UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

þ		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number: 001-33576

Airvana, Inc.

(Exact Name of Registrant as Specified in Its Charter)

Delaware		04-3507654
(State or Other Jurisdiction of		(I.R.S. Employer
Incorporation or Organization)		Identification Number)

19 Alpha Road
Chelmsford, Massachusetts 01824
(Address of Principal Executive Offices) (Zip Code)

Title of Each Class		Name of Each Exchange on Which Registered
Common Stock, $0.001 par value		The NASDAQ Global Market

(Title of Class)

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

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

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

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

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

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

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

The Aggregate market value of voting and non-voting common equity held by non-affiliates of the registrant as of June 27, 2008, based on the closing price of common stock as reported by The NASDAQ Global Market on such date, was approximately $109.4 million.

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

The number of shares of the registrant’s common stock, par value $0.001, outstanding as of March 4, 2010 was: 63,578,867

Portions of the registrant’s definitive proxy statement for its 2010 annual meeting of stockholders, to be filed pursuant to Regulation 14A with the Securities and Exchange Commission not later than 120 days after the registrant’s fiscal year end of January 3, 2010, are incorporated by reference into this Form 10-K.

 

 

ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED January 3, 2009

Table of Contents

		Page
PART I.
Item 1. Business			4
Item 1A. Risk Factors			19
Item 1B. Unresolved Staff Comments			35
Item 2. Properties			35
Item 3. Legal Proceedings			35
Item 4. Reserved			37
PART II.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities			37
Item 6. Selected Financial Data			40
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations			44
Item 7A. Quantitative and Qualitative Disclosures about Market Risk			70
Item 8. Financial Statements and Supplementary Data			72
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure			107
Item 9A. Controls and Procedures			107
Item 9B. Other Information			109
PART III.
Item 10. Directors, Executive Officers and Corporate Governance			109
Item 11. Executive Compensation			109
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters			121
Item 13. Certain Relationships and Related Transactions, and Director Independence			121
Item 14. Principal Accountant Fees and Services			121
PART IV.
Item 15. Exhibits and Financial Statement Schedules			122
Signatures			123
Exhibit 10.12
Exhibit 10.14
Exhibit 21.1
Exhibit 23.1
Exhibit 31.1
Exhibit 31.2
Exhibit 32

Forward Looking Statements

This Annual Report on Form 10-K contains “forward-looking statements” that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. The statements contained in this Annual Report on Form 10-K that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such forward-looking statements include expectations regarding the timing of the merger of Airvana with an entity formed by affiliates of S.A.C. Private Capital Group, LLC, GSO Capital Partners LP, Sankaty Advisors LLC and ZelnickMedia; statements regarding the ability to complete the merger; any expectation of earnings, revenues, billings or other financial items; development of femtocell alliances and shipments; any statements of the plans, strategies and objectives of management for future operations; factors that may affect our operating results; statements concerning new products or services; statements related to future capital expenditures; statements related to future economic conditions or performance; statements as to industry trends and other matters that do not relate strictly to historical facts or statements of assumptions underlying any of the foregoing. These statements are often identified by the use of words such as, but not limited to, “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “will,” “plan,” “target,” “continue,” and similar expressions or variations intended to identify forward-looking statements. These statements are based on the beliefs and assumptions of our management based on information currently available to management. Such forward-looking statements are subject to risks, uncertainties and other important factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified below, and those discussed in the section titled “Risk Factors” included elsewhere in this Annual Report on Form 10-K and in our other filings with the Securities and Exchange Commission or SEC. Furthermore, such forward-looking statements speak only as of the date of this report. We undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements.

Part I

Item 1.	Business

Overview

We are a leading provider of network infrastructure products used by wireless operators to provide mobile broadband services. We specialize in helping operators transform the mobile experience of users worldwide. Our high performance technology and products, from comprehensive femtocell solutions to core mobile network infrastructure, enable operators to deliver broadband services to mobile subscribers, wherever they are. Broadband multimedia services are growing rapidly as business users and consumers increasingly use mobile devices to work, communicate, play music and video and access the Internet. By expanding wireless broadband services, operators are able to increase their data services revenue and mitigate the decline in voice revenue caused by heightened competition. We expect that the continued capacity expansion of operator networks and accelerated use of multimedia applications on next-generation smartphones such as the iPhone and Android phones, will increasingly make mobile broadband networks the primary method for mobile communications and entertainment.

Our products leverage our expertise in three technologies — wireless communications, Internet Protocol, or IP, and broadband networking. IP technology is the foundation of our solutions. Our products enable new services and deliver carrier-grade mobility, scalability and reliability with relatively low operating and capital costs. As a result, our products have advantages over products based on circuit switching or legacy communication protocols.

Most of our current products are based on a wireless communications standard known as CDMA2000 1xEV-DO, or EV-DO. In 2002, we began delivering commercial infrastructure products based on the first generation EV-DO standard known as Rev 0. The second generation EV-DO standard is known as Rev A and supports push-to-talk, voice over IP, or VoIP, and faster Internet services. We delivered our first Rev A software release in April 2007. Prior to 2008, most of our EV-DO sales were driven by operator deployments focused on coverage — with operators extending their broadband services across larger portions of their subscriber geographies. Operators in some markets continue to deploy our products to expand coverage. Data traffic and service revenue growth continues to outpace voice growth at many major wireless operators around the world. Our EV-DO sales in 2008 and 2009 were driven by capacity growth as operators looked to expand their capacity to accommodate increased data traffic fueled by greater consumer use of handheld devices, web browsing, and third generation wireless standards, or 3G, multimedia applications. Over the longer term, we expect our EV-DO sales to continue to be driven by capacity growth as operators acquire more broadband subscribers that consume more broadband data.

We have developed a special business model to serve mobile operators and our original equipment manufacturer, or OEM, customers with embedded software products. Our software is deployed in an OEM’s installed base of wireless networks. These networks are designed to deliver high quality wireless services to millions of consumers and are built and regularly upgraded over long periods of time, often 10 to 15 years. A key element of our strategy is to deliver significant increases in performance and functionality to both our OEM customers and to operators through software upgrades to these networks. In 2007, we delivered two major EV-DO software releases that provide for deployment of high-performance multi-media applications by enabling faster downlink and uplink speeds, supporting push-to-talk services, and adding new proprietary “clustering” features that are designed to dramatically improve network scalability. In 2008, we delivered two additional EV-DO software releases which enable mobile operators to more efficiently increase capacity and accelerate the roll-out of next-generation multimedia services. In 2009, we delivered one additional EV-DO software release, which increased the capacity and performance of operators’ mobile broadband networks by redistributing the resources within the network to serve smartphone and data card traffic in an effective manner, optimizes the way network “control messages” are transmitted so the existing infrastructure can handle more devices, call activity, and in-session user mobility, and increases radio network performance, resulting in higher data rates for users in weak signal areas.

We are also investing significantly in fixed mobile convergence, or FMC, products that transform the experience of using mobile devices indoors, providing benefits such as better coverage, better quality and performance of broadband applications, and lower costs for both users and operators. Our FMC products enable operators to take advantage of wireline broadband connections such as cable, digital subscriber line, or DSL, and fiber that already exist in most offices and homes to connect mobile devices to an operator’s services. To accomplish this, operators can place a personal base station, or what the industry refers to as a femtocell access point, in the home or office. We have developed femtocell access points to support networks based on either of the world’s most prevalent wireless standards, code division multiple access, or CDMA, and universal mobile telephone standard, or UMTS. Currently, there is significant operator interest in our femtocells as they work with existing handsets and provide indoor coverage for both residential and enterprise users. Our femtocell products are an important component of our growth and diversification strategy.

