##### 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 September 30, 2007
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
 For the transition period from               to
 Commission file number 001-33391
 Veraz Networks, Inc.
  Delaware
(State or other jurisdiction of 
incorporation or organization)
    
    94-3409691
(I.R.S. Employer Identification Number)
 926 Rock Avenue, Suite 20
San Jose, California 95131
(408) 750-9400
 þ o
  o o þ
 o þ




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##### 



VERAZ NETWORKS, INC.
 FORM 10-Q
 For the Quarterly Period Ended September 30, 2007
 INDEX
 PART I. FINANCIAL INFORMATIONITEM 1. FINANCIAL STATEMENTS
    
    3Condensed Consolidated Balance Sheets
    
    3Condensed Consolidated Statements of Operations
    
    4Condensed Consolidated Statements of Cash Flows
    
    5Notes to Condensed Consolidated Financial Statements
    
    6ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
    
    20ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
    
    31ITEM 4. CONTROLS AND PROCEDURES
    
    31PART II. OTHER INFORMATIONITEM 1. LEGAL PROCEEDINGS
    
    32ITEM 1A. RISK FACTORS
    
    32ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
    
    49ITEM 3. DEFAULTS ON SENIOR SECURITIES
    
    49ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
    
    49ITEM 5. OTHER INFORMATION
    
    49ITEM 6. EXHIBITS
    
    50SIGNATURES
    
    51EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32
  2




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##### Table of Contents



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)
 September 30,
    
    
    December 31,2007
    
    
    2006ASSETSCurrent assets:Cash and cash equivalents
    
    $
    56,822
    
    
    $
    23,189Restricted cash
    
    
    606
    
    
    
    500Short-term investments
    
    
    6,224
    
    
    
    Accounts receivable (net of allowances of $167 and $183 as of September 30, 2007 and December 31, 2006,
respectively)
    
    
    29,607
    
    
    
    24,451Inventories
    
    
    9,255
    
    
    
    14,203Prepaid expenses
    
    
    1,508
    
    
    
    2,578Deferred tax assets
    
    
    126
    
    
    
    Other current assets
    
    
    2,396
    
    
    
    2,614Due from related parties
    
    
    860
    
    
    
    1,452Total current assets
    
    
    107,404
    
    
    
    68,987Property and equipment, net
    
    
    7,083
    
    
    
    7,123Other assets
    
    
    99
    
    
    
    151Total assets
    
    $
    114,586
    
    
    $
    76,261LIABILITIES, REDEEMABLE AND CONVERTIBLE PREFERRED STOCK, AND STOCKHOLDERS EQUITY (DEFICIT)Current liabilities:Accounts payable
    
    $
    11,057
    
    
    $
    9,042Accrued expenses
    
    
    15,781
    
    
    
    16,519Income tax payable
    
    
    542
    
    
    
    258Current portion of loan payable (net of unamortized discount of $257 and $433 as of September 30, 2007 and
December 31, 2006, respectively)
    
    
    3,302
    
    
    
    1,277Current portion of deferred revenue
    
    
    14,085
    
    
    
    27,074Due to related parties
    
    
    4,682
    
    
    
    7,256Total current liabilities
    
    
    49,449
    
    
    
    61,426Loan payable, less current portion (net of unamortized discount of $8 and $170 as of September 30, 2007 and
December 31, 2006, respectively)
    
    
    613
    
    
    
    3,147Noncurrent portion of deferred revenue
    
    
    
    
    
    
    454Total liabilities
    
    
    50,062
    
    
    
    65,027Commitments and contingencies (Note 10)Redeemable and convertible preferred stock:Redeemable preferred stock, Series A-1, $0.001 par value; none and 5,000,048 shares authorized; none and
5,000,048 shares issued and outstanding at September 30, 2007 and December 31, 2006
    
    
    
    
    
    
    15,871Redeemable preferred stock, Series A-2, $0.001 par value; none and 1 share authorized; none and 1 share issued and
outstanding at September 30, 2007 and December 31, 2006
    
    
    
    
    
    
    1,349Redeemable preferred stock, Series B-1, $0.001 par value; none and 9,000,000 shares authorized; none and
9,000,000 shares issued and outstanding at September 30, 2007 and December 31, 2006
    
    
    
    
    
    
    2,576Convertible preferred stock, Series C, $0.001 par value; none and 36,000,000 shares authorized; none and
17,532,502 shares issued and outstanding at September 30, 2007 and December 31, 2006
    
    
    
    
    
    
    38,283Convertible preferred stock, Series D, $0.001 par value; none and 5,000,000 shares authorized; none and 996,596
shares issued and outstanding at September 30, 2007 and December 31, 2006, respectively
    
    
    
    
    
    
    6,462Total redeemable and convertible preferred stock
    
    
    
    
    
    
    64,541Stockholders equity (deficit):Undesignated preferred stock, $0.001 par value; 10,000,000 and none shares authorized; none shares issued and
outstanding as of September 30, 2007 and December 31, 2006, respectively
    
    
    
    
    
