##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 (Mark One)
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended March 31, 2008
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
 For the transition period from                 to
 Commission file number 001-33391
 Veraz Networks, Inc.
  Delaware
    
    94-3409691(State or other jurisdiction of
    
    (I.R.S. Employer Identificationincorporation or organization)
    
    Number)
 926 Rock Avenue, Suite 20
San Jose, California 95131
(408) 750-9400
  o þ
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer þ
    
    Smaller reporting company o(Do not check if a smaller reporting company)
 o þ




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##### 



VERAZ NETWORKS, INC.
 FORM 10-Q
 For the Quarterly Period Ended March 31, 2008
 INDEX
 PART I. FINANCIAL INFORMATIONITEM 1. FINANCIAL STATEMENTS
    
    
    1Condensed Consolidated Balance Sheets
    
    
    1Condensed Consolidated Statements of Operations
    
    
    2Condensed Consolidated Statements of Cash Flows
    
    
    3Notes to Condensed Consolidated Financial Statements
    
    
    4ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
    
    
    19ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
    
    
    24ITEM 4. CONTROLS AND PROCEDURES
    
    
    24PART II. OTHER INFORMATIONITEM 1. LEGAL PROCEEDINGS
    
    
    25ITEM 1A. RISK FACTORS
    
    
    25ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
    
    
    43ITEM 3. DEFAULTS ON SENIOR SECURITIES
    
    
    43ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
    
    
    43ITEM 5. OTHER INFORMATION
    
    
    43ITEM 6. EXHIBITS
    
    
    43SIGNATURES
    
    
    44EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32




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PART I. FINANCIAL INFORMATION
 
 ITEM 1. FINANCIAL STATEMENTS
 VERAZ NETWORKS, INC. AND SUBSIDIARIES
 
 Condensed Consolidated Balance Sheets
(in thousands, except share and per share data)
(Unaudited)
 March 31,
    
    
    December 31,2008
    
    
    2007ASSETSCurrent assets:Cash and cash equivalents
    
    $
    49,330
    
    
    $
    52,232Restricted cash
    
    
    619
    
    
    
    610Short-term investments
    
    
    4,405
    
    
    
    5,354Accounts receivable (net of allowances of $151 and $151 as of March 31,
2008, and December 31, 2007, respectively)
    
    
    45,743
    
    
    
    40,814Inventories
    
    
    10,026
    
    
    
    9,505Prepaid expenses
    
    
    1,645
    
    
    
    1,497Deferred tax assets
    
    
    572
    
    
    
    410Other current assets
    
    
    3,685
    
    
    
    5,776Due from related parties
    
    
    392
    
    
    
    686Total current assets
    
    
    116,417
    
    
    
    116,884Property and equipment, net
    
    
    6,403
    
    
    
    6,720Other assets
    
    
    67
    
    
    
    143Total assets
    
    $
    122,887
    
    
    $
    123,747LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    9,634
    
    
    $
    11,066Accrued expenses
    
    
    20,203
    
    
    
    16,983Income tax payable
    
    
    276
    
    
    
    219Current portion of loan payable (net of unamortized discount of $95 and $170
as of March 31, 2008, and December 31, 2007, respectively)
    
    
    2,342
    
    
    
    3,147Deferred revenue
    
    
    13,316
    
    
    
    14,354Due to related parties
    
    
    11,188
    
    
    
    10,438Total current liabilities
    
    
    56,959
    
    
    
    56,207Commitments and contingencies (Note 10)Stockholders equity:Undesignated preferred stock, $0.001 par value; 10,000,000 and no shares
authorized; no shares issued and outstanding as of March 31, 2008 and December
31, 2007, respectively
    
    
    
    
    
    
    Common stock, $0.001 par value; 200,000,000 shares authorized; 41,839,624 and
41,100,459 shares issued and outstanding as of March 31, 2008 and December 31,
2007, respectively
    
    
    42
    
    
    
    41Additional paid-in capital
    
    
    125,483
    
    
    
    124,081Deferred stock-based compensation
    
    
    (273
    )
    
    
    (352
    )Accumulated deficit
    
    
    (59,324
    )
    
    
    (56,230
    )Total stockholders equity
    
    
    65,928
    
    
    
    67,540Total liabilities and stockholders equity
    
    $
    122,887
    
    
    $
    123,747
  1




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VERAZ NETWORKS, INC. AND SUBSIDIARIES
 