We were founded in March 2000 and sold our first product in the second quarter of fiscal 2002. Our growth has been driven primarily by sales through our OEM customers to wireless operators already using our EV-DO products as they increase the capacity and geographic coverage of their networks and by an increase in the number of wireless operators that deploy our EV-DO products on their networks. We have sold over 70,000 channel card licenses for use by over 70 operators worldwide.

Proposed Merger

On December 17, 2009, we entered into an Agreement and Plan of Merger, or the Merger Agreement, with 72 Mobile Holdings, LLC, a Delaware limited liability company, or Parent, and 72 Mobile Acquisition Corp, or Merger Sub, a wholly-owned subsidiary of Parent. Parent is a newly formed entity to be owned, directly and indirectly, by affiliates of S.A.C. Private Capital Group, LLC, GSO Capital Partners LP, Sankaty Advisors LLC and ZelnickMedia. Under the terms of the Merger Agreement, upon closing of the merger, Merger Sub will be merged with and into Airvana, with Airvana continuing as the surviving corporation, or the merger, and the holders of our common stock will receive $7.65 in cash per share of common stock. Following the closing of the merger, Parent will own all of the outstanding capital stock of the surviving corporation and we will no longer be a publicly traded company. We expect to close the merger in the first half of 2010.

Industry Background

Mobile phones and other handheld mobile devices, such as Blackberry devices and smartphones such as the iPhone and Android phones, have become ubiquitous. Historically, demand for voice communications has driven the rapid growth in wireless services. The availability of affordable mobile phones and lower service costs, such as flat-rate pricing, has increased demand for mobile voice communications. Until recently, mobile phones were used primarily for voice communication. The continued growth of mobile broadband services and introduction of flat-rate plans which include both voice and data have driven significant growth in the use of data services. Data revenues continue to grow rapidly and represent a growing portion of operators’ wireless services revenues and, hence, constitute a major growth opportunity for the industry.

The Desire for Mobile Broadband Services

Both consumers and business users have a need for mobile broadband services. For consumers, mobile broadband presents an opportunity to access wirelessly all of the multimedia services they normally access from their home or office using their wireline broadband connections. These services include music downloads, video streaming, gaming, information access (searches, news, weather, financial data) and electronic commerce. For business professionals, mobile broadband provides access to high speed wireless email, file downloads and online information through their mobile phones, smartphones and laptop computers.

Mobile broadband can also help operators increase their revenues and profitability. We believe that just as wireline broadband created demand for new multimedia services, the availability of mobile broadband will create demand for new services through wireless networks.

While email and instant messaging are currently among the primary applications for wireless data, faster and more reliable wireless networks are enabling operators to offer new multimedia services tailored for mobile users, providing an opportunity for higher revenues. As a result, wireless operators have joined efforts with media providers to develop content for mobile phones. This content has led to increased use of multimedia services, such as music downloads, video streaming, gaming, IP-TV and location-based services.

The Need for Fixed-Mobile Convergence

As people increasingly use wireless services as their primary means of communication, the mobile phone is becoming the primary phone for many users. Accordingly, more and more mobile phone calls are made indoors. However, the experience of using mobile devices indoors is often inferior to that of landline devices or the use of mobile devices outdoors. At the same time, cheap, high-capacity broadband services are increasingly available in homes and offices via landline (such as DSL and cable data technologies) connections.

FMC products allow operators to deliver converged services to mobile phones through a combination of wide-area mobile and in-building wireless networks. One method utilizes traditional mobile phones to access an operator’s voice and data services. When the user is in-building, the mobile phone communicates with a small, inexpensive “personal” access point that connects to the operator’s network through a broadband Internet connection. The industry calls these “femtocell access points”.

Users may benefit from FMC products through improved coverage and quality of wireless service, greater convenience, and reduced spending on the combination of wireline and wireless services. Operators may benefit from FMC products by driving more in-building usage of wireless services and by reducing the cost to provide these services. Wireline operators who are mobile virtual network operators, or MVNOs, may benefit from FMC products by retaining customers on their fixed networks when they are at home or in the office.

The Market Opportunity

Traditional circuit-switched networks cannot effectively deliver mobile broadband services. The delivery of mobile multimedia services requires a technology optimized for the Internet and capable of transmission at broadband speed. To offer multimedia services, wireless operators have required a new solution — a mobile broadband architecture based on IP technology. This solution has to be deployable at relatively low cost, sufficiently scalable to support a very large number of users and capable of delivering carrier-grade reliability. Operators also require scalable FMC solutions that will enable subscribers to access securely and reliably both a mobile network and in-building network through a single mobile phone. The development of these solutions requires a combination of three disciplines: wireless communications, IP and broadband networking.

Our Solution

We were founded to apply broadband and IP technologies to mobile networks. We have developed a suite of IP-based wireless infrastructure products that allow operators to provide users of mobile phones, laptop computers and other mobile devices with access to mobile broadband services. We have been able to develop our products because of our expertise in the three key technologies essential for mobile broadband — wireless communications, IP and broadband networking. Our products offer the following benefits:

Enable New Service Offerings

Our EV-DO mobile network products enable operators to deliver a broad range of new mobile broadband services, including:

•

Mobile Broadband Internet Access. Our EV-DO network products allow operators to offer broadband-quality Internet access anywhere in their networks. Users can access EV-DO-based networks through their laptop computers and other mobile devices. Mobile broadband networks offer increased convenience and mobility and wider coverage than wireless local area technologies such as Wi-Fi. In addition, in some developing markets, EV-DO networks are being used as a wireless alternative to DSL or cable to provide last-mile broadband Internet access. Our products have been used to deploy these services in Eastern Europe and Latin America.

•

Multimedia Consumer Services. Our EV-DO products enable wireless operators to provide multimedia services, such as video, music downloads, IP-TV and gaming. Broadband speed is important to users seeking to download or transmit the large files associated with multimedia services. Reflecting the growth of this market, media companies and wireless operators are developing content tailored for mobile phones. In 2008, Juniper Research estimated that global mobile entertainment services revenue, consisting of user-generated content, gambling, adult and infotainment, would increase three-fold by 2012.

•

Enhanced Voice Services. Our EV-DO products enable the delivery of interactive voice and video services, such as IP-based push-to-talk, video telephony and VoIP. For example, Sprint Nextel has announced its intention to deliver push-to-talk over its EV-DO network. In the future, our technology will enable wireless operators to migrate from separate voice and data networks to a single IP-based mobile broadband network delivering both voice and data.

Provide Scalability and Reliability

Our EV-DO products allow the base stations in a mobile network to connect to multiple radio network controllers in order to increase the reliability of handoffs of mobile users at mobile site boundaries. Operators can increase the capacity of their base stations simply by installing additional channel cards. Our clustering software enables wireless operators to scale their networks incrementally and to react quickly and reliably to increased demand for capacity without introducing any network boundaries. In addition, our clustering architecture is designed to enable the clustering of multiple radio network controllers so they appear as one high-capacity virtual controller. With our architecture, base stations will not be impacted by the failure of a single controller because they can continue to be served by the other controllers in the cluster.