    
    Common stock, $0.001 par value; 100,000,000 shares authorized; 40,747,959 and 13,789,287 shares issued and
outstanding as of September 30, 2007 and December 31, 2006, respectively
    
    
    41
    
    
    
    14Additional paid-in capital
    
    
    123,236
    
    
    
    6,975Deferred stock-based compensation
    
    
    (431
    )
    
    
    (690
    )Accumulated deficit
    
    
    (58,322
    )
    
    
    (59,606
    )Total stockholders equity (deficit)
    
    
    64,524
    
    
    
    (53,307
    )Total liabilities, redeemable and convertible preferred stock, and stockholders equity (deficit)
    
    $
    114,586
    
    
    $
    76,261
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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 Ended September 30,
    
    
    Nine Months Ended September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Revenues:IP Products
    
    $
    19,409
    
    
    $
    11,537
    
    
    $
    58,428
    
    
    $
    31,905DCME Products
    
    
    6,485
    
    
    
    10,527
    
    
    
    16,115
    
    
    
    30,078Services
    
    
    6,269
    
    
    
    4,072
    
    
    
    16,233
    
    
    
    8,846Total revenues
    
    
    32,163
    
    
    
    26,136
    
    
    
    90,776
    
    
    
    70,829Cost of Revenues:IP Products
    
    
    9,792
    
    
    
    5,704
    
    
    
    24,625
    
    
    
    14,605DCME Products
    
    
    2,355
    
    
    
    3,794
    
    
    
    5,642
    
    
    
    11,319Services
    
    
    3,067
    
    
    
    2,716
    
    
    
    8,820
    
    
    
    7,286Total cost of revenues
    
    
    15,214
    
    
    
    12,214
    
    
    
    39,087
    
    
    
    33,210Gross profit
    
    
    16,949
    
    
    
    13,922
    
    
    
    51,689
    
    
    
    37,619Operating Expenses:Research and development (net of grants from the Office of the
Chief Scientist in Israel of $371 and $297 in the three months
ended September 30, 2007 and 2006, respectively, and $1,107 and
$892 in the nine months ended September 30, 2007 and 2006,
respectively
    
    
    7,571
    
    
    
    8,607
    
    
    
    23,175
    
    
    
    24,902Sales and marketing
    
    
    7,017
    
    
    
    6,059
    
    
    
    19,956
    
    
    
    19,226General and administrative
    
    
    2,361
    
    
    
    2,439
    
    
    
    7,082
    
    
    
    6,565Total operating expenses
    
    
    16,949
    
    
    
    17,105
    
    
    
    50,213
    
    
    
    50,693Income (loss) from operations
    
    
    0
    
    
    
    (3,183
    )
    
    
    1,476
    
    
    
    (13,074
    )Other income, net
    
    
    545
    
    
    
    224
    
    
    
    650
    
    
    
    458Income (loss) before income taxes
    
    
    545
    
    
    
    (2,959
    )
    
    
    2,126
    
    
    
    (12,616
    )Income taxes
    
    
    213
    
    
    
    400
    
    
    
    842
    
    
    
    422Net income (loss)
    
    
    332
    
    
    
    (3,359
    )
    
    
    1,284
    
    
    
    (13,038
    )Deemed dividend on Series D convertible preferred stock
    
    
    
    
    
    
    
    
    
    
    (5,980
    )
    
    
    Net income (loss) allocable to common stockholders
    
    $
    332
    
    
    $
    (3,359
    )
    
    $
    (4,696
    )
    
    $
    (13,038
    )Net income (loss) allocable to common stockholders per share  basic
    
    $
    0.01
    
    
    $
    (0.25
    )
    
    $
    (0.15
    )
    
    $
    (0.98
    )Net income (loss) allocable to common stockholders per share  diluted
    
    $
    0.01
    
    
    $
    (0.25
    )
    
    $
    (0.15
    )
    
    $
    (0.98
    )Weighted-average shares outstanding:Basic
    
    
    40,684,379
    
    
    
    13,466,209
    
    
    
    31,544,530
    
    
    
    13,328,771Diluted
    
    
    46,175,103
    
    
    
    13,466,209
    
    
    
    31,544,530
    
    
    
    13,328,771Related Party TransactionsThe Condensed Consolidated Statements of Operations shown above include the following related
party transactions:Three Months Ended September 30,
    
    Nine Months Ended September 30,2007
    
    2006
    
    2007
    
    2006Revenues:IP Products, related party sales
    
    $
    116
    
    
    $
    188
    
    
    $
    225
    
    
    $
    497DCME Products, related party sales
    
    
    131
    
    
    
    
    
    
    
    410
    
    
    
    3,120Cost of Revenues:IP Products, costs arising from related party purchases
    
    
    138
    
    
    
    170
    
    
    
    154
    
    
    
    2,308DCME Products, costs arising from related party purchases
    
    
    2,087
    
    
    
    3,602
    
    
    
    5,150
    
    
    
    10,635Operating Expenses:Research and development
    
    
    544
    
    
    
    1,138
    
    
    
