| These are the factors that we believe could cause actual results to be different from expected and historical results |
| Other sections of this report include additional factors that could have an effect on our business and financial performance |
| The industry in which we compete is very competitive and changes rapidly |
| Sometimes new risks emerge, and management may not be able to predict all of them, or be able to predict how they may cause actual results to be different from those contained in any forward-looking statements |
| You should not rely upon forward-looking statements as a prediction of future results |
| We have experienced modest profitability in 2005 and 2004 after experiencing operating losses in several prior years |
| We are not assured of continued profitability |
| We have experienced modest profitability in 2005 and 2004 |
| We experienced operating losses in three of the four preceding fiscal years |
| The past operating losses have adversely affected our working capital, total assets and stockholders’ equity |
| Our operating plan has established a cost structure that, based on expected revenue, will continue to contribute to our profitability |
| If revenues do not increase in accordance with our current expectations, or if expenses are greater than we anticipate, we may experience losses again |
| Losses could force us to curtail our operations |
| 11 ______________________________________________________________________ Our operating results fluctuate and are difficult to predict, which could cause our stock price to decline |
| Our revenues and net income, if any, in any particular period may be lower than revenues and net income, if any, in a preceding or comparable period |
| Factors contributing to fluctuations, some of which are beyond our control, include: · fluctuations in our customers’ businesses; · demand for our customers’ products that incorporate our products; · timing and market acceptance of new products or enhancements introduced by us or our competitors; · availability of components from our suppliers and the manufacturing capacity of our subcontractors; · timing and level of expenditures for sales, marketing and product development; · changes in the prices of our products or of our competitors’ products; and · general industry trends |
| In addition, we have historically operated with no significant backlog and a customer order pattern that is skewed toward the later weeks of the quarter |
| Any significant deferral of orders for our products would cause a shortfall in revenues for the quarter |
| If our quarterly revenue or operating results fall below the expectations of investors or public market analysts, our common stock price may decline substantially |
| Higher average selling prices and installation obligations for our products stemming from our offering of systems may result in sharper fluctuations in our financial results in any particular quarter as the delay of any given sale or installation will have a greater impact on our revenues from period to period |
| We may receive one or more large orders in one quarter from a customer and then receive no orders from that customer in the next quarter |
| As a result, our revenues may vary significantly from quarter to quarter |
| The telecommunications industry is experiencing a modest turnaround from the slowdown of the preceding three years, but a reversal of this trend could impact our ability to achieve anticipated revenue levels |
| In 2005, the telecommunications industry experienced a modest turnaround |
| In the several years prior to 2005, the telecommunications industry experienced a severe slowdown characterized by economic uncertainty and substantial curtailment of infrastructure development and related capital spending |
| These broad-based industry conditions contributed to our operating losses and reduced our ability to forecast future operating results |
| Despite the modest turnaround, there is continued uncertainty as to the future spending patterns of telecommunications operators and the other enterprises that are the end-users of our products |
| If the adverse economic conditions in our industry were to continue or worsen, we may experience additional adverse effects on our revenues, net income and cash flow |
| The markets we target may not develop in the manner or at the growth rate that we anticipate, which could limit our future revenues |
| We currently operate in three areas of the communications market: (1) mobile and IP-based enhanced services; (2) voice quality systems for the global wireless markets; and (3) wireless backhaul optimization |
| Although we expect growth in these areas, each of these market areas is characterized by emerging product categories and rapid technological change, and we may fail to generate demand for our products at the levels we anticipate, which could limit our future revenues and harm our business |
| We may not be successful with these initiatives, which could result in reduced revenues and/or increased expenses |
| Historically, our direct sales force has been focused on selling systems building blocks offered by our Platform Solutions business to network equipment and application providers |
| Over the past two years, we have evolved to selling more complex system-level products to telecommunications operators and large network equipment providers |
| At the same time, we have recruited additional channel partners to expand the reach and improve coverage for our systems building blocks products and to enhance geographic coverage for our mobile applications offerings and wireless backhaul optimization products |
| In addition to performing sales and some level of marketing support, these channel partners provide all or some of the following: pre- and post-sales support, systems integration, fulfillment and credit services |