 Condensed Consolidated Statements of Operations
(in thousands, except share and per share data)
(Unaudited)
 Three Months EndedMarch 31,2008
    
    
    2007Revenues:IP Products
    
    $
    20,744
    
    
    $
    17,650DCME Products
    
    
    1,576
    
    
    
    5,134Services
    
    
    5,563
    
    
    
    4,671Total revenues
    
    
    27,883
    
    
    
    27,455Cost of Revenues:IP Products
    
    
    8,408
    
    
    
    7,196DCME Products
    
    
    585
    
    
    
    2,121Services
    
    
    3,938
    
    
    
    2,698Total cost of revenues
    
    
    12,931
    
    
    
    12,015Gross profit
    
    
    14,952
    
    
    
    15,440Operating Expenses:Research and development (net of grants from the Office of the Chief Scientist
in Israel of $589 and $366 in the three months ended March 31, 2008 and 2007,
respectively)
    
    
    7,873
    
    
    
    7,734Sales and marketing
    
    
    7,806
    
    
    
    5,963General and administrative
    
    
    2,936
    
    
    
    2,353Total operating expenses
    
    
    18,615
    
    
    
    16,050Loss from operations
    
    
    (3,663
    )
    
    
    (610
    )Other income (expense), net
    
    
    636
    
    
    
    (200
    )Loss before income taxes
    
    
    (3,027
    )
    
    
    (810
    )Income taxes
    
    
    67
    
    
    
    364Net loss
    
    $
    (3,094
    )
    
    $
    (1,174
    )Net loss allocable to common stockholders per share  basic and diluted
    
    $
    (0.07
    )
    
    $
    (0.08
    )Weighted-average shares outstanding used in computing net loss allocable to common
stockholders per share  basic and diluted
    
    
    41,394,660
    
    
    
    13,928,106
 Related Party Transactions
  Three Months EndedMarch 31,2008
    
    2007Revenues:IP Products, related party sales
    
    $
    54
    
    
    $
    25DCME Products, related party sales
    
    
    
    
    
    
    145Cost of Revenues:IP Products, costs arising from related party purchases
    
    
    184
    
    
    
    8DCME Products, costs arising from related party purchases
    
    
    535
    
    
    
    1,385Services, costs arising from related party purchases
    
    
    45
    
    
    
    Operating Expenses:Research and development
    
    
    384
    
    
    
    668Sales and marketing
    
    
    797
    
    
    
    855General and administrative
    
    
    44
    
    
    
    113
  2




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VERAZ NETWORKS, INC. AND SUBSIDIARIES
 
 Condensed Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)
 Three Months EndedMarch 31,2008
    
    
    2007Cash flows from operating activities:Net loss
    
    $
    (3,094
    )
    
    $
    (1,174
    )Adjustments to reconcile net loss to net cash provided by (used in) operating activities:Depreciation
    
    
    873
    
    
    
    966Loss on disposal of property and equipment
    
    
    24
    
    
    
    Stock-based compensation
    
    
    1,080
    
    
    
    481Provision for doubtful accounts
    
    
    49
    
    
    
    (90
    )Amortization of debt issuance cost and accretion of loan payable
    
    
    62
    
    
    
    130Deferred income taxes
    
    
    (90
    )
    
    
    (189
    )Net changes in operating assets and liabilities:Accounts receivable
    
    
    (4,978
    )
    
    
    (8,702
    )Sold accounts receivable
    
    
    
    
    
    
    3,606Inventories
    
    
    (521
    )
    
    
    (854
    )Prepaid expenses and other current assets
    
    
    1,943
    
    
    
    (479
    )Due from related parties
    
    
    294
    
    
    
    318Accounts payable
    
    
    (1,545
    )
    
    
    2,066Accrued expenses
    
    
    3,220
    
    
    
    (2,010
    )Income tax payable
    
    
    57
    
    
    
    153Deferred revenue
    
    
    (1,038
    )
    
    
    (3,326
    )Due to related parties
    
    
    750
    
    
    
    261Net cash used in operating activities
    
    
    (2,914
    )
    
    
    (8,843
    )Cash flows from investing activities:Restricted cash
    
    
    (9
    )
    
    
    Maturities and sales of short-term investments
    
    
    3,223
    
    
    
    Purchases of short-term investments
    
    
    (2,274
    )
    
    
    Purchases of property and equipment, net
    
    
    (467
    )
    