    1,757
    
    
    
    3,787Sales and marketing
    
    
    1,261
    
    
    
    549
    
    
    
    3,687
    
    
    
    2,975General and administrative
    
    
    72
    
    
    
    118
    
    
    
    278
    
    
    
    458Other income (expense):Other income
    
    
    113
    
    
    
    
    
    
    
    113
    
    
    
    118
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VERAZ NETWORKS, INC. AND SUBSIDIARIES
 
 Condensed Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)
 Nine Months Ended September 30,2007
    
    
    2006Cash flows from operating activities:Net income (loss)
    
    $
    1,284
    
    
    $
    (13,038
    )Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:Depreciation
    
    
    2,768
    
    
    
    2,249Stock-based compensation
    
    
    1,592
    
    
    
    786Provision for doubtful accounts
    
    
    (16
    )
    
    
    (122
    )Amortization of debt issuance cost
    
    
    338
    
    
    
    Deferred income taxes
    
    
    (176
    )
    
    
    Net changes in operating assets and liabilities:Accounts receivable
    
    
    (16,166
    )
    
    
    (13,551
    )Sold accounts receivable
    
    
    11,071
    
    
    
    12,245Inventories
    
    
    4,948
    
    
    
    (5,250
    )Prepaid expenses and other current assets
    
    
    (1,604
    )
    
    
    (838
    )Due from related parties
    
    
    592
    
    
    
    1,830Accounts payable
    
    
    3,087
    
    
    
    2,881Accrued expenses
    
    
    (738
    )
    
    
    1,642Income tax payable
    
    
    284
    
    
    
    387Deferred revenue
    
    
    (13,443
    )
    
    
    7,211Due to related parties
    
    
    (2,574
    )
    
    
    (2,317
    )Net cash used in operating activities
    
    
    (8,753
    )
    
    
    (5,885
    )Cash flows from investing activities:Restricted cash
    
    
    (106
    )
    
    
    1,111Short-term investments, net
    
    
    (6,224
    )
    
    
    477Purchases of property and equipment, net
    
    
    (2,474
    )
    
    
    (3,477
    )Other assets
    
    
    57
    
    
    
    (37
    )Net cash used in investing activities
    
    
    (8,747
    )
    
    
    (1,926
    )Cash flows from financing activities:Proceeds from the exercise of stock options
    
    
    400
    
    
    
    166Proceeds from sale of common stock in connection with the Companys initial public offering
    
    
    54,000
    
    
    
    Payment of underwriting discounts and other offering costs
    
    
    (5,818
    )
    
    
    (441
    )Proceeds from sale of Series D convertible preferred stock
    
    
    3,449
    
    
    
    Issuance cost for Series D convertible preferred stock
    
    
    (37
    )
    
    
    Redemption of redeemable preferred stock
    
    
    (14
    )
    
    
    Repayment of loan
    
    
    (847
    )
    
    
    Proceeds from borrowings
    
    
    
    
    
    
    15,000Net cash provided by financing activities
    
    
    51,133
    
    
    
    14,725Net increase in cash and cash equivalents
    
    
    33,633
    
    
    
    6,914Cash and cash equivalents at beginning of period
    
    
    23,189
    
    
    
    20,437Cash and cash equivalents at end of period
    
    $
    56,822
    
    
    $
    27,351Supplemental disclosure of cash flow information:Cash paid:Interest
    
    $
    280
    
    
    $
    599Income taxes
    
    $
    716
    
    
    $
    Noncash financing activities:Deemed dividend on Series D convertible preferred stock
    
    $
    5,980
    
    
    $
    
  5




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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
  6




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(b) Concentrations
        Three Months Ended September 30,
    
    Nine Months Ended September 30,2007
    
    2006
    
    2007
    
    2006Revenues:Belgacom
    
    
    *
    
    
    
    10
    %
    
    
    *
    
    
    
    16
    %Excel Communications
    
    
    12
    %
    
    
    *
    
    
    
    *
    
    
    
    *Classica
    
    
    *
    
    
    
    19
    %
    
    
    *
    
    
    
    14
    %OSS Corporation
    
    
    10
    %
    
    
    *
    
    
    
    *
    
    
    
    *
 September 30,
    
    December 31,2007
    
    2006Accounts Receivable and Due from Related Parties:Classica
    
    
    10
    %
    
    
    16
    %
 
 *
    
    Represents less than 10% (c) Revenue Recognition
  7




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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.
         8




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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
 9




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Share-Based Payment
 Disclosure About Fair Value of Financial Instruments
  Nine Months Ended
    
    Nine Months EndedSeptember 30, 2007
    
    September 30, 2006Expected term in years
    
    
    6.25
    
    
    
    6.25Risk-free interest rate
    
    
    4.72
    %
    
    
    5.00
    %Volatility
    
    
    73
    %
    
    
    79
    %Dividend yield
    
    
    
    
    
    
    Estimated fair value per
share of underlying common
stock
    
    $
    8.55
    
    
    $
    6.18
   10




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(e) Net Income (Loss) Allocable to Common Stockholders per Share
 Earnings per Share
  Three Months Ended September 30,
    
