products like ours. A continuation or subsequent recurrence of these industry patterns, as well as general domestic and
foreign economic conditions and other factors that reduce spending by companies in the communications industry, could harm our operating results in the future.

If we fail to anticipate and meet specific customer requirements, or if our products fail to interoperate with our customers existing networks or with existing and emerging industry, national, and international standards, we may
not be able to retain our current customers or attract new customers.

We must effectively anticipate and adapt our business,
products and services in a timely manner to meet customer requirements. We must also meet existing and emerging industry, national and international standards in order to meet changing customer demands. Prospective customers may require product
features and capabilities that are not included in our current product offerings. The introduction of new or enhanced products also requires that we carefully manage the transition from our older products in order to minimize disruption in customer
ordering patterns and ensure that adequate supplies of our new products can be delivered to meet anticipated customer demand. If we fail to develop products and offer services that satisfy customer requirements, or if we fail to effectively manage
the transition from our older products to our new or enhanced products, our ability to create or increase demand for our products would be seriously harmed and we may lose current and prospective customers, thereby harming our business.

Many of our customers will require that our products be designed to interface with their existing networks or with existing or emerging industry,
national, and international standards, each of which may have different and unique specifications. Issues caused by a failure to achieve homologation to certain standards or an unanticipated lack of interoperability between our products and these
existing networks may result in significant warranty, support, and repair costs, divert the attention of our engineering personnel from our hardware and software development efforts, and cause significant customer relations problems. If our products
do not interoperate with our customers respective networks or applicable standards, installations could be delayed or orders for our products could be cancelled, which would seriously harm our gross margins and result in the loss of revenues
and/or customers.

We expect that a majority of the revenues generated from our products, especially our IP products, including our ControlSwitch,
will be generated from a limited number of customers. If we lose customers or are unable to grow and diversify our customer base, our revenues may fluctuate and our growth likely would be limited.

To date, we have sold our IP products to approximately 118 customers. We expect that for the foreseeable future, the majority of the revenues from our IP
products will be generated from a limited number of customers in sales transactions that are unpredictable in many key respects, including, but not limited to, the timing of when these transactions close relative to when the related revenue will be
recognized, when cash will be received, the mix of hardware and software, the gross margins related to these transactions, and the total amount of payments to be received. We do not expect to have regular, recurring sales to a limited number of
customers. Due to the limited number of our customers and the irregular sales cycle in the industry, if we lose customers and/or fail to grow and diversify our customer base, or if they do not purchase our IP products at levels or at the times we
anticipate, our ability to maintain and grow our revenues will be adversely affected. The growth of our customer base could also be adversely affected by:



| |  |  | consolidation in the telecommunications industry affecting our customers;
| | - |  | -------------------------------------------------------------------------



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| |  |  | unwillingness of customers to implement our new products or renew contracts as they expire;
| | - |  | -------------------------------------------------------------------------------------------



| |  |  | potential customer concerns about our status as an emerging telecommunications equipment vendor;
| | - |  | ------------------------------------------------------------------------------------------------



| |  |  | delays or difficulties that we may experience in the development, introduction, and/or delivery of products or product enhancements;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------



| |  |  | deterioration in the general financial condition (including bankruptcy filings) of our customers and the potential unavailability to our customers of credit or
financing for additional purchases;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | new product introductions by our competitors;
| | - |  | ---------------------------------------------



| |  |  | geopolitical risks and uncertainties in countries where our customers or our own facilities are located; or
| | - |  | -----------------------------------------------------------------------------------------------------------



| |  |  | failure of our products to perform as expected.
| | - |  | -----------------------------------------------

Our quarterly operating results have fluctuated significantly in the past and may continue to fluctuate in the future, which could lead to volatility in the price of our common stock.

Our quarterly revenues and operating results have fluctuated significantly in the past and they may continue to fluctuate in the future, due to a number
of factors, many of which are outside of our control and any of which may cause our stock price to fluctuate. From our experience, customer purchases of telecommunications equipment have been unpredictable and irregular batch sales as customers
build out their networks, rather than regular, recurring sales. The primary factors that may affect our quarterly revenues and results include the following:



| |  |  | fluctuation in demand for our products and the timing and size of customer orders;
| | - |  | ----------------------------------------------------------------------------------



| |  |  | the length and variability of the sales cycle for our products;
| | - |  | ---------------------------------------------------------------



| |  |  | new product introductions and enhancements by our competitors and us;
| | - |  | ---------------------------------------------------------------------



| |  |  | our ability to develop, introduce, and ship new products and product enhancements that meet customer requirements in a timely manner;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the mix of product configurations sold and the mix of sales to new customers and expansion sales to existing customers;
| | - |  | -----------------------------------------------------------------------------------------------------------------------



| |  |  | our ability to obtain sufficient supplies of sole or limited source components;
| | - |  | -------------------------------------------------------------------------------



| |  |  | our ability to attain and maintain production volumes and quality levels for our products;
| | - |  | ------------------------------------------------------------------------------------------



| |  |  | costs related to acquisitions of complementary products, technologies, or businesses;
| | - |  | -------------------------------------------------------------------------------------



| |  |  | changes in our pricing policies, the pricing policies of our competitors, and the prices of the components of our products;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------



| |  |  | the timing of revenue recognition, amount of deferred revenues, and receivables collections;
| | - |  | --------------------------------------------------------------------------------------------



| |  |  | difficulties or delays in deployment of customer IP networks that would delay anticipated customer purchases of additional products and services;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | general economic conditions, as well as those specific to the telecommunications, networking, and related industries;
| | - |  | ---------------------------------------------------------------------------------------------------------------------



| |  |  | consolidation within the telecommunications industry, including acquisitions of or by our customers; and
| | - |  | --------------------------------------------------------------------------------------------------------



| |  |  | the failure of certain of our customers to successfully and timely reorganize their operations, including emerging from bankruptcy.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------