    
    (349
    )Other assets
    
    
    4
    
    
    
    11Net cash provided by (used in) investing activities
    
    
    477
    
    
    
    (338
    )Cash flows from financing activities:Proceeds from the exercise of stock options
    
    
    402
    
    
    
    151Proceeds from sale of Series D convertible preferred stock
    
    
    
    
    
    
    3,449Issuance cost for Series D convertible preferred stock
    
    
    
    
    
    
    (34
    )Payment of offering costs
    
    
    
    
    
    
    (481
    )Repayment of loan
    
    
    (867
    )
    
    
    Net cash (used in) provided by financing activities
    
    
    (465
    )
    
    
    3,085Net decrease in cash and cash equivalents
    
    
    (2,902
    )
    
    
    (6,096
    )Cash and cash equivalents at beginning of period
    
    
    52,232
    
    
    
    23,189Cash and cash equivalents at end of period
    
    $
    49,330
    
    
    $
    17,093Supplemental disclosure of cash flow information:Cash paid:Interest
    
    $
    74
    
    
    $
    123Income taxes
    
    $
    283
    
    
    $
    11
  3




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VERAZ NETWORKS, INC. AND SUBSIDIARIES
 
 Notes to Condensed Consolidated Financial Statements
(Unaudited)
 (1) The Company
  (2) Basis of Presentation
    (3) Significant Accounting Policies
  (a) Use of Estimates
  (b) Concentrations
  4




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(c) Revenue Recognition
  Reporting Revenue Gross as a Principal versus Net as an
Agent
 Revenue Recognition Revenue Arrangements with
Multiple Deliverables.
  Software
Revenue Recognition Modification of SOP 97-2, Software Revenue
Recognition, with Respect to Certain Transactions.
  5




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6




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(d) Stock-Based Compensation
 Accounting for Stock Issued to Employees Accounting for Certain Transactions Involving Stock
Compensation, an Interpretation of APB Opinion No. 25 Accounting for Stock-Based Compensation Accounting for Stock-Based  Compensation Transition and Disclosure
   7




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Share-Based Payment
 Disclosure About Fair Value of
Financial Instruments
  Three MonthsEnded March 31,2007Expected term in years
    
    
    6.25Risk-free interest rate
    
    
    4.78
    %Volatility
    
    
    74
    %Dividend yield
    
    
    Estimated fair value per share of underlying common stock
    
    $
    11.50
     8




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(e) Net Income (Loss) Allocable to Common Stockholders per Share
 Earnings per Share
  Three Months Ended March 31,2008
    
    2007Stock options
    
    
    3,923,022
    
    
    
    6,393,006Stock options granted outside of plans
    
    
    54,375
    
    
    
    58,018Restricted stock units
    
    
    102,706
    
    
    
    Warrants
    
    
    
    
    
    
    13,772Series C convertible preferred stock
    
    
    
    
    
    
    17,532,502Series D convertible preferred stock
    
    
    
    
    
    
    1,993,325
 Participating Securities and the Two-Class Method
under FASB Statement 128
   (f) Investments
  9




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(g)  Government-Sponsored Research and Development
  (h) Comprehensive Income (Loss)
 Reporting Comprehensive Income
 (i) Recent Accounting Pronouncements
 Disclosures about Derivative Instruments and
Hedging Activities Accounting for Derivative Instruments and Hedging Activities
 Noncontrolling Interests in Consolidated
Financial Statements
 Business Combinations.
 The Fair Value Option for Financial Assets and
Financial Liabilities, Including an Amendment of FASB Statement No. 115
 Fair Value Measurements
 10




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(4) Financial Instruments
  Level 1:
    
    Unadjusted quoted prices in active markets for identical assets or liabilitiesLevel 2:
    
    Unadjusted quoted prices in active markets for similar assets or liabilities, or
Unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or
Inputs other than quoted prices that are observable for the assets or liabilityLevel 3:
    
    Unobservable inputs for the asset or liability
  Fair Value at Reporting Date UsingTotal
    
    
    Level 1
    
    
    Level 2
    
    
    Level 3Assets:Fixed income available-for-sale securities
    
    $
    25,080
    
    
    $
    
    
    
    $
    25,080
    
    
    $
    
  (5) Related Party Transactions
     11




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(6) Short-Term Investments
  Amortized
    
    
    Fair
    
    
    UnrealizedCost
    
    
    Value
    
    
    Gain (Loss)Bonds, notes and other securities issued by the United States government and agencies
    