    Nine Months Ended September 30,2007
    
    2006
    
    2007
    
    2006Stock options
    
    
    5,396,261
    
    
    
    6,255,046
    
    
    
    5,615,872
    
    
    
    6,001,308Stock options granted outside of plans
    
    
    56,512
    
    
    
    56,359
    
    
    
    57,266
    
    
    
    55,233Restricted stock units
    
    
    37,951
    
    
    
    
    
    
    
    109,676
    
    
    
    Warrants
    
    
    
    
    
    
    11,720
    
    
    
    
    
    
    
    10,326Series C convertible preferred stock
    
    
    
    
    
    
    17,482,502
    
    
    
    
    
    
    
    17,482,502
 Participating Securities and the Two-Class Method
under FASB Statement 128
  (f) Investments
  11




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g) Comprehensive Income (Loss)
 Reporting Comprehensive Income
 (h) Recent Accounting Pronouncements
 The Fair Value Option for Financial Assets and
Financial Liabilities, Including an Amendment of FASB Statement No. 115
 Fair Value Measurements
 (4) Out-of-period adjustment
  Considering the Effects of Prior Year
Misstatements when Quantifying Misstatements in Current Year Financial Statements
  Year ended December 31, 2006PreviouslyReported
    
    As RevisedBalance Sheet:Inventories
    
    $
    13,956
    
    
    $
    14,203Stockholders deficit
    
    
    (53,554
    )
    
    
    (53,307
    )Statement of Operations:Loss from operations
    
    
    (14,160
    )
    
    
    (13,913
    )Net loss
    
    $
    (13,917
    )
    
    $
    (13,670
    )Net loss allocable to common stockholders per share  basic and diluted
    
    $
    (1.04
    )
    
    $
    (1.02
    )
 (5) Related Party Transactions
  12




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(6) Short-Term Investments
  Amortized
    
    
    Fair
    
    
    UnrealizedCost
    
    
    Value
    
    
    Gain (Loss)Bonds, notes and other securities United States government and agencies
    
    $
    2,500
    
    
    $
    2,500
    
    
    $
    Commercial paper
    
    
    2,407
    
    
    
    2,407
    
    
    
    Corporate bonds
    
    
    1,317
    
    
    
    1,317
    
    
    
    $
    6,224
    
    
    $
    6,224
    
    
    $
    
 (7) Inventories
  September 30,
    
    
    December 31,2007
    
    
    2006Finished products
    
    $
    3,157
    
    
    $
    1,413Work in process at customers locations
    
    
    2,814
    
    
    
    8,056Raw material and components
    
    
    3,284
    
    
    
    4,734$
    9,255
    
    
    $
    14,203
  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
  14




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PrincipalThree months ended December 31, 2007
    
    $
    846Year ended December 31, 2008
    
    
    3,287Total payments
    
    $
    4,133
 Interest on Receivables and Payables
 (10) Commitments and Contingencies
 (a) Leases
  Three months ended December 31, 2007
    
    $
    551Year ended December 31, 2008
    
    
    1,743Year ended December 31, 2009
    
    
    1,097Year ended December 31, 2010
    
    
    841Year ended December 31, 2011
    
    
    567Total
    
    $
    4,799
 (b) Office of the Chief Scientist Grants
  15




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(c) Guarantees
   (d) Purchase Commitments
  (11) Income Taxes
   Accounting for Uncertainty in Income Taxesan interpretation of FASB Statement No. 109.
   16




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(12) Reverse Stock Split
  (13) Preferred Stock
    Shares
    
    Liquidation
    
    Aggregate
    
    AggregateShares
    
    Issued and
    
    Preference
    
    Liquidation
    
    RedemptionAuthorized
    
    Outstanding
    
    per Share
    
    Preference
    
    ValueRedeemable preferred stock:Series A-1
    
    
    5,000,048
    
    
    
    5,000,048
    
    
    $
    1.60

    
    $
    8,000

    
    $
    5Series A-2
    
    
    1
    
    
    
    1
    
    
    $
    1,000,000

    
    
    1,000

    
    
    Series B-1
    
    
    9,000,000
    
    
    
    9,000,000
    
    
    $
    1.50

    
    
    13,500

    
    
    9Subtotal
    
    
    14,000,049
    
    
    
    14,000,049
    
    
    
    
    
    
    
    22,500

    
    
    14Convertible preferred stock:Series C
    
    
    36,000,000
    
    
    
    17,532,502
    
    
    $
    3.432

    
    
    60,172

    
    
    Series D
    
    
    5,000,000
    
    
    
    1,523,951
    
    
    $
    6.54

    
    
    9,967

    
    
    55,000,049
    
    
    
    33,056,502
    
    
    
    
    
    
    $
    92,639

    
    $
    14
 Classification and Measurement of Redeemable
Securities
 (14) Stockholders Equity
  (a) Warrants
  17




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(b) Employee Benefit Plans
    (c) Restricted Stock Units and Restricted Stock
   18