Reduce Capital and Operating Expenses

Our EV-DO products enable operators to reduce their capital and operating expenses by taking advantage of efficiencies associated with the use of IP technology. An EV-DO network employing our IP-based architecture uses high-volume, off-the-shelf components, such as IP routers, and allows mobile sites to connect to radio network controllers through an IP data network, such as a lower-cost metropolitan Ethernet network.

Leverage Existing Broadband Infrastructure

We are developing FMC products that will enable operators to take advantage of broadband connections that already exist in most offices and homes. Customers using our femtocell access point products will benefit from increased coverage and quality of service and a reduction in combined spending for wireline and wireless services. Operators will benefit from reduced network operating costs, increased revenue and greater customer satisfaction.

Our Strategy

Our strategy is to enhance our leadership in the mobile broadband infrastructure market by growing and expanding our EV-DO and FMC product offerings, acquiring new customers and selected complementary businesses. Principal elements of our strategy include the following:

•

Grow our EV-DO product sales. We plan to grow sales of our EV-DO products as operators continue to expand both the coverage and capacity of their wireless networks and increase their offerings of mobile broadband services. The continued growth of broadband service revenues for the operators implies a need for capacity expansion. To date, most of our EV-DO sales have been driven by coverage deployments. We believe that a much greater opportunity lies in future capacity expansion. We are developing new features to facilitate this growth, such as technologies that will improve the quality of both VoIP and push-to-talk services.

•

Enter the Fixed-Mobile Convergence Market. We are currently developing femtocell access point products for in-building deployment in CDMA and UMTS networks. We plan to sell these FMC products directly to operators and through OEM customers. We have entered into agreements with Nokia Siemens Networks to market an end-to-end UMTS femtocell solution, as well as with Thomson and Pirelli Broadband Solutions to integrate our femtocell product into their residential gateway offerings. In addition, we have entered into agreements with Motorola and Hitachi to supply CDMA femtocell solutions. We have also been selected by two major operators, Sprint Nextel and KDDI, to supply CDMA femtocell solutions.

•

Develop Products for the GSM/UMTS Markets. While CDMA is the leading mobile technology used by operators in North America, GSM/UMTS are the leading standards used elsewhere in the world. We are currently developing femtocell access point products to address the GSM/UMTS markets.

•

Leverage our Expertise in All-IP Mobile Networks to Develop 4G Technologies. Third generation wireless standards enable the delivery of IP data services over mobile networks. While EV-DO is considered a 3G standard, it is based on an architecture where all multimedia services, including voice, are carried over a single all-IP wireless network. The fourth generation wireless standards, known as 4G, are expected to offer faster speeds and carry all multimedia services over an all-IP wireless network. We believe our expertise in EV-DO and all-IP wireless network technology positions us well to develop 4G solutions.

•

Expand our OEM Sales Channels. Our OEM relationships have allowed us to reach a broad end-user market rapidly. By collaborating with our OEM customers to develop specific functionality to be incorporated into products for their end-customers, we enable our OEM customers to expand their product offering and achieve faster time to market for innovative products that enable new operator services. We intend to continue to pursue new OEM relationships to leverage their extensive operator relationships, industry networks and global reach.

•

Leverage our Operator Relationships. We have developed direct relationships with leading wireless operators to understand their needs and create demand for our products. We collaborate directly with these operators to develop new products and services for their customers. While our OEM customers represent our primary sales channel, we also offer some products for sale directly to operators.

Available Information

Our Internet website address is http://www.airvana.com. Through our website, we make available, free of charge, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to those reports, as soon as reasonably practicable after we electronically file such material with, or furnish to, the Securities and Exchange Commission, or SEC. These SEC reports can be accessed through the investor relations section of our website. The information found on our website is not part of this or any other report we file with or furnish to the SEC.

You may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet website that contains reports, proxy and information statements, and other information regarding us and other issuers that file electronically with the SEC. The SEC’s Internet website address is http://www.sec.gov.

Products

We have two categories of products — mobile network EV-DO products and FMC products.

Mobile Network EV-DO Products

Our mobile network EV-DO products are IP-based and comply with the CDMA2000 1xEV-DO standard. A typical mobile radio access network, or RAN, consists of a specific combination of base stations, radio network controllers, or RNCs, and a network management system. Our mobile network EV-DO products consist primarily of software for all three RAN elements. These three elements are designed to work in conjunction with each other and cannot be deployed independently. We also design and offer base station channel cards and other hardware for use with our software.

AIRVANA PRODUCTS IN AN EV-DO RADIO ACCESS NETWORK

Base Stations and OEM Base Station Channel Cards

Mobile base stations send and receive signals to mobile phones and other mobile devices connected to the network. They generally reside immediately beside a mobile tower. OEM base station channel cards and our software are the primary elements of an EV-DO base station and serve as its intelligence. Telefon AB L.M. Ericsson, or Ericsson, our largest OEM customer, manufactures Rev A OEM base station channel cards under license from us.

Radio Network Controllers

A RNC directs and controls many base stations. Our RNC consists of proprietary software and a carrier-grade, off-the-shelf hardware platform. Our RNC software manages EV-DO mobility as users move between cell towers. Our RNCs are significantly smaller in size and offer higher capacity than RNCs used in traditional mobile networks. Our RNCs use IP technology to communicate with our software running on base station mobile cards. To enhance scalability, we are also developing a software upgrade that will allow our RNCs to be clustered together to serve as a larger, virtual RNC. We offer our RNC software on a stand-alone basis or bundled with a hardware platform.

Network Management System

Our AirVista Network Management System is software designed for the remote management of all of our components in a mobile network deployment. This high-capacity system provides a common management platform for all of our EV-DO and FMC products. Our AirVista software is used to access securely, configure and control all of our RAN elements over an IP network.

Fixed-Mobile Convergence Products

Our FMC products under development include femtocell access points, which we expect to make commercially available in 2010. When deployed in homes and offices, femtocell access points will allow users to use existing mobile phones in-building with improved coverage and increased broadband wireless performance. Femtocell products under development include versions to support UMTS and CDMA. As part of our femtocell solution, we are also developing a Femtocell Service Manager, which controls the access points.

Our femtocell solutions will include the following key benefits:

•

Improved in-building coverage. Our femtocell access points are designed to significantly improve in-building mobile network coverage.

•

Improved user experience of mobile services. Because our femtocell access points will be shared by a small number of users, they will be able to provide a higher performance voice and data experience compared to existing mobile network services.

•

Compatibility with existing mobile phones. Our femtocell access points will allow users to make phone calls and access Internet broadband services through their existing CDMA or UMTS mobile phones.

•

Plug and play installation. Our femtocell access points are being designed for consumer installation with minimal user configuration. They will be connected by consumers to their existing broadband Internet services, such as those provided by DSL, cable or fiber optics.