    $
    3,308
    
    
    $
    3,308
    
    
    $
    Commercial paper
    
    
    747
    
    
    
    747
    
    
    
    Corporate bonds
    
    
    350
    
    
    
    350
    
    
    
    $
    4,405
    
    
    $
    4,405
    
    
    $
    
 12




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##### Table of Contents



(7) Inventories
  March 31,
    
    
    December 31,2008
    
    
    2007Finished products
    
    $
    2,741
    
    
    $
    2,760Work in process at customers locations
    
    
    3,657
    
    
    
    3,084Raw material and components
    
    
    3,628
    
    
    
    3,661$
    10,026
    
    
    $
    9,505
  Restatement and
Revision of Accounting Research Bulletins, Chapter 4: Inventory Pricing
 (8) Factoring
 Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities
  (9) Loan
   Interest on Receivables and Payables
  13




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(10) Commitments and Contingencies
 (a) Leases
  Nine months ending December 31, 2008
    
    $
    1,578Year ending December 31, 2009
    
    
    1,543Year ending December 31, 2010
    
    
    1,224Year ending December 31, 2011
    
    
    719Year ending December 31, 2012
    
    
    51Total
    
    $
    5,115
 (b) Office of the Chief Scientist Grants
  (c) Guarantees
   (d) Purchase Commitments
  14




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(11) Income Taxes
   Accounting for Uncertainty in Income Taxes  an interpretation of FASB Statement No. 109
   (12) Stockholders Equity
 (a) Employee Benefit Plans
   15




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st st
   (b) Stock Award Activity
  WeightedNumber of
    
    
    
    
    
    
    
    
    
    AverageShares
    
    Number of
    
    Weighted
    
    Contractual
    
    AggregateAvailable
    
    Options
    
    Average
    
    Life
    
    Intrinsicfor Grant
    
    Outstanding
    
    Exercise Price
    
    (in Years)
    
    ValueBalance at December 31, 2007
    
    
    82,815
    
    
    
    6,766,352
    
    
    $
    1.39Authorized
    
    
    1,233,013
    
    
    
    Restricted stock units granted
    
    
    (1,049,105
    )
    
    
    Restricted stock units cancelled and forfeited
    
    
    24,899
    
    
    
    Options granted
    
    
    
    
    
    
    Options exercised
    
    
    
    
    
    
    (737,600
    )
    
    $
    0.54Options cancelled and forfeited
    
    
    102,110
    
    
    
    (102,110
    )
    
    $
    2.22Balance at March 31, 2008
    
    
    393,732
    
    
    
    5,926,642
    
    
    $
    1.48
    
    
    
    6.42
    
    
    $
    8,605Options vested and expected to vest at March 31, 2008
    
    
    
    
    
    
    5,864,464
    
    
    $
    1.46
    
    
    
    6.40
    
    
    $
    8,569Options exercisable at March 31, 2008
    
    
    
    
    
    
    4,481,137
    
    
    $
    0.99
    
    
    
    6.03
    
    
    $
    7,463
   (13) Segment and Geographic Information
 Disclosures about Segments of an Enterprise and Related Information
 16




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Three Months Ended March 31,2008
    
    
    2007Revenues:Europe, Middle East and Africa
    
    $
    15,025
    
    
    $
    14,996North America
    
    
    4,544
    
    
    
    4,754Asia Pacific and India
    
    
    5,438
    
    
    
    4,489Caribbean and Latin America
    
    
    2,876
    
    
    
    3,216$
    27,883
    
    
    $
    27,455Foreign countries which contributed more than 10% of revenues:
    
    Russia
    
    
    Russia
 Three Months Ended March 31,2008
    
    
    2007Sales originating from:United States
    
    $
    13,610
    
    
    $
    14,041Israel
    
    
    11,846
    
    
    
    11,417Other foreign countries
    
    
    2,427
    
    
    
    1,997$
    27,883
    
    
    $
    27,455
 March 31,
    
    
    December 31,2008
    
    
    2007Long-lived assets, net:United States
    
    $
    2,809
    
    
    $
    3,121Israel
    
    
    3,005
    
    
    
    3,067Other foreign countries
    
    
    589
    
    
    
    532$
    6,403
    
    
    $
    6,720
 (14) Subsequent Events
 SEC Inquiry and Investigation by Independent Counsel
     17