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(d) 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, 2006
    
    
    298,597
    
    
    
    7,823,874
    
    
    $
    1.12Authorized
    
    
    250,652Restricted stock units and Restricted stock granted
    
    
    (460,320
    )Restricted stock units forfeited
    
    
    3,225Options granted
    
    
    (250,750
    )
    
    
    250,750
    
    
    $
    8.55Options exercised
    
    
    
    
    
    
    (652,986
    )
    
    $
    0.61Options cancelled and forfeited
    
    
    288,365
    
    
    
    (288,365
    )
    
    $
    2.78Balance at September 30, 2007
    
    
    129,769
    
    
    
    7,133,273
    
    
    $
    1.36
    
    
    
    6.79
    
    
    $
    40,809Options vested and expected to vest at September 30, 2007
    
    
    
    
    
    
    7,032,192
    
    
    $
    1.33
    
    
    
    6.77
    
    
    $
    40,395Options exercisable at September 30, 2007
    
    
    
    
    
    
    4,978,700
    
    
    $
    0.77
    
    
    
    6.22
    
    
    $
    31,145
 (15) Segment and Geographic Information
 Disclosures about Segments of an Enterprise and Related Information
 Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Revenues:Europe, Middle East and Africa
    
    $
    13,309
    
    
    $
    16,687
    
    
    $
    43,862
    
    
    $
    52,270North America
    
    
    10,889
    
    
    
    3,452
    
    
    
    24,707
    
    
    
    9,521Asia Pacific and India
    
    
    5,755
    
    
    
    4,090
    
    
    
    14,314
    
    
    
    5,801Caribbean and Latin America
    
    
    2,210
    
    
    
    1,907
    
    
    
    7,893
    
    
    
    3,237$
    32,163
    
    
    $
    26,136
    
    
    $
    90,776
    
    
    $
    70,829Foreign countries which
contributed more than 10% of
revenues:
    
    Russia
    
    Russia Belgium
    
    Russia
    
    Russia Belgium
 Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Sales originating from:United States
    
    $
    18,184
    
    
    $
    7,973
    
    
    $
    48,387
    
    
    $
    17,298Israel
    
    
    10,859
    
    
    
    18,063
    
    
    
    35,318
    
    
    
    53,346Other foreign countries
    
    
    3,120
    
    
    
    100
    
    
    
    7,071
    
    
    
    185$
    32,163
    
    
    $
    26,136
    
    
    $
    90,776
    
    
    $
    70,829
 September 30,
    
    
    December 31,2007
    
    
    2006Long-lived assets, net:United States
    
    $
    3,355
    
    
    $
    3,256Israel
    
    
    3,184
    
    
    
    3,311Other foreign countries
    
    
    544
    
    
    
    556$
    7,083
    
    
    $
    7,123
 19




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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, 2006, included in our Prospectus,
filed with the Securities and Exchange Commission on April 5, 2007. The discussion in this 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
  
    
    Revenue recognition
    
    Allowance for doubtful accounts
    
    Stock-based compensation
    
    Accounting for income taxes
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##### Table of Contents



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.
   
    
    Vendor-specific objective evidence, or VSOE, of fair value for IP services: Beginning in
the third quarter of 2006, we established VSOE of fair value for IP services (installation,
training and consulting). We limit our assessment of VSOE of fair value to the price charged
when the same element is sold separately. Accordingly, assuming all other revenue
recognition criteria are met, revenue is recognized upon delivery of the hardware and
software using the residual method. We expect that our estimates and assumptions used to
determine the timing and amount of revenue recognized for IP services will be more
consistent. We are not likely to materially change our pricing practices in the future.
    
    VSOE for PCS based on renewal rates: VSOE for PCS in IP solutions is based on the premise
that the stated renewal rates in the contractual arrangements will be enforced when the
customer renews their PCS after the initial term. Historically, 100% of the customers that
have chosen to renew have renewed at the stated renewal rate. We have no reason to believe
that our customers will not renew the PCS at the stated renewal rate.
    
    Extended payment terms: Our arrangement fees are generally due within one year or less
from the later of the date of delivery or acceptance. Some arrangements may have payment
terms extending beyond these customary terms. We have experienced collectibility issues on
arrangements where payment terms have extended beyond one year. Therefore, on arrangements
with these terms, the fees are considered not to be fixed or determinable. Our collection
history supports that we recognize revenue based on the assumption that collection is
probable when our fees are negotiated under our customary terms.
 21




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Allowance for doubtful accounts .
 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
   Share-Based Payment
 Disclosure About Fair Value of Financial Instruments
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Nine Months Ended
    
    Nine Months EndedSeptember 30, 2007
    
    September 30, 2006Expected term in years
    
    
    6.25
    
    
    
    6.25Risk-free interest rate
    
    
    4.72
    %
    
    
    5.00
    %Volatility
    
    
    73
    %
    
    
    79
    %Dividend yield
    
    
    
    
    