In addition, as a result of our accounting policies, we may be unable to recognize all of the revenue associated with certain customer contracts in the
same period as the costs associated with those contracts are expensed, which could cause our quarterly gross margins, particularly of IP gross margins, to fluctuate significantly. Further, our accounting policies may require that revenue related to
certain customer contracts be delayed for periods of a year or more. This delay may cause spikes in our revenue in quarters when it is recognized and may result in deferred revenue to revenue conversion taking longer than anticipated.

A significant portion of our operating expenses are fixed in the short term. If revenues for a particular quarter are below expectations, we may not be
able to reduce operating expenses proportionally for that quarter. Therefore, any such revenue shortfall would likely have a direct negative effect on our operating results for that quarter. For these and other reasons, we believe that
quarter-to-quarter comparisons of our operating results are not a good indication of our future performance.



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We believe it likely that in some future quarters, our operating results may be below the expectations of
public market analysts and investors, which may adversely affect our stock price. A decline in the market price of our common stock could cause our stockholders to lose some or all of their investment and may adversely impact our ability to attract
and retain employees and raise capital. In addition, such a decline in our stock price may cause stockholders to initiate securities class action lawsuits. Whether or not meritorious, litigation brought against us could result in substantial costs
and diversion of time and attention of our management. Our insurance to cover claims of this sort, if brought, may not be adequate.

If we do not
respond rapidly to technological changes or to changes in industry standards, our products could become obsolete.

The market for IP
infrastructure products and services is characterized by rapid technological change, frequent new product introductions and evolving standards. We may be unable to respond quickly or effectively to these developments. We may experience difficulties
with software development, hardware design, manufacturing, marketing, or certification that could delay or prevent our development, introduction, or marketing of new products and enhancements. The introduction of new products by our competitors, the
market acceptance of products based on new or alternative technologies or the emergence of new industry standards could render our existing or future products obsolete. If the standards adopted are different from those that we have chosen to
support, market acceptance of our products may be significantly reduced or delayed. If our products become technologically obsolete, we may be unable to sell our products in the marketplace and generate revenues, and our business could be adversely
affected. Because our products are sophisticated and designed to be deployed in complex environments and in multiple locations, they may have errors or defects that we find only after full deployment. If these errors lead to customer dissatisfaction
or we are unable to establish and maintain a support infrastructure and required support levels to service these complex environments, our business may be seriously harmed.

Our products are sophisticated and are designed to be deployed in large and complex networks. Because of the nature of our products, they can only be
fully tested when substantially deployed in very large networks with high volumes of traffic. Some of our customers have only recently begun to commercially deploy our products or deploy our products in larger configurations and they may discover
errors or defects in the software or hardware, the products may not operate as expected, or our products may not be able to function in the larger configurations required by certain customers. If we are unable to correct errors or other performance
problems that may be identified after full deployment of our products, we could experience:



| |  |  | cancellation of orders or other losses of or delays in revenues;
| | - |  | ----------------------------------------------------------------



| |  |  | loss of customers and market share;
| | - |  | -----------------------------------



| |  |  | harm to our reputation;
| | - |  | -----------------------



| |  |  | a failure to attract new customers or achieve market acceptance for our products;
| | - |  | ---------------------------------------------------------------------------------



| |  |  | increased service, support, and warranty costs and a diversion of development resources;
| | - |  | ----------------------------------------------------------------------------------------



| |  |  | increased insurance costs and losses to our business and service provider customers; and
| | - |  | ----------------------------------------------------------------------------------------



| |  |  | costly and time-consuming legal actions by our customers.
| | - |  | ---------------------------------------------------------

If we experience warranty failure that indicates either manufacturing or design deficiencies, we may be required to recall units in the field and/or stop producing and shipping such products until the deficiency is
identified and corrected. In the event of such warranty failures, our business could be adversely affected resulting in reduced revenue, increased costs and decreased customer satisfaction. Because customers often delay deployment of a full system
until they have tested the products and any defects have been corrected, we expect these revisions may cause delays in orders by our customers for our systems. Because our strategy is to introduce more complex products in the future, this risk will
intensify over time. Service provider customers have discovered errors in our products. If the costs of remediating problems experienced by our customers exceed our expected expenses, which historically have not been significant, these costs may
adversely affect our operating results.