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Late SEC Filing and Notice of Possible NASDAQ Delisting
   18




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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 Consolidated Financial
Statements and Notes thereto for the year ended December 31, 2007, included in our Annual Report on
Form 10-K, filed with the Securities and Exchange Commission on March 14, 2008. 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, plans, objectives,
expectations and intentions. 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.
 Overview
       Critical Accounting Policies and Estimates
  19




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Results of Operations
 Comparison of Three Months Ended March 31, 2008 and 2007
 Revenues
 Three Months Ended March 31,2008
    
    
    2007Percentage
    
    
    
    
    
    
    Percentageof Total
    
    
    
    
    
    
    of Total
    
    
    Period-to-Period ChangeAmount
    
    
    Revenue
    
    
    Amount
    
    
    Revenue
    
    
    Amount
    
    
    Percentage(dollars in thousands)Revenues:IP Products
    
    $
    20,744
    
    
    
    74
    %
    
    $
    17,650
    
    
    
    64
    %
    
    $
    3,094
    
    
    
    18
    %DCME Products
    
    
    1,576
    
    
    
    6
    
    
    
    5,134
    
    
    
    19
    
    
    
    (3,558
    )
    
    
    (69
    )Services
    
    
    5,563
    
    
    
    20
    
    
    
    4,671
    
    
    
    17
    
    
    
    892
    
    
    
    19Total revenues
    
    $
    27,883
    
    
    
    100
    %
    
    $
    27,455
    
    
    
    100
    %
    
    $
    428
    
    
    
    2
    %Revenue by Geography:Europe, Middle East and Africa
    
    $
    15,025
    
    
    
    54
    %
    
    $
    14,996
    
    
    
    55
    %
    
    $
    29
    
    
    
    
    %North America
    
    
    4,544
    
    
    
    16
    
    
    
    4,754
    
    
    
    17
    
    
    
    (210
    )
    
    
    (4
    )Asia Pacific and India
    
    
    5,438
    
    
    
    20
    
    
    
    4,489
    
    
    
    16
    
    
    
    949
    
    
    
    21Caribbean and Latin America
    
    
    2,876
    
    
    
    10
    
    
    
    3,216
    
    
    
    12
    
    
    
    (340
    )
    
    
    (11
    )Total revenues
    
    $
    27,883
    
    
    
    100
    %
    
    $
    27,455
    
    
    
    100
    %
    
    $
    428
    
    
    
    2
    %
      20




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Cost of Revenues and Gross Profit
 Three Months Ended March 31,2008
    
    
    2007Percentage
    
    
    
    
    
    
    Percentageof Total
    
    
    
    
    
    
    of Total
    
    
    Period-to-Period ChangeAmount
    
    
    Revenue
    
    
    Amount
    
    
    Revenue
    
    
    Amount
    
    
    Percentage(dollars in thousands)Cost of Revenues:IP Products
    
    $
    8,408
    
    
    
    41
    %
    
    $
    7,196
    
    
    
    41
    %
    
    $
    1,212
    
    
    
    17
    %DCME Products
    
    
    585
    
    
    
    37
    
    
    
    2,121
    
    
    
    41
    
    
    
    (1,536
    )
    
    
    (72
    )Services
    
    
    3,938
    
    
    
    71
    
    
    
    2,698
    
    
    
    58
    
    
    
    1,240
    
    
    
    46Total cost of revenues
    
    $
    12,931
    
    
    
    46
    %
    
    $
    12,015
    
    
    
    44
    %
    
    $
    916
    
    
    
    8
    %Gross Profit:IP Products
    
    $
    12,336
    
    
    
    59
    %
    
    $
    10,454
    
    
    
    59
    %
    
    $
    1,882
    
    
    
    18
    %DCME Products
    
    
    991
    
    
    
    63
    
    
    
    3,013
    
    
    
    59
    
    
    
    (2,022
    )
    
    
    (67
    )Services
    
    
    1,625
    
    
    
    29
    
    
    
    1,973
    
    
    
    42
    
    
    
    (348
    )
    
    
    (18
    )Total gross profit
    
    $
    14,952
    
    
    
    54
    %
    
    $
    15,440
    
    
    
    56
    %
    
    $
    (488
    )
    
    
    (3
    )%
       21




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##### Table of Contents



Operating Expenses
 Three Months Ended March 31,2008
    
    
    2007Percentage
    
    
    
    
    