| These system level product sales are more complex and have longer sales cycle |
| In order to succeed in this initiative, we must be successful in selling to our customers’ laboratories for evaluation and field trial, to their purchasing decision-makers, to their new services decision-makers, and to the appropriate network operations staff in order to achieve customer acceptance of our systems products |
| Repeated customer acceptance is required to achieve market acceptance of our systems offerings |
| There can be no assurance that we will be successful at implementing our initiatives, and if we fail, our revenues could be reduced and/or our expenses increased |
| Additionally, our channel partners may not perform as agreed or expected |
| We are dependent on channel partners to sell a substantial portion of our revenues and on other third parties to perform other functions important to our business |
| In concert with our greater emphasis on systems offerings, we shifted the primary sales method of our systems building blocks to indirect sales through channel partners and network equipment providers |
| These channel partners are companies in the business of reselling communications products like those we produce to application developers, systems integrators and others |
| As a result, we are increasingly reliant on the effectiveness of channel partners’ and network equipment providers’ sales, marketing, and distribution capabilities to generate and fulfill demand for our products |
| In 2005, 61prca of our revenues were attributable to channel partners |
| We are also increasingly reliant on strategic alliances with hardware, software, technology, application, content and system integration partners to bring our offerings to market and to reach targeted customers |
| Similarly, we have outsourced maintenance and technical support of our systems building blocks products to external suppliers |
| Therefore, we are increasingly reliant on these outsource partners to maintain the quality of our systems building blocks products and to provide timely and effective technical support to a segment of our customer base |
| Moreover, we do not control the amount of resources that these outsource partners commit to marketing our products or products incorporating our technologies or performing these other functions |
| If they do not commit sufficient resources to these activities, our revenues could suffer |
| Our revenue growth depends significantly on the timely development and launch of new products and product enhancements, and we cannot be sure that our new products will gain wide market acceptance |
| The communications industry is characterized by rapid technological change, which requires continual development and introduction of new products and product enhancements that respond to evolving market needs and industry standards on a timely and cost-effective basis |
| Successfully developing new products requires us to accurately anticipate technological evolution in the communications industry as well as the technical and design needs of our customers |
| In addition, new product development and launch 13 ______________________________________________________________________ require significant commitments of capital and personnel well in advance of when they can be expected to result in revenue |
| We are continuing to invest significant research and development resources into new product categories, including voice applications and IP infrastructure, and supporting technologies |
| The market acceptance and commercial viability of these new product categories have not been proven |
| Failure to successfully update and enhance current products and to develop and launch new products would harm our business |
| We have experienced, and may in the future experience, delays in developing and releasing new products and product enhancements |
| These delays have led to, and may in the future lead to, delayed sales, increased expenses and lower quarterly revenues than anticipated |
| Our failure to timely introduce a new product or product enhancement could harm our reputation with our customers or reduce demand for that product |
| The markets we serve are highly competitive, and we may be unable to compete effectively, which could adversely affect demand for our products |
| There are numerous companies currently marketing products that compete directly with our products |
| Moreover, our competitors and customers may be able to develop products and services that are superior to our products and services that achieve greater customer acceptance or that have significantly improved functionality as compared to our existing and future products and services |
| Moreover, many of our competitors have significantly greater financial resources than we do and therefore are better able to invest in the research and development activities necessary to bring innovative new products to market |
| By focusing all of their efforts on a specific niche of the market, some of our competitors may succeed in introducing products that change the competitive dynamic in that market niche and adversely affect demand for our products |
| Certain of our competitors may be able to negotiate alliances with strategic partners on more favorable terms than we are able to negotiate |
| Many of our competitors have well-established relationships with our existing and prospective customers, including those on which we have focused significant sales and marketing efforts |
| These competitive factors could render one or more of our products obsolete, which would adversely affect our revenues |
| Internal development efforts by our customers may adversely affect demand for our products |