    
    Estimated fair value per share of underlying common
stock
    
    $
    8.55
    
    
    $
    6.18
     Accounting for Equity Instruments That Are Issued to Other Than Employees for
Acquiring, or in Conjunction with Selling, Goods or Services Accounting for Stock Appreciation Rights and Other Variable Stock Option or Award Plans
 Accounting for income taxes .
 Accounting for Uncertainty in Income Taxesan interpretation of FASB Statement No. 109.
 23




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Results of Operations
 Comparison of Three Months Ended September 30, 2007 and 2006
 Revenues
 Three Months Ended September 30,2007
    
    2006Percentage
    
    
    
    
    
    Percentageof Total
    
    
    
    
    
    of Total
    
    Period-to-Period ChangeAmount
    
    Revenue
    
    Amount
    
    Revenue
    
    Amount
    
    Percentage(dollars in thousands)Revenues:IP Products
    
    $
    19,409
    
    
    
    60
    %
    
    $
    11,537
    
    
    
    44
    %
    
    $
    7,872
    
    
    
    68
    %DCME Products
    
    
    6,485
    
    
    
    20
    
    
    
    10,527
    
    
    
    40
    
    
    
    (4,042
    )
    
    
    (38
    )Services
    
    
    6,269
    
    
    
    20
    
    
    
    4,072
    
    
    
    16
    
    
    
    2,197
    
    
    
    54Total revenues
    
    $
    32,163
    
    
    
    100
    %
    
    $
    26,136
    
    
    
    100
    %
    
    $
    6,027
    
    
    
    23
    %Revenue by Geography:Europe, Middle East and Africa
    
    $
    13,309
    
    
    
    41
    %
    
    $
    16,687
    
    
    
    64
    %
    
    $
    (3,378
    )
    
    
    (20
    )%North America
    
    
    10,889
    
    
    
    34
    
    
    
    3,452
    
    
    
    13
    
    
    
    7,437
    
    
    
    215Asia Pacific and India
    
    
    5,755
    
    
    
    18
    
    
    
    4,090
    
    
    
    16
    
    
    
    1,665
    
    
    
    41Caribbean and Latin America
    
    
    2,210
    
    
    
    7
    
    
    
    1,907
    
    
    
    7
    
    
    
    303
    
    
    
    16Total revenues
    
    $
    32,163
    
    
    
    100
    %
    
    $
    26,136
    
    
    
    100
    %
    
    $
    6,027
    
    
    
    23
    %
      24




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Cost of revenues and Gross Profit
 Three Months Ended September 30,2007
    
    2006Percentage
    
    
    
    
    
    Percentageof Total
    
    
    
    
    
    of Total
    
    Period-to-Period ChangeAmount
    
    Revenue
    
    Amount
    
    Revenue
    
    Amount
    
    Percentage(dollars in thousands)Cost of Revenues:IP Products
    
    $
    9,792
    
    
    
    50
    %
    
    $
    5,704
    
    
    
    49
    %
    
    $
    4,088
    
    
    
    72
    %DCME Products
    
    
    2,355
    
    
    
    36
    
    
    
    3,794
    
    
    
    36
    
    
    
    (1,439
    )
    
    
    (38
    )Services
    
    
    3,067
    
    
    
    49
    
    
    
    2,716
    
    
    
    67
    
    
    
    351
    
    
    
    13Total cost of revenues
    
    $
    15,214
    
    
    
    47
    %
    
    $
    12,214
    
    
    
    47
    %
    
    $
    3,000
    
    
    
    25
    %Gross Profit:IP Products
    
    $
    9,617
    
    
    
    50
    %
    
    $
    5,833
    
    
    
    51
    %
    
    $
    3,784
    
    
    
    65
    %DCME Products
    
    
    4,130
    
    
    
    64
    
    
    
    6,733
    
    
    
    64
    
    
    
    (2,603
    )
    
    
    (39
    )Services
    
    
    3,202
    
    
    
    51
    
    
    
    1,356
    
    
    
    33
    
    
    
    1,846
    
    
    
    136Total gross profit
    
    $
    16,949
    
    
    
    53
    %
    
    $
    13,922
    
    
    
    53
    %
    
    $
    3,027
    
    
    
    22
    %
       Operating Expenses
 Three Months Ended September 30,2007
    
    2006Percentage
    
    
    
    
    
    Percentageof Total
    
    
    
    
    
    of Total
    
    Period-to-Period ChangeAmount
    
    Revenue
    
    Amount
    
    Revenue
    
    Amount
    
    Percentage(dollars in thousands)Research and development, net
    
    $
    7,571
    
    
    
    24
    %
    
    $
    8,607
    
    
    
    33
    %
    
    $
    (1,036
    )
    
    
    (12
    )%Sales and marketing
    
    
    7,017
    
    
    
    22
    
    
    
    6,059
    
    
    
    23
    
    
    
    958
    
    
    
    16General and administrative
    
    
    2,361
    
    
    
    7
    
    
    
    2,439
    
    
    
    9
    
    
    
    (78
    )
    
    
    (3
    )Total operating expenses
    
    $
    16,949
    
    
    