    
    Percentageof Total
    
    
    
    
    
    
    of Total
    
    
    Period-to-Period ChangeAmount
    
    
    Revenue
    
    
    Amount
    
    
    Revenue
    
    
    Amount
    
    
    Percentage(dollars in thousands)Research and development, net
    
    $
    7,873
    
    
    
    28
    %
    
    $
    7,734
    
    
    
    28
    %
    
    $
    139
    
    
    
    2
    %Sales and marketing
    
    
    7,806
    
    
    
    28
    
    
    
    5,963
    
    
    
    22
    
    
    
    1,843
    
    
    
    31General and administrative
    
    
    2,936
    
    
    
    11
    
    
    
    2,353
    
    
    
    8
    
    
    
    583
    
    
    
    25Total operating expenses
    
    $
    18,615
    
    
    
    67
    %
    
    $
    16,050
    
    
    
    58
    %
    
    $
    2,565
    
    
    
    16
    %
 Research and development expenses, net.
  Sales and marketing expenses.
  General and administrative expenses.
  Other income (expense), net.
 22




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Income taxes.
 Net loss.
 Liquidity and Capital Resources
  Operating Activities
    Investing Activities
    23




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Financing Activities
    Contractual Obligations and Commitments
  April 1, 2008
    
    
    January 1, 2009
    
    
    January 1, 2010
    
    
    January 1, 2011through
    
    
    through
    
    
    through
    
    
    throughTotal
    
    
    December 31, 2008
    
    
    December 31, 2009
    
    
    December 31, 2010
    
    
    December 31, 2012Contractual Obligations:Debt obligations
    
    $
    2,511
    
    
    $
    2,511
    
    
    $
    
    
    
    $
    
    
    
    $
    Operating lease obligations
    
    
    5,115
    
    
    
    1,578
    
    
    
    1,543
    
    
    
    1,224
    
    
    
    770Purchase obligations
    
    
    2,828
    
    
    
    2,828
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    10,454
    
    
    $
    6,917
    
    
    $
    1,543
    
    
    $
    1,224
    
    
    $
    770
 Off-Balance Sheet Arrangements
  
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 Foreign Currency Risk
  Interest Rate Sensitivity
   
 ITEM 4. CONTROLS AND PROCEDURES
 Limitations of Disclosure Controls and Procedures and Internal Control Over Financial Reporting
  24




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Disclosure Controls and Procedures
   Changes in Internal Control Over Financial Reporting
  
 PART II. OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
  
 ITEM 1A. RISK FACTORS
  Risks Related to Our Business
 We have received a letter regarding a confidential informal inquiry by the SEC, and cooperation with such governmental inquiry
has and will continue to cost significant amounts of money and management resources.
  We have not been in compliance with SEC reporting requirements and NASDAQ listing requirements and may continue to face compliance issues with such regulatory bodies. If we are unable to remain in compliance with SEC reporting requirements and
NASDAQ listing requirements our business will be harmed.
  An informal inquiry by the SEC may result in charges filed against us and in fines or penalties.
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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.
  
    
    capital spending levels of service providers;
    
    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;
    
    changes in the regulation of communications services; and
    
    general global economic conditions including a general global recession or other general
decrease in corporate spending.
  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.
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We have not had sustained profits and our losses could continue.
  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.
    
    
    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.
  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.
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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.
  Our revenue and operating results may be adversely impacted if the market for IP products does not
develop as we expect or if sales of our IP products and other products do not make up for expected
declines in revenue from our DCME products and if the mix between new sales and expansion sales
changes substantially.
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Our accountants identified and reported to us material weaknesses for the years ended December 31,
2003, 2004 and 2005, relating to our internal controls over financial reporting and significant
deficiencies for the year ended December 31, 2006. If we fail to maintain proper and effective
internal controls, our ability to produce accurate financial statements could be impaired, which
could adversely affect our operating results, our ability to operate our business and our stock
price.
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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.
   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.
   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.
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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.
  
    
    consolidation in the telecommunications industry affecting our customers;
    
    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 of our customers;
    
    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.
  
    
    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;
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
    
    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.
     If we do not respond rapidly to technological changes or to changes in industry standards, our
products could become obsolete.
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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.
  
    
    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.
   
    
    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.
 If we are not able to manage growth and expansion of our operations and the expenses associated
with operations, or if our business does not grow as we expect, our operating results may suffer.
  33




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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.
   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, and 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.
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We may face risks associated with our international sales that could impair our ability to
grow our revenues.
  