| Many of our customers, including the large network equipment and application providers on which we focus a significant portion of our sales and marketing efforts, have the technical and financial ability to design and produce components replicating or improving on the functionality of most of our products |
| These organizations often consider in-house development of technologies and products as an alternative to doing business with us |
| We cannot be certain that these customers will resolve these make-buy” decisions in favor of working with us, rather than attempting to develop similar technology and products internally or obtaining them through acquisition |
| If our customers choose to produce internally rather than purchase from us, it will decrease the size of the market for our products |
| Offering to sell system-level products that compete with the products manufactured by our customers could negatively affect our business |
| We have broadened our product offerings from systems building blocks to subsystems and platforms, as well as full systems |
| These products could compete with products offered by some of our customers |
| These customers could decide to decrease purchases from us because of this competition |
| This could result in a material adverse effect on our results of operations |
| 14 ______________________________________________________________________ Our products typically have long sales cycles, causing us to expend significant resources before achieving agreements, “design wins” or “successful trials” and ultimately recognizing revenue |
| The length of our sales cycle typically ranges from six to 18 months and varies substantially from customer to customer |
| Prospective customers generally must commit significant resources to test and evaluate our products and integrate them into their operating environment or product offering |
| This evaluation period is often prolonged due to delays associated with approval processes that typically accompany the design and testing of new communications equipment by our customers |
| In addition, the rapidly emerging and evolving nature of the markets in which our customers and we compete may cause prospective customers to delay their purchase decisions as they evaluate new technologies and develop and implement new systems |
| During the period in which our customers are evaluating whether to place an order with us, we often incur substantial sales and marketing expenses, without any assurance of future orders or their timing |
| Even after we achieve an agreement, “design win” or “successful trial” and our product is expected to be utilized in a product or service offering being developed by our customer, the timing of the development, introduction and implementation of the product is controlled by, and can vary significantly with the needs of our customers and may exceed several months |
| This complicates our planning processes and reduces the predictability of our revenues |
| If sales forecasted from a specific customer for a particular quarter are not realized in that quarter, we may fail to achieve our revenue goals |
| Our supply agreement with Lucent ends on March 31, 2006 and we may not be able to compensate for revenue from that source |
| As part of our acquisition of Lucent’s voice quality business in December 2001, we entered into a three year supply agreement with Lucent in which Lucent agreed to purchase from us, on an exclusive basis for Lucent’s resale purposes, any of our products that Lucent requires which incorporate the acquired voice quality products |
| We extended the agreement to, and it will expire on, March 31, 2006, however the exclusivity provisions are no longer in effect |
| Lucent continues to incorporate our products into products it markets to others |
| We are engaged in discussions with Lucent regarding further extension of the supply agreement or a replacement agreement |
| We are relying on sales to Lucent to continue to generate a significant portion of our near-term revenue for such products and have incorporated this expectation in our operating plan |
| Revenues from Lucent for the year ended December 31, 2005 were approximately 22dtta6prca of our total revenues, with revenues from one end customer of Lucent accounting for in excess of 10prca of our 2005 revenue |
| We expect a significant decrease in business from Lucent and the end customer in 2006 |
| Accordingly, any delays, reductions or other disruptions in Lucent’s purchasing volume, any significant disputes we might become involved in regarding our commercial relationship with Lucent or failure to extend the agreement or execute a replacement would have a significant and material adverse effect on our revenues |
| We recently acquired a business and may acquire other businesses or technologies in the future; we may be unable to integrate our new business, or businesses we acquire in the future, with our business |
| The process of integrating Openera’s business into ours may absorb significant management attention, produce unforeseen operating difficulties and expenditures and may not produce the favorable business and market opportunities the acquisition was intended to provide |
| Additionally, the approximately 4dtta34 million shares of common stock we issued in connection with the acquisition will have a dilutive impact on the number of our shares outstanding |
| If we are presented with appropriate opportunities, we may acquire other businesses or technologies |
| We may not be able to identify, negotiate, or finance any future acquisition successfully |
| If we engage in an acquisition transaction, the process of integration may produce unforeseen operating difficulties and expenditures and may absorb significant attention of our management that would otherwise be available for the ongoing development of our business |