In addition, because our products are deployed in large and complex networks around the world, our
customers expect us to establish a support infrastructure and maintain demanding support standards to ensure that their networks maintain high levels of availability and performance. To support the continued growth of our business, our support
organization will need to provide service and support at a high level throughout the world. This will include hiring and training customer support engineers both at our primary corporate locations as well as our smaller offices in new geographies,
such as Central and South America and Russia. If we are unable to provide the expected level of support and service to our customers, we could experience:



| |  |  | loss of customers and market share;
| | - |  | -----------------------------------



| |  |  | a failure to attract new customers in new geographies;
| | - |  | ------------------------------------------------------



| |  |  | increased service, support, and warranty costs and a diversion of development resources; and
| | - |  | --------------------------------------------------------------------------------------------



| |  |  | network performance penalties.
| | - |  | ------------------------------



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The long and variable sales and deployment cycles for our products may cause our operating results to vary
materially, which could result in a significant unexpected revenue shortfall in any given quarter.

Our products, particularly IP
switching products, have lengthy sales cycles, which typically extend from three to 12 months and may take up to two years. A customers decision to purchase our products often involves a significant commitment of the customers resources
and a product evaluation and qualification process that can vary significantly in length. The length of our sales cycles also varies depending on the type of customer to which we are selling, the product being sold and the type of network in which
our product will be utilized. We may incur substantial sales and marketing expenses and expend significant management effort during this time, regardless of whether we make a sale.

Even after making the decision to purchase our products, our customers may deploy our products slowly. Timing of deployment can vary widely among
customers and among product types. The length of a customers deployment period will impact our ability to recognize revenue related to such customers purchase and may also directly affect the timing of any subsequent purchase of
additional products by that customer. As a result of these lengthy and uncertain sales and deployment cycles for our products, it is difficult for us to predict the quarter in which our customers may purchase additional products or features from us,
and our operating results may vary significantly from quarter to quarter, which may negatively affect our operating results for any given quarter.

We rely on channel partners for a significant portion of our revenue. Our failure to effectively develop and manage these third party distributors, systems integrators, and resellers specifically and our indirect sales channel
generally, or disruptions to the processes and procedures that support, our indirect sales channels, could adversely affect our ability to generate revenues from the sale of our products.

We rely on third party distributors, systems integrators, and resellers for a significant portion of our revenue. Our revenues depend in large part on the
performance of these indirect channel partners. Although many aspects of our partner relationships are contractual in nature, our arrangements with our indirect channel partners are not exclusive. Accordingly, important aspects of these
relationships depend on the continued cooperation between the parties.

In particular, we historically utilized ECI as an agent for selling
our IP and DCME products in Russia and an affiliate of ECI provided services for us in Russia. During the six months ended June 30, 2009, and fiscal years ended December 31, 2008, 2007, and 2006, $1.7 million, $13.2 million, $23.9 million
and $28.7 million, respectively, of our revenues were derived from sales in Russia, which required, in some cases, payment of an agent fee to ECI or an affiliate of ECI. We have terminated our relationship with ECI in Russia and are endeavoring to
establish a direct sales and services team in the region. We may not successfully develop that direct sales and services team and our sales and revenue in the region could continue to weaken and our business and results of operations could be
adversely effected.

Many factors out of our control could interfere with our ability to market, license, implement or support our products
with any of our partners, which in turn could harm our business. These factors include, but are not limited to, a change in the business strategy of one of our partners, the introduction of competitive product offerings by other companies that are
sold through one of our partners, potential contract defaults by one of our partners, or changes in ownership or management of one of our distribution partners. Some of our competitors may have stronger relationships with our distribution partners
than we do, and we have limited control, if any, as to whether those partners implement our products rather than our competitors products or whether they devote resources to market and support our competitors products rather than our
offerings. In addition, we recognize a portion of our revenue based on a sell-through model using information provided by our partners. If those partners provide us with inaccurate or untimely information, the amount or timing of our revenues could
be adversely impacted and our operating results may be harmed.

Moreover, if we are unable to leverage our sales and support resources
through our distribution partner relationships, we may need to hire and train additional qualified sales and engineering personnel. We cannot assure you, however, that we will be able to hire additional qualified sales and engineering personnel in
these circumstances, and our failure to do so may restrict our ability to generate revenue or implement our products on a timely basis. Even if we are successful in hiring additional qualified sales and engineering personnel, we will incur
additional costs and our operating results, including our gross margin, may be adversely affected. The loss of or reduction in sales by these resellers could reduce our revenues. If we fail to maintain relationships with these third party resellers,
fail to develop new relationships with third party resellers in new markets, fail to manage, train, or provide incentives to existing third party resellers effectively or if these third party resellers are not successful in their sales efforts,
sales of our products may decrease and our operating results would suffer.



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We may face risks associated with our international sales that could impair our ability to grow our revenues.

For the six months ended June 30, 2009, and fiscal years ended December 31, 2008, 2007, and 2006 revenues from outside
North America were approximately $32.1 million, $77.6 million, $93.1 million, and $81.8 million, respectively. We intend to continue selling into our existing international markets and expand into additional international markets where we currently
do not do business. If we are unable to continue to sell products effectively in these existing international markets and expand into additional new international markets, our ability to grow our business will be adversely affected. Some factors
that may impact our ability to maintain our international operations and sales and/or cause our results from operations in these international markets to differ from expectations include:



| |  |  | difficulty enforcing contracts and collecting accounts receivable in foreign jurisdictions, leading to longer collection periods;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------



| |  |  | certification and qualification requirements relating to our products;
| | - |  | ----------------------------------------------------------------------



| |  |  | the impact of recessions in economies outside the United States;
| | - |  | ----------------------------------------------------------------