AIRVANA FMC PRODUCT PLAN

Technology

Our IP RAN

The distinguishing feature of our mobile broadband network architecture is our proprietary use of IP technology to deliver the following:

•

mechanisms to support subscriber mobility;

•

protocols to carry traffic between the various network elements of a RAN in a secure manner;

•

methods to increase the availability of the network in case of a failure in any of its elements;

•

designs that increase the scalability of the network;

•

procedures to configure, manage and maintain the RAN; and

•

quality-of-service algorithms to allocate dynamically the resources of the RAN to subscribers and the various applications they use.

IP Backhaul

Our IP RAN architecture is designed to take advantage of the flexibility of IP networks. Our EV-DO solutions were among the first commercially deployed radio networks to rely solely on IP for the transport of packets between nodes. Traditional mobile networks use point-to-point T1/E1 circuits to connect base stations with radio network controllers. Using IP transport between base stations and radio network controllers allows wireless operators to take advantage of widely-available IP equipment, such as routers, to terminate T1/E1 circuits or use alternative low-cost IP transport services such as Metro Ethernet. Our IP backhaul capability reduces the size and cost of the required radio network controller equipment.

RNC Clustering

Our products eliminate the strict hierarchical relationships between base stations and RNCs. In traditional circuit-based radio access networks, each base station is controlled by a designated RNC. In our IP RAN architecture, on the other hand, each base station can be served by multiple RNCs. This leads to improvements in handling subscriber mobility, increasing the scalability and reliability of the RAN.

In traditional radio access networks, where each base station is served by a single RNC, base stations that are served by a given RNC form a geographic zone, called a subnet. When a mobile user travels outside the subnet, handoffs have to be performed between RNCs. These handoffs are often the cause of dropped calls and create unnecessary radio traffic. When a mobile user moves along the subnet boundary, repeated handoffs may occur, further exacerbating the problem.

Because wireless operators want to minimize the frequency of handoffs between RNCs, they often seek high capacity RNCs to make subnets as large as possible. However, individual RNC capacity is limited by the state-of-the-art in available microprocessors and memory. The clustering software we are developing will allow a wireless operator to increase the subnet size by clustering multiple RNCs and making them behave as if they were a single, much larger, virtual RNC. When a mobile subscriber requests resources from the RAN, the base station will be able to route this request to the specific RNC within the cluster using our proprietary algorithms. As a result, subnets will be able to be made very large and handoff boundaries between RNCs may be reduced.

RNC clustering also can improve the reliability of the RAN. In a traditional radio access network, when an RNC fails, all base stations that are served by that RNC go out of service. In our IP RAN architecture, when one RNC fails, the remaining RNCs in the cluster will continue to serve subscribers.

Multi-Homing

Our IP RAN architecture also supports multi-homing technology, which allows an RNC to continue to serve a mobile subscriber on an active call when that subscriber moves outside the current subnet. In traditional radio network architectures, handoffs between RNCs are handled using so-called inter-RNC handoff procedures, which require signaling and user traffic to flow through two RNCs. With our multi-homing technology, signaling and user traffic will flow only between the serving base station and the serving RNC and never have to traverse multiple RNCs. By keeping the mobile subscriber attached to a given RNC, this technology reduces latency and minimizes the processing load on RNCs.

IP Quality-of-Service

Quality-of-Service, or QoS, refers to a network’s ability to prioritize different kinds of traffic over others. For example, voice traffic, which is very sensitive to delay, needs priority over less delay-sensitive web-browsing traffic. All-IP mobile broadband networks need to serve a variety of traffic with very different QoS requirements. EV-DO standards define sophisticated methods for the subscriber’s device to request QoS from the radio network. As these requests are made, the RAN must then manage its available radio resources to best satisfy the subscriber’s QoS requests. Our IP RAN architecture includes proprietary algorithms for controlling the admission of subscriber applications to the network and uses technologies designed to deal with instances of network overload in a predictable manner.

IP Network Management

Our use of IP technologies also extends into our network management systems, which is used by wireless operators to manage and maintain their networks. Instead of using closed, proprietary protocols to manage RAN nodes, our management system uses Web-based protocols, such as XML, for communication between the management system and network elements. This allows our network management system to offer familiar web browser interfaces to users.

IP RAN Flat Architecture

Mobile broadband RANs serve user traffic in multiple types of nodes. For example, in EV-DO networks, the base station, the RNC, the packet data serving node, or PDSN, and the mobile IP home agent all cooperate to serve user traffic. However, having many different nodes in the network can add latency, increase the capital and maintenance cost of the network and require complex interactions between the nodes to deliver end-to-end QoS.

Our IP RAN architecture will support flatter architectures, where either the RNC and PDSN, or the base station, RNC and PDSN, can be combined in a single node. Since there is no strict one-to-one relationship between base stations and RNCs in our IP RAN, these elements can be combined in a single node without introducing any handoff or subnet boundaries between the base stations. Our RNC clustering technology will allow us to integrate PDSN functionality into our RNC, without reducing the effective base station footprint or subnet size.

As radio networks become more distributed, and base stations and access points are placed closer to users, as with picocell base stations and femtocell access points, we expect flat networks will become the preferred architecture for wireless operators.

Distance-Based Paging

Paging is a critical capability in all mobile wireless systems. To preserve battery life, subscriber devices are programmed to turn off their radio circuitry and periodically wake up to listen for any incoming calls. RANs alert the subscriber to an incoming call by broadcasting a page message through all base stations where the subscriber might be located. To facilitate paging, in traditional RANs, subscriber devices inform the RAN whenever they cross a certain geographic paging zone. When the RAN wants to page the user, it does so through all the base stations in the paging zone where the subscriber last reported its location. Such paging mechanisms can create significant unnecessary signaling traffic if subscribers move back and forth between paging zones.

Our IP RAN architecture includes distance-based paging, which uses dynamically varying circular paging zones centered on the base station where a subscriber has last reported its location. This technique avoids the problems caused by unnecessary repeated location updates, but requires more sophisticated handling in the RNC to keep track of the list of base stations for paging. Distance-based paging also allows the operator to configure very small paging areas in order to reduce the amount of radio bandwidth that frequent broadcast pages take away from normal user traffic. These considerations are especially important in page intensive applications such as push-to-talk.

Femtocells

Our femtocell technology will consist of:

•

a flat network architecture;

•

a flexible hardware architecture based on programmable processing elements;

	•		an extensive software/firmware technology that will implement the radio, networking and security functions of a femtocell;
	•		a suite of proprietary algorithms designed to optimize the performance and robustness of the femtocell system; and

•

a scalable service manager to facilitate the management of our femtocells by the network operator.

Our flat femtocell network architecture collapses the base station, RNC and packet data nodes of a macro-cellular RAN into a small femtocell access point. Our network architecture is designed to provide flexible options to connect to a wireless operator’s core network, connecting either to existing circuit-switched core networks, which include mobile switching centers, or state-of-the-art packet-switched core networks based on the session initiation protocol or the IP multimedia system.

Our programmable hardware platform is designed to offer the ability to upgrade the software and firmware running on the femtocell after it has been installed in a user’s home, the ability to rapidly evolve our femtocell solution to take advantage of the latest available programmable processor technology and to rapidly develop low-cost hard-wired application-specific-integrated-circuits.

We believe that our extensive software and firmware solution for femtocells will implement the critical modulation and demodulation functions found in the physical layer and the scheduling and power and rate control functions found in the media access control layer. Our software and firmware solution will also implement all necessary radio network controller, packet data node and security functions.