| If we make future acquisitions, we may issue shares of stock 15 ______________________________________________________________________ that dilute other stockholders, incur debt, assume contingent liabilities, or create additional expenses related to amortizing intangible assets, any of which might harm our financial results and cause our stock price to decline |
| Any financing that we might need for future acquisitions may only be available to us on terms that restrict our business or that impose on us costs that reduce our net income |
| We rely on third parties to assemble, and in certain cases, to ship, distribute and install our products |
| Failures or delays by such parties in executing their responsibilities could subject us to product shortages or quality assurance problems, which, in turn, could lead to an increase in the cost of manufacturing or assembling our products |
| We do not have in-house manufacturing capabilities and currently rely on third-party contract manufacturers to assemble our systems building blocks and systems |
| Our manufacturing requirements are primarily fulfilled by Plexus Corp |
| In addition, Plexus ships some of our products directly to our customers from its fabrication facility |
| Our supply agreement with Plexus expires in October 2006 but automatically extends for consecutive one-year periods unless either party gives notice 120 days prior to the expiration date of the then-current term |
| We also rely on other third parties to provide distribution and installation services |
| This reliance could subject us to product shortages or quality assurance problems, which, in turn, could lead to an increase in the cost of manufacturing or assembling our products |
| Any problems that occur and persist in connection with the manufacture, delivery, quality or cost of the assembly of our products could affect our ability to ship product and recognize revenue and harm our relationship with our customers |
| We depend on sole source suppliers for certain components used in our products; any interruption in our supplies could affect our ability to deliver products to our customers and record associated revenue |
| We rely on vendors to supply components for our products, and we rely on sole source suppliers for certain custom integrated circuits and other devices that are components of one or more of our products |
| In particular, Texas Instruments, Inc |
| (“Texas Instruments”) is our sole source for the DSPs used in many of our products and customarily requires order lead times of 12 to 14 weeks or more to ensure delivery in desired quantities |
| In addition, Agere Systems, Inc |
| (“Agere”) is our sole source supplier for integrated circuit components used in many of our products and customarily requires order lead times of 13 weeks or more |
| Neither Texas Instruments nor Agere is under a contractual obligation to supply us with our needs for these devices |
| An interruption in supply from or a termination of the relationship with either Texas Instruments or Agere would disrupt production, thereby adversely affecting our ability to deliver products to our customers and record associated revenues |
| Converting to an alternative source for key components could require a large investment in capital and manpower resources and might cause significant delays in introducing replacement products |
| Although we believe we could identify alternative sources for all of our components, that process could take several months, and any interruption in our supplies could affect our ability to deliver products to our customers and record associated revenue |
| Additionally, our agreement with Plexus specifies that if Plexus’ inventory related to manufacture of our products is not turned eight times per year, we are required to purchase enough inventory to bring Plexus up to eight turns |
| This is assessed on a quarterly basis |
| 16 ______________________________________________________________________ We do not obtain binding purchase commitments from our customers and rely on projections prepared by our customers and channel partners in assessing future demand for our products |
| Our volume purchase agreements, pursuant to which we sell products, do not require our customers or channel partners to purchase any minimum number of products |
| Therefore, there can be no assurance that these agreements will result in purchase orders for our products |
| After we begin receiving initial orders for a product from a customer, we rely heavily on the customer’s projections as to future needs for our product, without having any binding commitment from the customer as to future orders |
| Because our expenses are based on forecasting of future orders, a substantial reduction or delay in orders for our products from our customers could negatively impact our operating results |
| We may be unable to attract and retain management or key personnel we need to succeed |
| The loss of any of our senior management or key technical, sales or marketing personnel, particularly if lost to competitors, could harm our business |
| Our future success will depend in large part on our ability to attract, retain and motivate highly skilled employees |
| We may not be able to adequately protect our intellectual property, which may facilitate the development of competing products by others |
| We rely on a combination of trade secret and copyright laws, restrictions on disclosure, and patents to protect our intellectual property rights |
| Despite our efforts to protect our proprietary rights, third parties may copy or otherwise obtain and use our products or technology |
| The laws of some foreign countries do not protect our proprietary rights to as great an extent as the laws of the United States |