| |  |  | unexpected changes in foreign regulatory requirements, including import and export regulations, and currency exchange rates;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------



| |  |  | certification and qualification requirements for doing business in foreign jurisdictions;
| | - |  | -----------------------------------------------------------------------------------------



| |  |  | inadequate protection for intellectual property rights in certain countries;
| | - |  | ----------------------------------------------------------------------------



| |  |  | less stringent adherence to ethical and legal standards by prospective customers in certain foreign countries, including compliance with the Foreign Corrupt
Practices Act;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | potentially adverse tax or duty consequences;
| | - |  | ---------------------------------------------



| |  |  | unfavorable foreign exchange movements, particularly the continued devaluation of the U.S. dollar, which could result in decreased revenues and/or increased
expenses; and
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | political and economic instability.
| | - |  | -----------------------------------

Maintaining and improving our financial controls and the requirements of being a public company may strain our resources, divert managements attention and affect our ability to attract and retain qualified board
members.

As a public company, we are subject to the reporting requirements of the Securities Exchange Act of 1934, or the
Exchange Act, the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, and the NASDAQ Stock Market Rules, or Nasdaq rules. The requirements of these rules and regulations will increase our legal and financial compliance costs, make some activities
more difficult, time-consuming or costly and may also place undue strain on our personnel, systems and resources. The Exchange Act will require, among other things, that we file annual, quarterly and current reports with respect to our business and
financial condition. The Sarbanes-Oxley Act will require, among other things, that we maintain effective disclosure controls and procedures and internal control over financial reporting. As a public company, our systems of internal controls over
financial reporting will be required to be periodically assessed and reported on by management and will be subject to annual audits by our independent auditors. We are presently evaluating our internal controls for compliance and will be required to
comply with the Sarbanes-Oxley guidelines beginning with our Annual Report on Form 10-K for the year ending December 31, 2009, to be filed in early 2010. During the course of our evaluation, we may identify areas requiring improvement, and may
be required to design enhanced processes and controls to address issues identified through this review. This could result in significant delays and cost to us and require us to divert substantial resources, including management time, from other
activities. We have commenced a review of our existing internal control structure. Although our review is not complete, we have taken steps to improve our internal control structure by hiring or transferring dedicated, internal Sarbanes-Oxley Act
compliance personnel to analyze and improve our internal controls, to be supplemented periodically with outside consultants as needed. However, we cannot be certain regarding when we will be able to successfully complete the procedures,
certification, and attestation requirements of Section 404 of the Sarbanes-Oxley Act. If we fail to maintain the adequacy of our internal controls, we may not be able to conclude that we have effective internal controls over financial reporting
in accordance with the Sarbanes-Oxley Act. Moreover, effective internal controls are necessary for us to produce reliable financial reports and are important to help prevent fraud. As a result, our failure to satisfy the requirements of
Section 404 on a timely basis could result in the loss of investor confidence in the reliability of our financial statements, which in turn could harm the market value of our common stock. Any failure to maintain effective internal controls
also could impair our ability to manage our business and harm our financial results.

Under the Sarbanes-Oxley Act and Nasdaq rules, we are
required to maintain an independent board. We also expect these rules and regulations will make it more difficult and more expensive for us to maintain directors and officers liability insurance, and we may be required to accept reduced
coverage or incur substantially higher costs to maintain coverage. If we are unable to maintain adequate directors and officers insurance, our ability to recruit and retain qualified directors, especially those directors who may be
deemed independent for purposes of Nasdaq rules, and officers will be significantly curtailed.



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If we lose the services of one or more members of our current executive management team or other key employees, or
if we are unable to attract additional executives or key employees, we may not be able to execute on our business strategy.

Our
future success depends in large part upon the continued service of our executive management team and other key employees. In particular, Douglas Sabella, our president and chief executive officer, is critical to the overall management of our company
as well as to the development of our culture and our strategic direction. In order to be successful, we must also hire, retain and motivate key employees, including those in managerial, technical, marketing, and sales positions. In particular, our
product generation efforts depend on hiring and retaining qualified engineers. Experienced management and technical, sales, marketing and support personnel in the telecommunications and networking industries are in high demand and competition for
their talents is intense. This is particularly the case in Silicon Valley, where our headquarters and significant operations are located.

The loss of services of any of our executives, one or more other members of our executive management or sales team or other key employees, none of whom are bound by employment agreements for any specific term, could seriously harm our
business.

We have no internal hardware manufacturing capabilities and we depend exclusively upon contract manufacturers to manufacture our hardware
products. Our failure to successfully manage our relationships with Flextronics, ECI or other replacement contract manufacturers would impair our ability to deliver our products in a manner consistent with required volumes or delivery schedules,
which would likely cause us to fail to meet the demands of our customers and damage our customer relationships.

We outsource the
manufacturing of all of our hardware products. Our I-Gate 4000 media gateways are exclusively manufactured for us by Flextronics. We buy our DCME products from ECI, which subcontracts the manufacturing to Flextronics. These contract manufacturers
provide comprehensive manufacturing services, including assembly of our products and procurement of materials and components. Each of our contract manufacturers also builds products for other companies and may not always have sufficient quantities
of inventory available or may not allocate their internal resources to fill these orders on a timely basis. Further, our contract manufacturers may choose to limit the amount of credit available to us which will impact our ability to timely order
and procure products.