    53
    %
    
    $
    17,105
    
    
    
    65
    %
    
    $
    (156
    )
    
    
    (1
    )%
 Research and development expenses, net.
 25




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Sales and marketing expenses.
  General and administrative expenses.
   Other income, net.
 Income taxes.
 Net income (loss).
 26




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Comparison of Nine Months Ended September 30, 2007 and 2006
 Revenues
 Nine Months Ended September 30,2007
    
    2006Percentage
    
    
    
    
    
    Percentageof Total
    
    
    
    
    
    of Total
    
    Period-to-Period ChangeAmount
    
    Revenue
    
    Amount
    
    Revenue
    
    Amount
    
    Percentage(dollars in thousands)Revenues:IP Products
    
    $
    58,428
    
    
    
    64
    %
    
    $
    31,905
    
    
    
    45
    %
    
    $
    26,523
    
    
    
    83
    %DCME Products
    
    
    16,115
    
    
    
    18
    
    
    
    30,078
    
    
    
    42
    
    
    
    (13,963
    )
    
    
    (46
    )Services
    
    
    16,233
    
    
    
    18
    
    
    
    8,846
    
    
    
    13
    
    
    
    7,387
    
    
    
    84Total revenues
    
    $
    90,776
    
    
    
    100
    %
    
    $
    70,829
    
    
    
    100
    %
    
    $
    19,947
    
    
    
    28
    %Revenue by Geography:Europe, Middle East and Africa
    
    $
    43,862
    
    
    
    48
    %
    
    $
    52,270
    
    
    
    74
    %
    
    $
    (8,408
    )
    
    
    (16
    )%North America
    
    
    24,707
    
    
    
    27
    
    
    
    9,521
    
    
    
    13
    
    
    
    15,186
    
    
    
    160Asia Pacific and India
    
    
    14,314
    
    
    
    16
    
    
    
    5,801
    
    
    
    8
    
    
    
    8,513
    
    
    
    147Caribbean and Latin America
    
    
    7,893
    
    
    
    9
    
    
    
    3,237
    
    
    
    5
    
    
    
    4,656
    
    
    
    144Total revenues
    
    $
    90,776
    
    
    
    100
    %
    
    $
    70,829
    
    
    
    100
    %
    
    $
    19,947
    
    
    
    28
    %
      27




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Cost of revenues and Gross Profit
 Nine Months Ended September 30,2007
    
    2006Percentage
    
    
    
    
    
    Percentageof Related
    
    
    
    
    
    of Related
    
    Period-to-Period ChangeAmount
    
    Revenue
    
    Amount
    
    Revenue
    
    Amount
    
    Percentage(dollars in thousands)Cost of Revenues:IP Products
    
    $
    24,625
    
    
    
    42
    %
    
    $
    14,605
    
    
    
    46
    %
    
    $
    10,020
    
    
    
    69
    %DCME Products
    
    
    5,642
    
    
    
    35
    
    
    
    11,319
    
    
    
    38
    
    
    
    (5,677
    )
    
    
    (50
    )Services
    
    
    8,820
    
    
    
    54
    
    
    
    7,286
    
    
    
    82
    
    
    
    1,534
    
    
    
    21Total cost of revenues
    
    $
    39,087
    
    
    
    43
    %
    
    $
    33,210
    
    
    
    47
    %
    
    $
    5,877
    
    
    
    18
    %Gross Profit:IP Products
    
    $
    33,803
    
    
    
    58
    %
    
    $
    17,300
    
    
    
    54
    %
    
    $
    16,503
    
    
    
    95
    %DCME Products
    
    
    10,473
    
    
    
    65
    
    
    
    18,759
    
    
    
    62
    
    
    
    (8,286
    )
    
    
    (44
    )Services
    
    
    7,413
    
    
    
    46
    
    
    
    1,560
    
    
    
    18
    
    
    
    5,853
    
    
    
    375Total gross profit
    
    $
    51,689
    
    
    
    57
    %
    
    $
    37,619
    
    
    
    53
    %
    
    $
    14,070
    
    
    
    37
    %
       Operating Expenses
 Nine Months Ended September 30,2007
    
    2006Percentage
    
    
    
    
    
    Percentageof Total
    
    
    
    
    
    of Total
    
    Period-to-Period ChangeAmount
    
    Revenue
    
    Amount
    
    Revenue
    
    Amount
    
    Percentage(dollars in thousands)Research and development, net
    
    $
    23,175
    
    
    
    25
    %
    
    $
    24,902
    
    
    
    35
    %
    
    $
    (1,727
    )
    
    
    (7
    )%Sales and marketing
    
    
    19,956
    
    
    
    22
    
    
    
    19,226
    
    
    
    27
    
    
    
    730
    
    
    
    4General and administrative
    
    
    7,082
    
    
    
    8
    
    
    
    6,565
    
    
    
    9
    
    
    
    517
    
    
    
    8Total operating expenses
    
    $
    50,213
    
    
    
    55
    %
    
    $
    50,693
    
    
    
    71
    %
    
    $
    (480
    )
    