Adapting macro-cellular RAN technology to small femtocells that support a wide range of existing mobile phones requires sophisticated signal processing and networking algorithms. We are developing these algorithms in the following technology areas:

•

managing interference between femtocells and between femtocell and macro cellular networks;

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providing seamless handoffs as users cross between femtocell and macro cellular networks;

•

limiting access to a femtocell to authorized users;

•

acquiring accurate timing, frequency and location information; and

•

managing the use of a wireless operator’s spectrum.

Finally, our service manager will operate on a scalable server platform and implement unique methods to facilitate the easy and secure activation and maintenance of thousands of femtocells from a central location in the network using the public Internet.

Operators Deploying Our Products

We have sold channel card licenses for use by over 70 operators worldwide. These operators have purchased our products primarily through our OEM customers. Some of the largest deployments to date include networks operated by the following operators:

	•		Bell Mobility (Canada)
	•		China Telecom (China)
	•		Eurotel (Czech Republic)
	•		Leap Wireless (USA)
	•		Pelephone (Israel)
	•		Sprint Nextel (USA)
	•		Telefonica (Latin America)
	•		Verizon Wireless (USA)

OEM Customers and Strategic Relationships

We have strategic relationships with nine leading global communications equipment vendors including Ericsson, Nokia Siemens Networks, Thomson, Motorola, Hitachi and Pirelli Broadband Solutions. We believe these relationships provide several commercial advantages, including extended sales and marketing reach, reduced accounts receivable concerns and the mitigation of currency risk arising from the global nature of the network infrastructure business. Similarly, we believe these vendors benefit from our relationships by leveraging our R&D expertise, reducing the time-to-market for new products, and realizing incremental revenue from the sale of complementary hardware, software and services resulting from the incorporation of our technology into or the interoperatiblity with their products.

Ericsson

On January 14, 2009 Nortel Networks Corporation announced that it, Nortel Networks Limited, and certain of its other Canadian subsidiaries filed for creditor protection under the Companies’ Creditors Arrangement Act in Canada. Also on January 14, 2009, some of Nortel Networks Corporation’s U.S. subsidiaries, including Nortel Networks Inc., or Nortel Networks, filed Chapter 11 voluntary petitions in the State of Delaware. On July 28, 2009, the United States and Canadian bankruptcy courts approved a bid for Nortel Networks’ CDMA business by Telefon AB L.M. Ericsson, or Ericsson, a global wireless network infrastructure provider, subject to satisfaction of regulatory and other conditions. This acquisition was completed in November 2009. Substantially all of our current billings and revenue are now derived from Ericsson.

We have sold our EV-DO mobile network solutions since 2001 primarily through Nortel Networks and, after its acquisition of Nortel Networks’ CDMA business, Ericsson. Ericsson accounted for 85% of our revenue and 94% of our billings in fiscal 2009. Nortel Networks accounted for 99% of our revenue and 93% of our billings in fiscal 2008, and 99% of our revenue and 98% of our billings in fiscal 2007. We originally entered into our OEM agreement with Nortel Networks for the development of our proprietary EV-DO Rev 0 technology, including base station channel card hardware and software, RNC software, and network management system software. This agreement was assigned to Ericsson as part of Ericsson’s acquisition of Nortel Networks’ CDMA business. The agreement is non-exclusive, contains no minimum purchase commitments, and sets forth the terms and conditions under which Ericsson licenses our proprietary EV-DO software. In 2005, Nortel Networks exercised its right under the OEM agreement to license, on a non-exclusive basis, our proprietary Rev A base station channel card hardware design to enable it to manufacture such hardware and derivatives thereof. These OEM base station channel cards are inserted into Ericsson’s CDMA 2000 base stations and, under our agreement, operate exclusively with our EV-DO software. The term of the OEM agreement extends through January 1, 2011, with automatic annual renewals, unless either party gives 12 months prior notice of its intent not to renew. Ericsson also has the right to terminate the agreement at any time. We have amended the agreement several times, most recently in December 2009 when we agreed to pricing for software products and upgrades that were then under development.

Ericsson has the option, under our agreement, to purchase from us the specification for communications among base stations, RNCs and network management systems. The specification would enable Ericsson to develop EV-DO software to work with the base station channel card software licensed from us and deployed in the networks of Ericsson’s operator customers. If Ericsson elects to exercise this option, Ericsson will pay us a fixed fee as well as a significant royalty on sales of current and future products that incorporate this interface specification. The royalty rate varies with annual volume but represents a portion of the license fees we currently receive from our sales to Ericsson. If Ericsson were to exercise the option, Ericsson would receive the current interface specification at the time of option exercise, updated with any upgrade then under development, plus one additional upgrade subject to a development agreement within a limited time after the option exercise for an additional fee. If Ericsson were in the future to develop its own EV-DO software, it could, by exercising this option, enable its own software to communicate with the base station channel cards currently installed in its customers’ networks.

In September 2007, we entered into an agreement with Nortel Networks, amending certain provisions of the Development and Purchase and Sale Agreement for CDMA High Data Rate (1xEV-DO) Products, dated as of October 1, 2001, between us and Nortel Networks, in which we agreed to amend pricing for our products and services, including the addition of new pricing for software products and upgrades that were under development at the time and were subsequently delivered in June 2008.

In November 2008, we entered into another agreement with Nortel Networks, amending certain provisions of the Development and Purchase and Sale Agreement for CDMA High Data Rate (1xEV-DO) Products, dated as of October 1, 2001, between us and Nortel Networks, in which we agreed to pricing for software products and upgrades that were delivered at that time.

In December 2009, we entered into another agreement with Ericsson, amending certain provisions of the Development and Purchase and Sale Agreement for CDMA High Data Rate (1xEV-DO) Products, dated as of October 1, 2001, between us and Nortel Networks, in which we agreed to amend pricing for our products and services, including the addition of new pricing for software products and upgrades delivered in 2009.

Other OEM Relationships

In August 2007, we entered into an agreement with Nokia Siemens Networks to certify interoperability of our UMTS femtocell product with Nokia Siemens Networks’ femtocell gateway product. We and Nokia Siemens Networks plan to provide a joint solution to operators, and cooperate in joint marketing, sales and support programs. The agreement is non-exclusive and sets forth the terms under which we may use their proprietary interface specifications of their products.

In January 2008, we entered into a global sourcing agreement with Thomson to supply our UMTS femtocell technology. Pursuant to the agreement, Thomson may use our femtocell products in conjunction with its own residential gateway offerings. The agreement is non-exclusive and sets forth the terms and conditions under which Thomson may purchase our femtocell products. The term of the agreement extends through January 2011, with automatic annual renewals. Either party may terminate the agreement with 90 days notice.

In February 2008, we entered into a global OEM agreement with Motorola to provide our CDMA femtocell solution products. The agreement is non-exclusive and sets forth the terms and conditions under which Motorola may purchase our femtocell and UAG products. The initial term of the agreement extends through May 2010, with automatic annual renewals. Following the initial term, Motorola may terminate the agreement with 180 days notice.

In June 2008, we entered into an agreement with Alcatel-Lucent to develop an integrated IP Multimedia Subsystem, or IMS, femtocell solution for CDMA network operators that combines our femtocell access point and femtocell network gateway with Alcatel-Lucent’s IMS core network infrastructure. The development agreement was terminated by Alcatel-Lucent in the second quarter of fiscal 2009.