We do not have long-term supply contracts with these contract manufacturers and they are not required to manufacture
products for any specified period at any specified price. We do not have internal manufacturing capabilities to meet our customers demands and cannot assure you that we will be able to develop or contract for additional manufacturing capacity
on acceptable terms on a timely basis if it is needed. An inability to manufacture our products at a cost comparable to our historical costs could impact our gross margins or force us to raise prices, affecting customer relationships and our
competitive position.

Qualifying a new contract manufacturer and commencing commercial scale production is expensive and time consuming
and could result in a significant interruption in the supply of our products. We are in the process of qualifying a second manufacturing facility for Flextronics and there will be additional costs and complexity associated with manufacturing at
multiple sites. If our contract manufacturers are not able to maintain our high standards of quality, increase capacity as needed, or are forced to shut down a factory, our ability to deliver quality products to our customers on a timely basis may
decline, which would damage our relationships with customers, decrease our revenues and negatively impact our growth.

We and our contract
manufacturers rely on single or limited sources for the supply of some components of our products and if we fail to adequately predict our manufacturing requirements or if our supply of any of these components is disrupted, we will be unable to ship
our products on a timely basis, which would likely cause us to fail to meet the demands of our customers and damage our customer relationships.

We and our contract manufacturers currently purchase several key components of our products, including commercial digital signal processors, from single or limited sources. We purchase these components on a purchase
order basis. If we overestimate our component requirements, we could have excess inventory, which would increase our costs and result in write-downs harming our operating results. If we underestimate our requirements, we may not have an adequate
supply, which could interrupt manufacturing of our products and result in delays in shipments and revenues.



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We currently do not have long-term supply contracts with our component suppliers and they are not
required to supply us with products for any specified periods, in any specified quantities, or at any set price, except as may be specified in a particular purchase order. Because the key components and assemblies of our products are complex,
difficult to manufacture and require long lead times, in the event of a disruption or delay in supply, or inability to obtain products, we may not be able to develop an alternate source in a timely manner, at favorable prices, or at all. In
addition, during periods of capacity constraint, we are disadvantaged compared to better capitalized companies, as suppliers may in the future choose not to do business with us or may require higher prices or less advantageous terms. A failure to
find acceptable alternative sources could hurt our ability to deliver high-quality products to our customers and negatively affect our operating margins. In addition, reliance on our suppliers exposes us to potential supplier production difficulties
or quality variations. Our customers rely upon our ability to meet committed delivery dates, and any disruption in the supply of key components would seriously adversely affect our ability to meet these dates and could result in legal action by our
customers, loss of customers, or harm our ability to attract new customers, any of which could decrease our revenues and negatively impact our growth.

Failure to manage expenses and inventory risks associated with meeting the demands of our customers may adversely affect our business or results of operations.

To ensure that we are able to meet customer demand for our products, we place orders with our contract manufacturers and suppliers based on our estimates
of future sales. If actual sales differ materially from these estimates because of inaccurate forecasting or as a result of unforeseen events or otherwise, our inventory levels and expenses may be adversely affected and our business and results of
operations could suffer. In addition, in order to remain competitive, we must continue to introduce new products and processes into our manufacturing environment. There cannot be any assurance, however, that the introduction of new products will not
create obsolete inventories related to older products.

If we are not able to obtain necessary licenses of third party technology at acceptable
prices, or at all, our products could become obsolete.

We have incorporated third-party licensed technology into our current
products. From time to time, we may be required to license additional technology from third parties to develop new products or product enhancements. Third party licenses may not be available or continue to be available to us on commercially
reasonable terms or at all. The inability to maintain or re-license any third party licenses required in our current products, or to obtain any new third-party licenses to develop new products and product enhancements, could require us to obtain
substitute technology of lower quality or performance standards or at greater cost, and delay or prevent us from making these products or enhancements, any of which could seriously harm the competitiveness of our products.

Failures by our strategic partners or by us in integrating our products with those provided by our strategic partners could seriously harm our business.

Our solutions include the integration of products supplied by strategic partners, who offer complementary products and services. We expect
to further integrate our IP Products with such partner products and services in the future. We rely on these strategic partners in the timely and successful deployment of our solutions to our customers. If the products provided by these partners
have defects or do not operate as expected, if we do not effectively integrate and support products supplied by these strategic partners, or if these strategic partners fail to be able to support products, we may have difficulty with the deployment
of our solutions, which may result in:



| |  |  | a loss of or delay in recognizing revenues;
| | - |  | -------------------------------------------



| |  |  | increased service, support, and warranty costs and a diversion of development resources; and
| | - |  | --------------------------------------------------------------------------------------------



| |  |  | network performance penalties.
| | - |  | ------------------------------

In
addition to cooperating with our strategic partners on specific customer projects, we also may compete in some areas with these same partners. If these strategic partners fail to perform or choose not to cooperate with us on certain projects, in
addition to the effects described above, we could experience:



| |  |  | a loss of customers and market share; and
| | - |  | -----------------------------------------



| |  |  | a failure to attract new customers or achieve market acceptance for our products.
| | - |  | ---------------------------------------------------------------------------------



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Our ability to compete and our business could be jeopardized if we are unable to protect our intellectual property.