    
    (1
    )%
 Research and development expenses, net.
 28




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##### Table of Contents



Sales and marketing expenses.
  General and administrative expenses.
  Other income, net.
 Income taxes.
 Net income (loss).
 Deemed dividend on Series D convertible preferred stock.
 29




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##### Table of Contents



Liquidity and Capital Resources
  Operating Activities
    Investing Activities
    Financing Activities
    30




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##### Table of Contents



Contractual Obligations and Commitments
  Payment DueOctober 1, 2007
    
    
    January 1, 2008
    
    
    January 1, 2010through
    
    
    through
    
    
    throughTotal
    
    
    December 31, 2007
    
    
    December 31, 2009
    
    
    December 31, 2011Contractual Obligations:Debt obligations
    
    $
    4,395
    
    
    $
    942
    
    
    $
    3,453
    
    
    $
    Operating lease obligations
    
    
    4,799
    
    
    
    551
    
    
    
    2,840
    
    
    
    1,408Purchase commitments
    
    
    3,557
    
    
    
    3,557
    
    
    
    
    
    
    
    Total
    
    $
    12,751
    
    
    $
    5,050
    
    
    $
    6,293
    
    
    $
    1,408
 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
  31




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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
 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.
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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 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.
     33




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##### Table of Contents




    
    Personnel:Since April 2005, we have hired several experienced employees in key financial
management positions, including our Chief Financial Officer, Worldwide Financial Controller,
and Director of Financial Planning and Analysis. In addition, we created new financial
management and administrative positions, and hired experienced and qualified employees for
such new positions as follows: Director of Accounting, Director of Financial Reporting and
Compliance, General Counsel, General Accounting Manager and Revenue Manager. We plan to
continue to evaluate our personnel needs and hire experienced and qualified employees as
appropriate and replace departing employees with appropriately qualified personnel.
    
    Training:Since April 2005, the majority of our finance and administration staff have
participated in one or more continuing professional education courses, industry roundtables
or other formal and informal training courses. In addition, we have conducted in-house
training (one-on-one, and in group settings) concerning various matters (i.e. the revenue
recognition process, closing process, etc.) for the finance, administration and sales staff.
The objective of this training is to strengthen the general proficiency and specific
knowledge of our employees, as well as improve internal controls over financial reporting.
We plan to continue to conduct such training in the future.
    
    Internal Process:We have steadily made improvements in our internal processes. The
objective of such internal process improvements has been to remediate the material
weaknesses and significant deficiencies, and achieve an overall improvement in internal
controls over financial reporting. Such process improvements have included, but are not
limited to, the establishment of a centralized electronic database of key contracts,
accounting records and related documentation, increased uniformity and consistency with
respect to customer contracts, accounting records and related documentation, and increased
level of management review of key processes, particularly the revenue cycle and sales
process. We plan to continue to evaluate our internal controls and make improvements as
appropriate.
    We have not been sustainably profitable and our losses could continue.
  34




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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 substantialy.
  Our limited operating history makes it difficult to evaluate our current business and future
prospects.
  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.
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Our business is dependent upon our relationship with ECI Telecom Ltd. and certain of its
subsidiaries and affiliates, or ECI, and ECI is our largest stockholder and a significant
technology and commercial partner of ours. If ECIs business is adversely affected or if our
relationship with ECI is adversely affected for any reason, including ECIs pending acquisition,
our business could be harmed and our results of operations would likely be negatively affected.
      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.
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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 Control Switch, 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;
    
    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;
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
    
    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.
  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;
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
    
    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.
 We intend to expand our operations and increase our expenditures in an effort to grow our business.
If we are not able to manage this growth and expansion, or if our business does not grow as we
expect, our operating results may suffer.
  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.
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We rely on indirect 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.
     We may face risks associated with our international sales that could impair our ability to grow our
revenues.
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
    
    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; 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.
  We have no internal hardware manufacturing capabilities and we depend exclusively upon contract
manufacturers to manufacture our hardware products. In particular, our I-Gate 4000 media gateways
are exclusively manufactured for us by Flextronics (Israel) Ltd., or Flextronics. We buy our DCME
products from ECI who subcontracts manufacturing of these products to Flextronics. 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.
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Failure to manage expenses and inventory risks associated with meeting the demands of our customers
may adversely affect our business or results of operations.
  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.
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Our ability to compete and our business could be jeopardized if we are unable to protect our
intellectual property.
   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;
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
    
    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.
  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.
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We have invested substantially in our enhanced access switching solution and we may be unable to
achieve and maintain substantial sales.
  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.
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Product liability claims related to our customers networks could result in substantial costs.
  Risks Related to Our Operations in Israel
  Increased political, economic and social instability in the Middle East, may adversely affect our
business and operating results.
    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.
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
    
    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.
  
 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
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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. 50




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SIGNATURE
  Veraz Networks, Inc.Date: November 14, 2007
    By:

/s/ Al WoodAl Wood Chief Financial Officer(Principal Financial and Chief Accounting Officer) 51




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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.