In July 2008, we entered into an agreement with Hitachi to develop a joint CDMA femtocell solution that integrates our femtocell products with Hitachi’s core radio access network infrastructure that Hitachi offers in Japan.

In September 2008, we entered into a supply agreement with Hitachi under which Hitachi will provide marketing, sales and support activities for our femtocell products. The initial term of the supply agreement extends through June 2014 and provides for automatic annual renewals, unless either party gives 180 days notice of its intent not to renew.

In December 2008, we entered into a sourcing agreement with Pirelli Broadband Solutions to add wireless broadband connectivity to Pirelli’s portfolio of consumer broadband devices by using our UMTS femtocell technology. The agreement is non-exclusive and sets forth the terms and conditions under which Pirelli may purchase our femtocell products. The initial term of the agreement extends through November 2010, with automatic annual renewals, unless either party gives 90 days notice of its intent not to renew.

In June 2009, we entered into a global reseller agreement with a multinational infrastructure provider to supply and support our femtocell service manager and UAG products. The agreement is non-exclusive and sets forth the terms and conditions under which the customer may purchase our FMC products. The initial term of the agreement extends through May 2012.

In June 2009, we entered into an agreement with a multinational infrastructure provider for the licensing and support of our femtocell service manager. The agreement is non-exclusive and sets forth the terms and conditions under which the customer may purchase our product. The initial term of the agreement extends through June 2014, with automatic annual renewals, unless either party gives 90 days notice of its intent not to renew.

In June 2009, we entered into a master purchase agreement with Sprint/United Management Company, or Sprint, to supply and support femtocell products. Under the agreement, we will provide our HubBub CDMA femtocell for Sprint’s commercial 3G femtocell service offerings. The agreement is non-exclusive and sets forth the terms and conditions under which Sprint may purchase our femtocell product and services. The term of the agreement extends through December 2014.

In January 2010, we entered into a global reseller agreement with a multinational infrastructure provider to supply and support our UMTS femtocells. The agreement is non-exclusive and sets forth the terms and conditions under which the customer may purchase our femtocell products. The initial term of the agreement is five years, with automatic annual renewals, unless either party gives nine months written notice of its intent not to renew.

Sales and Marketing

We market and sell our products both indirectly through our OEM customers and directly to wireless operator customers. To date, substantially all of our sales have been through our OEM customers. In addition to our sales and marketing efforts directed towards OEM customers, we augment the sales efforts of our OEM customers by working with their delivery and operational teams and assisting in the training and support of their sales personnel. Increasingly, an important part of our sales effort is creating demand for our products by working directly with operators. We foster relationships with operators by discussing technology trends, identifying market requirements, carrying out field support trials of our technologies in conjunction with teams from our OEM customers and providing training and education related to our technology. Through these contacts with our end-customers, we believe we are better able to understand their operations, incorporate feature and product requirements into our solutions and better track the technology needs of our end-customers.

As of January 3, 2010, we had 33 employees in sales and marketing.

Service and Support

We offer technical support services to our OEM customers and, in some cases, directly to wireless operators. Our OEM customers are responsible for handling basic first-level customer support, with our technical support personnel addressing complex issues related to our technologies.

Our service and support efforts are divided into two main categories: ongoing commercial network support, and pre-commercial or new network rollout support. Our ongoing customer support and services include live network product rollout, around-the-clock technical support, software and hardware maintenance services, emergency outage recovery and service ticket tracking and management. Pre-commercial support services include deployment optimization services, customer network engineering and on-site deployment work related to system configuration and integration with existing infrastructure.

We also provide customer consulting services including network and radio frequency deployment planning, network optimization and overall performance management. Our products and technology are sold with a full range of technical documentation, including planning, installation and operation guides. We also provide standard and customized training targeted at management, operational support personnel and network planners and engineers.

As of January 3, 2010, we had 43 employees in service and support.

Research and Development

Investment in research and development is at the core of our business strategy. As of January 3, 2010, we had 483 engineers in Chelmsford, Massachusetts, Bangalore, India and Cambridge, United Kingdom with significant expertise in digital communications, including wireless communications, IP and broadband networking. Our research and development organization is responsible for designing, developing and enhancing our software and hardware products, performing product testing and quality assurance activities, and ensuring the compatibility of our products with third-party platforms. Our research and development organization is also responsible for developing new algorithms and concepts for our existing and future products.

Manufacturing and Operations

We develop and test our software products in-house and outsource the manufacturing of the carrier-grade hardware components of our products. We believe that outsourcing the manufacturing of these hardware components enables us to conserve working capital, better adjust manufacturing volumes to meet changes in demand and more quickly deliver products.

As of January 3, 2010, we had 13 employees in manufacturing and operations.

Competition

The market for network infrastructure products is highly competitive and rapidly evolving. The market is subject to changing technology trends, shifting customer needs and expectations and frequent introduction of new products. We believe we are able to compete successfully primarily on the basis of our expertise in all-IP wireless communication, the performance and reliability of our products and our OEM business model.

The nature of our competition varies by product. For our EV-DO products, we face competition from several of the world’s largest telecommunications equipment providers that offer either a directly competitive product or a product based on alternative technologies. Our competitors include Alcatel-Lucent, Hitachi, Huawei, and Samsung.

In our sales to OEM customers, we face the competitive risk that OEMs might seek to develop in-house alternative solutions to those currently licensed from us. Additionally, OEMs might elect to source technology from our competitors.

The market for FMC solutions is in its early stages. We expect to encounter competition from products already on the market, as well as new products to be developed. Our competition includes several public companies, including Cisco, Ericsson and Samsung, as well as several private companies, including Huawei.

Our current and potential new competitors may have significantly greater financial, technical, marketing and other resources than we do and may be able to devote greater resources to the development, promotion, sale and support of their products. In addition, many of our competitors have more extensive customer bases and broader customer relationships than we do, including relationships with our potential customers. Our competitors may therefore be in a stronger position to respond quickly to new technologies and may be able to market or sell their products more effectively. Moreover, further consolidation in the communications equipment market could adversely affect our OEM customer relationships and competitive position. Our products may not continue to compete favorably and we may not be successful in the face of increasing competition from new products and enhancements introduced by existing competitors or new companies entering the markets in which we provide products.

Intellectual Property

We believe that our continued success depends in large part on our proprietary technology, the skills of our employees and the ability of our employees to continue to innovate and incorporate advances in wireless communication technology into our products. We regard our products and the internally-developed software embedded in our products as proprietary. The wireless industry is dominated by large vendors with significant intellectual property portfolios. To establish and protect our own intellectual property rights, we rely on a combination of patent, trademark, copyright and trade secret laws.

As of February 18, 2010, we had been issued 15 patents, with 2 additional patents allowed and we had over 110 patent applications pending in the United States and in foreign jurisdictions.

We license our technology pursuant to agreements that impose restrictions on customers’ ability to use the technology, such as prohibiting reverse engineering and, in the case of software products, limiting the use of software copies and restricting access to our source code. We also seek to avoid disclosure of our intellectual property using contractual obligations, by requiring employees and consultants with access to our proprietary information to execute nondisclosure, non-compete and assignment of intellectual property agreements.