We rely on a combination of patent, copyright, trademark, and trade secret laws and restrictions on disclosure to protect our
intellectual property rights. However, these legal means afford only limited protection and may not adequately protect our rights or permit us to gain or keep any competitive advantage. Our patent applications may not issue as patents at all or they
may not issue as patents in a form that will be advantageous to us. Our issued patents and those that may issue in the future may be challenged, invalidated, or circumvented, which could limit our ability to stop competitors from marketing related
products. Although we have taken steps to protect our intellectual property and proprietary technology, there is no assurance that third parties will not be able to invalidate or design around our patents. Furthermore, although we have entered into
confidentiality agreements and intellectual property assignment agreements with our employees, consultants, and advisors, such agreements may not be enforceable or may not provide meaningful protection for our trade secrets or other proprietary
information in the event of unauthorized use or disclosure or other breaches of the agreements.

Additionally, despite our efforts to
protect our proprietary rights, unauthorized parties may attempt to copy or otherwise obtain and use our products or technology. Monitoring unauthorized use of our products is difficult and we cannot be certain that the steps we have taken to do so
will prevent unauthorized use of our technology, particularly in foreign countries where the laws may not protect our proprietary rights as comprehensively as in the United States. If competitors are able to use our technology or develop unpatented
proprietary technology similar to ours or competing technologies, our ability to compete effectively could be harmed.

Possible third party claims of
infringement of proprietary rights against us could have a material adverse effect on our business, results of operation or financial condition.

The telecommunications industry generally and the market for IP telephony products in particular are characterized by a relatively high level of litigation based on allegations of infringement of proprietary rights.
We have received in the past and may receive in the future receive inquiries from other patent holders and may become subject to claims that we infringe their intellectual property rights. We cannot assure you that we are not in infringement of
third party patents. Any parties claiming that our products infringe upon their proprietary rights, regardless of its merits, could force us to license their patents for substantial royalty payments or to defend ourselves, and possibly our customers
or contract manufacturers, in litigation. We may also be required to indemnify our customers and contract manufacturers for damages they suffer as a result of such infringement. These claims and any resulting licensing arrangement or lawsuit, if
successful, could subject us to significant royalty payments or liability for damages and invalidation of our proprietary rights. Any potential intellectual property litigation also could force us to do one or more of the following:



| |  |  | stop selling, incorporating, or using our products that use the challenged intellectual property;
| | - |  | -------------------------------------------------------------------------------------------------



| |  |  | obtain from the owner of the infringed intellectual property right a license to sell or use the relevant technology, which license may not be available on
reasonable terms, or at all; or
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | redesign those products that use any allegedly infringing technology.
| | - |  | ---------------------------------------------------------------------

Any lawsuits regarding intellectual property rights, regardless of their success, would be time consuming, expensive to resolve and would divert our
managements time and attention.

Regulation of the telecommunications industry could harm our operating results and future prospects.

The telecommunications industry is highly regulated and our business and financial condition could be adversely affected by the changes in
the regulations relating to the telecommunications industry. Currently, there are few laws or regulations that apply directly to access to, or delivery of, voice services on IP networks. We could be adversely affected by regulation of IP networks
and commerce in any country, including the United States, where we operate. Such regulations could include matters such as voice over the Internet or using Internet protocol, encryption technology, and access charges for service providers. The
adoption of such regulations could decrease demand for our products, and at the same time increase the cost of selling our products, which could have a material adverse effect on our business, operating result, and financial condition.

Compliance with regulations and standards applicable to our products may be time consuming, difficult and costly, and if we fail to comply, our product sales
will decrease.

In order to achieve and maintain market acceptance, our products must continue to meet a significant number of
regulations and standards. In the United States, our products must comply with various regulations defined by the Federal Communications Commission and Underwriters Laboratories, including particular standards relating to our DCME products and our
enhanced access switching solution, also known as our Class 5 solution.



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As these regulations and standards evolve, and if new regulations or standards are implemented, we will
be required to modify our products or develop and support new versions of our products, and this will increase our costs. The failure of our products to comply, or delays in compliance, with the various existing and evolving industry regulations and
standards could prevent or delay introduction of our products, which could harm our business. User uncertainty regarding future policies may also affect demand for communications products, including our products. Moreover, distribution partners or
customers may require us, or we may otherwise deem it necessary or advisable, to alter our products to address actual or anticipated changes in the regulatory environment. Our inability to alter our products to address these requirements and any
regulatory changes could have a material adverse effect on our business, financial condition, and operating results.

Failure of our hardware
products to comply with evolving industry standards and complex government regulations may prevent our hardware products from gaining wide acceptance, which may prevent us from growing our sales.

The market for network equipment products is characterized by the need to support industry standards as different standards emerge, evolve, and achieve
acceptance. We will not be competitive unless we continually introduce new products and product enhancements that meet these emerging standards. Our products must comply with various domestic regulations and standards defined by agencies such as the
Federal Communications Commission, in addition to standards established by governmental authorities in various foreign countries and the recommendations of the International Telecommunication Union. If we do not comply with existing or evolving
industry standards or if we fail to obtain timely domestic or foreign regulatory approvals or certificates, we will not be able to sell our products where these standards or regulations apply, which may harm our business.