| If we fail to adequately protect our intellectual property rights, it will be easier for our competitors to sell competing products |
| Our products may infringe on the intellectual property rights of third parties, which may result in lawsuits and prohibit us from selling our products |
| There is a risk that third parties have filed or will file applications for, or have received or will receive, patents or obtain additional intellectual property rights relating to materials or processes that we use or propose to use |
| As a result, from time to time, third parties may assert patent or other intellectual property rights to technologies that are used in our products or are otherwise important to us |
| In addition, third parties may assert claims or initiate litigation against us or our manufacturers, suppliers or customers with respect to existing or future products or other proprietary rights |
| We generally undertake to indemnify our customers against intellectual property infringement claims asserted against them with respect to the products we sell to them |
| Any claims against us or customers that we indemnify against intellectual property claims, with or without merit, may be time-consuming, result in costly litigation and diversion of technical and management personnel or require us to develop non-infringing technology |
| If a claim is successful, we may be required to obtain a license from the parties claiming the infringement |
| If we are unable to obtain a license, we may be unable to market our affected products |
| Limitations on our ability to market our products and delays and costs associated with monetary damages and redesigns in compliance with an adverse judgment or settlement could harm our business |
| Defects in our products or problems arising from the use of our products together with other vendors’ products may result in lost revenues or customer relationships and could be detrimental to our reputation |
| Products as complex as ours may contain known or undetected errors or performance problems |
| Defects are frequently found during the period immediately following introduction and initial implementation of new products or enhancements to existing products |
| Although we attempt to resolve errors before implementation, our products are not error-free |
| These errors or performance problems 17 ______________________________________________________________________ could result in lost revenues or customer relationships and could be detrimental to our business and reputation generally |
| Additionally, reduced market acceptance of our services due to errors or defects in our technology would harm our business by reducing our revenues and damaging our reputation |
| In some of our contracts, we have agreed to indemnify our customers against certain liabilities arising from defects in our products |
| In addition, our customers generally use our products together with their own products and products from other vendors |
| As a result, when a problem occurs in the network, it may be difficult to identify the source of the problem |
| These problems may cause us to incur significant warranty and repair costs, divert the attention of our engineering personnel from our product development efforts, and cause significant customer relations problems |
| To date, defects in our products or those of other vendors’ products with which ours are used by our customers have not had a material negative effect on our business |
| Because we derive a significant portion of our revenues from international sales, our business could be adversely affected by downturns in economic conditions in countries outside the United States and other risks associated with international operations |
| Sales to customers outside North America accounted for approximately 65prca of our revenues in 2005, and we believe a material portion of our domestic sales results in the use of our products outside North America |
| Because of our dependence upon international sales, we are subject to a number of risks, including volatility in currency exchange rates, political and economic instability in other countries, the imposition of trade and tariff regulations by foreign governments and the difficulties in managing operations across disparate geographic areas |
| These or other factors may limit our ability to sell our products in other countries, which could result in lost revenues and negatively impact our financial condition |
| Future regulation or legislation could restrict our business or increase our costs |
| We are unable to predict the impact, if any, that future legislation, legal decisions or regulations relating to our target markets may have on our business, financial condition and results of operations |
| Regulation may focus on, among other things, assessing access or settlement charges, or imposing tariffs or regulations based on the characteristics and quality of products and services, either of which could restrict our business or increase our cost of doing business |
| Anti-takeover provisions in Delaware law and our corporate documents may affect the value of our common stock |
| Provisions of Delaware law and our corporate documents may make it difficult and expensive for a third party to remove our board of directors or management or to acquire us |
| For example, our certificate of incorporation provides for the election of members to our board of directors for staggered three-year terms and we have adopted a shareholder rights plan |
| The existence of these anti-takeover provisions may substantially impede the ability of a third party to acquire control of us or accumulate large blocks of our common stock, which may adversely affect our stock price |