Despite our efforts to protect our intellectual property, our means to protect our intellectual property rights may be inadequate. Unauthorized parties may attempt to copy aspects of our products, obtain and use information that we regard as proprietary, or even elect to design around our current intellectual property rights. In addition, the laws of some foreign countries do not protect our proprietary rights to as great an extent as do the laws of the United States and many foreign countries do not enforce their intellectual property laws as diligently as U.S. government agencies and private parties. Litigation and associated expenses may be necessary to enforce our property rights.

We have licensed from Qualcomm some of its EV-DO technology for use in our products. Our software also relies on certain application-specific integrated circuit, or ASIC, technology from Qualcomm used in EV-DO products. An inability to access these ASIC technologies could result in significant delays in our product releases and could require substantial effort to locate or develop replacement technology.

Many companies in the wireless industry have significant patent portfolios. These companies and other parties may claim that our products infringe their proprietary rights. We may become involved in litigation as a result of allegations that we infringe the intellectual property rights of others. For example, we have received letters from Wi-LAN Inc. asserting that some of our products infringe four issued United States patents and an issued Canadian patent relating to wireless communication technologies. A majority of our revenue to date has been derived from the allegedly infringing EV-DO products. We have evaluated various matters relating to Wi-LAN’s assertion and we do not believe that our products infringe any valid claim of the patents identified by Wi-LAN. However, we may seek to obtain a license to use the relevant technology from Wi-LAN. We cannot be certain that Wi-LAN would provide such a license or, if provided, what its economic terms would be. If we were to seek to obtain such a license, and such license were available from Wi-LAN, we could be required to make significant payments with respect to past and/or future sales of our products, and such payments may adversely affect our financial condition and operating results. If Wi-LAN determines to pursue claims against us for patent infringement, we might not be able to successfully defend against such claims.

Employees

As of January 3, 2010, we had approximately 600 employees, of which approximately 175 were located in India, approximately 60 were located in the United Kingdom and most of the remainder were based in the United States. None of our employees is represented by a union or covered by a collective bargaining agreement.

Facilities

Our corporate headquarters is located in Chelmsford, Massachusetts, where we lease approximately 85,000 square feet of office space. This lease expires on April 30, 2012. We also lease approximately 35,000 square feet of space in Bangalore, India pursuant to a lease which expires in March 2012 and approximately 10,000 square feet of space in Cambridge, United Kingdom pursuant to leases which expire in February 2012 and August 2012.

Item 1A.		Risk Factors

Our business is subject to numerous risks. We caution you that the following important factors, among others, could cause our actual results to differ materially from those expressed in forward-looking statements made by us or on our behalf in filings with the SEC, press releases, communications with investors and oral statements. Any or all of our forward-looking statements in this Annual Report on Form 10-K and in any other public statements we make may turn out to be wrong. They may be affected by inaccurate assumptions we might make or by known or unknown risks and uncertainties. Many factors mentioned in the discussion below will be important in determining future results. Consequently, no forward-looking statement can be guaranteed. Actual future results may vary materially from those anticipated in forward-looking statements. We undertake no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise. You are advised, however, to consult any further disclosure we make in our reports filed with the SEC.

Risks Relating to Our Business

We depend on a single OEM customer, Ericsson, for almost all of our revenue and billings, and a significant shortfall in sales to Ericsson would significantly harm our business and operating results.

We derived almost all of our revenue and billings in each of the last several years from sales to a single OEM customer. Ericsson, which acquired Nortel Networks’ CDMA business, accounted for 85% of our revenue and 94% of our billings in fiscal 2009. Nortel Networks accounted for 99% of our revenue and 93% of our billings in fiscal 2008 and 99% of our revenue and 98% of our billings in fiscal 2007.

Ericsson can terminate our contract at any time and, in any event, the contract does not contain commitments for future purchases of our products. The rate at which Ericsson purchases products from us depends on its success in selling to operators its own EV-DO infrastructure solutions that include our products. There can be no assurance that Ericsson will continue to devote and invest significant resources and capital to its wireless infrastructure business or that it will be successful in the future in such business. Ericsson might seek to develop internally, or acquire from a third party, alternative wireless solutions to those currently purchased from us. We expect to derive a substantial majority of our revenue, billings and cash flow in fiscal 2010 from Ericsson, and therefore any adverse change in our relationship with Ericsson, or a significant decline or shortfall in our sales to Ericsson, would significantly harm our business and operating results.

If our announced merger is delayed or not completed, our business and the market price of our common stock could be adversely affected.

On December 17, 2009, we announced our entry into the Merger Agreement with Parent and Merger Sub. There are a number of risks and uncertainties relating to the proposed merger, including the possibility that the transaction is delayed or not completed as a result of our failure to obtain necessary approval of our stockholders, the litigation filed by our shareholders in opposition to the proposed merger, our failure to obtain or any delay in obtaining necessary regulatory clearances or our failure to satisfy other closing conditions. We have incurred significant expenditures related to the merger. Any delay in completing, or failure to complete, the merger could have a negative impact on our business, our stock price, and our relationships with customers or employees. In addition, under certain circumstances, if the transaction is terminated, we may be required to pay a significant termination fee to Parent.

Because our OEM business model requires us to defer the recognition of most of our revenue from product and service sales until we deliver specified upgrades, and in some cases to further defer a portion of our revenue until applicable warranty periods expire, our revenue in any period is not likely to be indicative of the level of our sales activity in that period.

We recognize revenue from the sale of products and services under our OEM agreements only after we deliver specified upgrades to those products that were committed at the time of sale. The period of development of these upgrades can range from 12 to 24 months after the date of commitment. As a result, most of our revenue in any quarter typically reflects license fees under our OEM agreements for products and services delivered and invoiced to customers several quarters earlier. For these products and services, we generally record the amount of the invoice as deferred revenue and then begin to recognize such deferred revenue as revenue upon delivery of the committed software upgrades. When we cannot establish vendor specific objective evidence, or VSOE, of fair value for our maintenance and support services, we recognize a portion of the product and services revenue based on the portion of the maintenance period that has elapsed when the revenue first becomes recognizable, and we recognize the remaining portion of that product and services revenue ratably over the remaining maintenance period. As a result, our revenue is not likely to be indicative of the level of our sales activity in any period. Due to our OEM business model, we expect that, for the foreseeable future, any quarter in which we recognize a significant amount of deferred revenue as a result of our delivery of a previously committed upgrade will be followed by one or more quarters of insignificant revenue as we defer revenue while we develop additional upgrades. Investors may encounter difficulties in tracking the performance of our business because our revenue will not reflect the level of our billings in any period, and these difficulties could adversely affect the trading price of our common stock.

Our revenue and billings growth may be constrained by our product concentration and lack of revenue diversification.

Almost all of our revenue and billings to date have been derived from sales of our EV-DO products, and we expect EV-DO revenues to remain a major contributor to revenue for the foreseeable future. Continued market acceptance of these products is critical to our future success. The future demand for our EV-DO products depends, in large part, on the continued expansion of the EV-DO-based wireless networks currently deployed by operators and determinations by additional operators to deploy EV-DO-based wireless networks. Demand for our EV-DO products also depends on our ability to continue to develop and deliver on a timely basis product upgrades to enable operators to enhance the performance of their networks and implement new mobile broadband services. Any decline in demand for EV-DO products, or inability on our part to develop and deliver product upgrades that meet the needs of operators, would adversely affect our business and operating results.