Production and marketing of products in certain states and countries may subject us to environmental and other regulations including, in some instances,
the requirement to provide customers the ability to return product at the end of its useful life and make us responsible for disposing or recycling products in an environmentally safe manner. Additionally, certain states and countries may pass
regulations requiring our products to meet certain requirements to use environmentally friendly components, such as the European Union Directive 2002/96/EC Waste Electrical and Electronic Equipment, or WEEE, to mandate funding, collection,
treatment, recycling, and recovery of WEEE by producers of electrical or electronic equipment into Europe and similar rules and regulations in other countries. China is in the final approval stage of compliance programs which will harmonize with the
European Union WEEE and Recycling of Hazardous Substances directives. In the future, Japan and other countries are expected to adopt environmental compliance programs. If we fail to comply with these regulations, we may not be able to sell our
products in jurisdictions where these regulations apply, which would have a material adverse affect on our results of operations.

We have invested
substantially in our enhanced access switching solution and we may be unable to achieve and maintain substantial sales.

We have
spent considerable effort and time developing our Class 5 solution, and have had limited sales of this product line to date. Although we have scaled back our development efforts with respect to new features and functionalities for our Class 5
solution, we continue to spend effort and time on our solution. We anticipate sales of our access solution as part of our operational plan, but we may not achieve the success rate we currently anticipate or we may not achieve any success at all. The
market for our access solution is new and it is unclear whether there will be broad adoption of this solution by our existing and future potential customers. If the market for our Class 5 products does not develop or if we are unable to further
develop the required features, we may need to reduce or cancel our development efforts or conclude an agreement with a third party to license the Class 5 solution.

Future interpretations of existing accounting standards could adversely affect our operating results.

Generally
accepted accounting principles in the United States are subject to interpretation by the FASB, the American Institute of Certified Public Accountants, or AICPA, the SEC, and various other bodies formed to promulgate and interpret appropriate
accounting principles. A change in these principles or interpretations could have a significant effect on our reported financial results, and could affect the reporting of transactions completed before the announcement of a change.

For example, we recognize our product software license revenue in accordance with AICPA Statement of Position, or SOP 97-2, Software Revenue Recognition,
as amended by SOP 98-9, Software Revenue Recognition with Respect to Certain Transactions, and related interpretations. The AICPA or other accounting standards setters may continue to issue interpretations and guidance for applying the relevant
accounting standards to a wide range of sales contract terms and business arrangements that are prevalent in software licensing arrangements. Future interpretations of existing accounting standards, including SOP 97-2 and SOP 98-9, or changes in our
business practices could result in future changes in our revenue recognition accounting policies that have a material adverse effect on our results of operations. We may be required to delay revenue recognition into future periods, which could
adversely affect our operating results. In the past we have had to defer recognition for license fees, and may have to do so again in the future. Such deferral may be as a result of several factors, including whether a transaction involves:



| |  |  | software arrangements that include undelivered elements for which we do not have vendor specific objective evidence, or VSOE, of fair value;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | requirements that we deliver services for significant enhancements and modifications to customize our software for a particular customer;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------



| |  |  | material acceptance criteria or other identified product-related issues; or
| | - |  | ---------------------------------------------------------------------------



| |  |  | payment terms extending beyond our customary terms.
| | - |  | ---------------------------------------------------

Because of these factors and other specific requirements under accounting principles generally accepted in the United States for software revenue recognition, we must have very precise terms in our software
arrangements in order to recognize revenue when we initially deliver software or perform services. Negotiation of mutually acceptable terms and conditions can extend our sales cycle, and we sometimes accept terms and conditions that do not permit
revenue recognition at the time of delivery.

Increased political, economic and social instability in the Middle East may adversely affect our
business and operating results.

The continued threat of terrorist activity and other acts of war or hostility, including the war in
Iraq, threats against Israel and the recent Israeli conflict in Gaza, have created uncertainty throughout the Middle East and have significantly increased the political, economic, and social instability in Israel, where substantially all of our
products are manufactured. Acts of terrorism, either domestically or abroad and particularly in Israel, or a resumption of the confrontation along the northern border of Israel, would likely create further uncertainties and instability. To the
extent terrorism, or the political, economic or social instability results in a disruption of our operations or delays in our manufacturing or shipment of our products, then our business, operating results and financial condition could be adversely
affected.

Our I-Gate 4000 media gateways and our DCME products are exclusively manufactured for us by Flextronics, with the DCME products
being manufactured by Flextronics through our relationship with ECI. The Flextronics manufacturing facility is located in Migdal-Haemek, Israel, which is located in northern Israel. While Flextronics has other locations across the world at which our
manufacturing requirements may be fulfilled and we are in the process of diversifying our manufacturing capabilities to locations outside of the Middle East, any disruption to its Israeli manufacturing capabilities in Migdal-Haemek would likely
cause a material delay in our manufacturing process. If we are forced or if we decide to switch the manufacture of our products to a different Flextronics facility, the time and expense of such switch along with the increased costs, if any, of
operating in another location, would adversely affect our operations. In addition, while we expect that Flextronics will have the capacity to manufacture our products at facilities outside of Israel, there can be no assurance that such capacity will
be available when we require it or upon terms favorable or acceptable to us. To the extent terrorism or political, economic or social instability results in a disruption of Flextronics manufacturing facilities in Israel or ECI operations in
Israel as they relate to our business, then our business, operating results and financial condition could be adversely affected.