    
    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 consequences;
    
    unfavorable foreign exchange movements, particularly the continued devaluation of the US
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.
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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.
    We have a substantial employee presence in India and the hiring and retention of skilled employees
in India has become increasingly difficult. If we are unable to hire and retain skilled employees
in India and elsewhere, we may not be able to execute our business strategy.
  36




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



If we are not able to obtain necessary licenses of third-party technology at acceptable prices, or
at all, our products could become obsolete.
  Failures by our strategic partners or by us in integrating our products with those provided by our
strategic partners could seriously harm our business.
  
    
    a loss of, or delay in, recognizing revenues;
    
    increased service, support and warranty costs and a diversion of development
resources; and
    
    network performance penalties.
  
    
    a loss of customers and market share; and
    
    a failure to attract new customers or achieve market acceptance for our products.
 Our ability to compete and our business could be jeopardized if we are unable to protect our
intellectual property.
   38




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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.
  
    
    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.
  If we acquire
or invest in other companies, assets or technologies and we are not able to
integrate them with our business, or we do not realize the anticipated financial and strategic
goals for any of these transactions, our financial performance may be impaired.
  
    
    we may find that the acquired company, asset or technology does not further our business
strategy, that we overpaid for the company, asset or technology or that the economic
conditions underlying our acquisition decision have changed;
    
    we may have difficulty integrating the assets, technologies, operations or personnel of
an acquired company, or retaining the key personnel of the acquired company;
    
    our ongoing business and managements attention may be disrupted or diverted by
transition or integration issues and the complexity of managing geographically or culturally
diverse enterprises;
    
    we may encounter difficulty entering and competing in new product or geographic markets,
and we may face increased competition, including price competition or intellectual property
litigation; and
    
    we may experience significant problems or liabilities associated with product quality,
technology and legal contingencies relating to the acquired business or technology, such as
intellectual property or employment matters.
  39




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Regulation of the telecommunications industry could harm our operating results and future
prospects.
  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.
   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.
   We have invested substantially in our enhanced access switching solution and we may be unable to
achieve and maintain substantial sales.
  40




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##### Table of Contents



Future interpretations of existing accounting standards could adversely affect our operating
results.
  Software Revenue Recognition Software
Revenue Recognition with Respect to Certain Transactions
 
    
    software arrangements that include undelivered elements for which we do not have vendor
specific objective evidence, or VSOE, of fair value;
    
    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.
  Product liability claims related to our customers networks could result in substantial costs.
  Increased political, economic and social instability in the Middle East, may adversely affect our
business and operating results.
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Our operations may be disrupted by the obligations of our personnel to perform military service.
  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.
   
    
    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.
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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 (a) Sales of Unregistered Securities
  (b) Use of Proceeds from Public Offering of Common Stock
  
 ITEM 3. DEFAULTS ON SENIOR SECURITIES
  
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  
 ITEM 5. OTHER INFORMATION
  
 ITEM 6. EXHIBITS
  Exhibit
    
    Description of document3.1
    
    Amended and Restated Certificate of Incorporation of the Registrant (1)3.2
    
    Amended and Restated Bylaws of the Registrant (1)4.1
    
    Reference is made to Exhibits 3.1 and 3.24.2
    
    Specimen stock certificate (1)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 200231.2
    
    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 200232
    
    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
 
 (1)
    
    Filed as an exhibit to Veraz Networks, Inc. Registration Statement on Form S-1 (No.
333-138121) and incorporated herein by reference. 43




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##### Table of Contents



SIGNATURE
  Veraz Networks, Inc.Date: July 29, 2008
    
    By:
    
    /s/ Al WoodAl Wood, Chief Financial Officer(Principal Financial and
Chief Accounting Officer)
 44




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##### Table of Contents



EXHIBIT INDEX
 Exhibit
    
    Description of document3.1
    
    Amended and Restated Certificate of Incorporation of the Registrant (1)3.2
    
    Amended and Restated Bylaws of the Registrant (1)4.1
    
    Reference is made to Exhibits 3.1 and 3.24.2
    
    Specimen stock certificate (1)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 200231.2
    
    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 200232
    
    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
 
 (1)
    
    Filed as an exhibit to Veraz Networks, Inc. Registration Statement on Form S-1 (No.
333-138121) and incorporated herein by reference.