In
addition, any hostilities involving Israel or the interruption or curtailment of trade between Israel and its present trading partners, or a significant downturn in the economic or financial condition of Israel, could adversely affect our operations
and product development, cause our revenues to decrease, and adversely affect the price of our shares. Furthermore, several countries, principally in the Middle East, still restrict doing business with Israel, Israeli companies or companies with
operations in Israel. Should additional countries impose restrictions on doing business with Israel, our business, operating results and financial condition could be adversely affected.

Our operations may be disrupted by the obligations of our personnel to perform military service.

Many of our 155 employees in Israel, including certain key employees, are obligated to perform up to one month (in some cases more) of annual military reserve duty until they reach age 45 and, in emergency circumstances, could be called to
active duty. Recently, there have been call-ups of military reservists, including several of our employees, and it is possible that there will be additional call-ups in the future. Our operations could be disrupted by the absence of a significant
number of our employees due to military service or the absence for extended periods of one or more of our key employees for military service. Such disruption could adversely affect our business and results of operations.

The grants we have received from the Israeli government for certain research and development expenditures restrict our ability to manufacture products and transfer
technologies outside of Israel, and require us to satisfy specified conditions. If we fail to satisfy these conditions, we may be required to refund grants previously received together with interest and penalties.

Our research and development efforts have been financed, in part, through grants that we have received from the Office of the Chief Scientist of the
Israeli Ministry of Industry, Trade, and Labor, or the OCS. Therefore, we must comply with the requirements of the Israeli Law for the Encouragement of Industrial Research and Development, 1984 and related regulations, or the Research Law.



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Under the Research Law, the discretionary approval of an OCS committee is required for any transfer of
technology or manufacturing of products developed with OCS funding. OCS approval is not required for the export of any products resulting from the research or development. There is no assurance that we would receive the required approvals for any
proposed transfer. Such approvals, if granted, may be subject to the following additional restrictions:



| |  |  | we could be required to pay the OCS a portion of the consideration we receive upon any transfer of such technology or upon an acquisition of our Israeli subsidiary
by an entity that is not Israeli. Among the factors that may be taken into account by the OCS in calculating the payment amount are the scope of the support received, the royalties that were paid by us, the amount of time that elapsed between the
date on which the know-how was transferred and the date on which the grants were received, as well as the sale price; and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the transfer of manufacturing rights could be conditioned upon an increase in the royalty rate and payment of increased aggregate royalties and payment of interest
on the grant amount.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

These restrictions may impair our ability to sell our company or technology assets or to outsource
manufacturing outside of Israel. The restrictions will continue to apply even after we have repaid the full amount of royalties payable for the grants.



|ITEM 4. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
|------- | ---------------------------------------------------

Our annual meeting of stockholders was held on May 29, 2009 for the purpose of: (1) electing two directors for a three-year term and until the election and qualification of their successors; and (2) ratifying the selection of
KPMG LLP as our independent registered public accounting firm for the 2009 fiscal year.

Proxies for the meeting were solicited pursuant to
Section 14(a) of the Securities Exchange Act of 1934, as amended, and there was no solicitation in opposition of managements solicitations. Stockholders passed both the proposals. The final vote on the proposals was recorded as follows:

Proposal 1:

Electing the following two directors for a
three-year term and until the election and qualification of their successors was ratified by the following vote:



|                   |  |            |  |          
|------------------ |  | ---------- |  | ---------
|Director           |  | Votes For  |  | Withheld 
|Douglas A. Sabella |  | 27,521,888 |  | 1,503,826
|Pascal Levensohn   |  | 27,529,838 |  | 1,495,876

Proposal 2:

The
selection of KPMG LLP as our independent registered public accounting firm for the 2009 fiscal year was ratified by the following vote:



|           |  |         |  |           
|---------- |  | ------- |  | ----------
|For        |  | Against |  | Abstain   
|28,835,698 |  | 190,017 |  | 14,300,116

Our directors that hold office following our annual meeting are Bob L. Corey, Promod Haque, Pascal
Levensohn, Dror Nahumi, Douglas A. Sabella and W. Michael West.



|ITEM 6. | EXHIBITS
|------- | --------

The following is an index of the exhibits
included in this report:



|        |  |                                                                                                                                                                                  
|------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  | Description of document                                                                                                                                                          
|31.1    |  | Certification of Chief Executive Officer, pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
|        | 
|31.2    |  | Certification of Chief Financial Officer, pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
|        | 
|32.1    |  | Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002    



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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.



|                      |  |  |  |                      |  |                                                   
|--------------------- |  |  |  | -------------------- |  | --------------------------------------------------
|                      |  |  |  | Veraz Networks, Inc.
|                      |  |  | 
|Date: August 14, 2009 |  |  |  | By:                  |  | /s/    Albert J. Wood                             
|                      |  |  |  | Name:                |  | Albert J. Wood                                    
|                      |  |  |  | Title:               |  | Chief Financial Officer                           
|                      |  |  |  |                      |  | (Principal Financial and Chief Accounting Officer)



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EXHIBIT INDEX



|        |  |                                                                                                                                                                                  
|------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  | Description of document                                                                                                                                                          
|31.1    |  | Certification of Chief Executive Officer, pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|        | 
|31.2    |  | Certification of Chief Financial Officer, pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|        | 
|32.1    |  | Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002