A majority of our current products are based exclusively on the CDMA2000 air interface standard for wireless communications, and therefore any movement by existing or prospective operator customers to a different standard could impair our business and operating results.

There are multiple competing air interface standards for wireless communications networks. A majority of our current products are based exclusively on the CDMA2000 air interface standard, which handles a majority of wireless subscribers in the United States. Other standards, such as GSM/UMTS, are currently the primary standards used by wireless operators in mobile networks worldwide. Our EV-DO products do not operate in networks using the GSM/UMTS standards.

We believe there are a limited number of operators that have not already chosen the air interface standard to deploy in their 3G wireless networks. Our success will therefore depend, to a significant degree, on whether operators that have currently deployed CDMA2000-based networks expand and upgrade their networks and whether additional operators that have not yet deployed 3G networks select CDMA2000 as their standard. Our business will be harmed if operators currently utilizing the CDMA2000 standard transition their networks to a competing standard and we have not at that time developed and begun to offer competitive products that are compatible with that standard. Our business will also be harmed if operators that have currently deployed both CDMA and GSM/UMTS networks determine to focus more of their resources on their GSM/UMTS networks.

The introduction of fourth generation wireless technology could reduce spending on our EV-DO products and therefore harm our operating results.

The standards for mobile broadband solutions are expected to evolve into a fourth generation of wireless standards, known as 4G. Wireless operators have announced plans to build networks based on the 4G standard. For example, Verizon Wireless, Bell Mobility and TELUS have each announced its intent to build 4G networks using the Long Term Evolution, or LTE, standard and Sprint Nextel has announced its intent to build a 4G network using WiMAX technology. In addition, Bell Mobility and TELUS each recently announced that it will overlay its CDMA networks with UMTS technology as it migrates to the LTE standard. The market for our existing EV-DO products is likely to decline if and when operators begin to delay expenditures for EV-DO products in anticipation of the availability of new 4G-based products. Our primary OEM customer, Ericsson, has publicly announced that it is developing 4G-based LTE products. We do not have an agreement to supply Ericsson with any 4G-based products. We believe that it is likely that Ericsson will choose to enter into partnerships for 4G-based products with one or more of our competitors or choose to develop these products internally.

Our future success will depend on our ability to develop and market new products compatible with 4G standards and the acceptance of those products by operators. The development and introduction of these products will be time consuming and expensive, and we may not be able to correctly anticipate the market for 4G-compatible products and related business trends. Any inability to develop successfully 4G-based products could harm significantly our future business and operating results.

The variable sales and deployment cycles for our EV-DO products are likely to cause our quarterly billings to fluctuate materially.

The deployment by operators of wireless infrastructure equipment that enables new end-user services typically occurs in stages, and our quarterly billings will vary significantly depending on the rate at which such deployments occur. Operators will typically make significant initial investments for new equipment to assure that new services facilitated by such equipment are available to end-users throughout the operator’s network. Operators typically will defer significant additional purchases of such equipment until end-user usage of the services offered through such equipment creates demand for increased capacity. Our quarterly billings will typically increase significantly when an operator either chooses initially to deploy an EV-DO network or deploys a significant product upgrade introduced by us, and our quarterly billings will decline in other quarters when those deployments have been completed.

It is difficult to anticipate the rate at which operators will deploy our wireless infrastructure products, the rate at which the use of new mobile broadband services will create demand for additional capacity, and the rate at which operators will implement significant product upgrades. For example, our product and service billings in fiscal 2006 reflected an increase in sales of software for OEM base station channel cards that support Rev A as operators ramped up their deployments of EV-DO infrastructure. Our product and service billings for each of the second half of fiscal 2007 and the first half of fiscal 2008 were less than our product and service billings for the first half of fiscal 2007. Our product and service billings for the second half of fiscal 2008 were greater than they were for the first half of fiscal 2008. We believe that several large operators completed their initial deployments of Rev A software in the first half of fiscal 2007 and then moderated their deployments over the remainder of the year. We believe that several large operators began their capacity deployments in the second half of 2008. The staged deployments of wireless infrastructure equipment by customers of both our existing and new OEMs are likely to continue to cause significant volatility in our quarterly operating results.

If demand for mobile broadband services does not grow as quickly as we anticipate, or develops in a manner that we do not anticipate, our revenue and billings may decline or fail to grow, which would adversely affect our operating results.

We derive, and expect to continue to derive, a substantial portion of our revenue and billings from sales of mobile broadband infrastructure products. We expect demand for mobile broadband services to continue to be the primary driver for growth and expansion of EV-DO networks. The market for mobile broadband services is relatively new and still evolving, and it is uncertain whether these services will achieve and sustain high levels of demand and market acceptance. The level of demand and continued market acceptance for these services may be adversely affected by factors that limit or interrupt the supply of mobile phones designed for EV-DO networks. In addition, the unavailability of EV-DO versions of popular mobile devices, such as the i-Phone that only work on UMTS technology, could hamper the expansion of EV-DO networks. Another expected driver for the growth of EV-DO networks is VoIP. The migration of voice traffic to EV-DO networks will depend on many factors outside of our control. If the demand for VoIP and other mobile broadband services does not grow, or grows more slowly than expected, the need for our EV-DO products would be diminished and our operating results would be significantly harmed.

Deployments of our EV-DO products by two large U.S. wireless operators account for a substantial majority of our revenue and billings, and a decision by these operators to reduce their use of our products would harm our business and operating results.

A substantial portion of our cumulative billings for fiscal 2007, 2008 and 2009 are attributable to sales of our EV-DO products to two large wireless operators in North America. Our sales of EV-DO products currently depend to a significant extent on the rate at which these operators expand and upgrade their CDMA networks. Our business and operating results would be harmed if either of these operators were to select a wireless network solution offered by a competitor or for any other reason were to discontinue or reduce the use of our products or product upgrades in their networks.

If the market for our FMC products does not develop as we expect, or our FMC products do not achieve sufficient market acceptance, our business will suffer.

We are investing significantly in the development of both our EV-DO based and UMTS based FMC products so that operators may offer mobile broadband services using wireline broadband connections and mobile networks. We do not expect to have meaningful sales of our CDMA FMC products until the second half of fiscal 2010, depending on operators’ deployment plans. However, it is possible that the market for our FMC products will not develop as we expect. The market for our UMTS FMC products is developing more slowly than the market for our CDMA products. It is uncertain whether our FMC products will achieve and sustain high levels of demand, market acceptance and profitability. Our ability to sell our FMC products will depend, in part, on factors outside our control, such as the commercial availability and market acceptance of mobile phones designed to support FMC applications and the market acceptance of femtocell access point products. The market for our FMC products may be smaller than we expect, the market may develop more slowly than we expect or our competitors may develop alternative technologies that are more attractive to operators. Our FMC products are an important component of our growth and diversification strategy and, therefore, if we are unable to successfully execute on this strategy, our sales, billings and revenues could decrease and our operating results could be harmed.

Our future sales will depend on our success in generating sales to a limited number of OEM customers, and any failure to do so would have a significant detrimental effect on our business.

There are a limited number of OEMs that offer EV-DO solutions, several of which have developed their own EV-DO technology internally and, therefore, do not require solutions from us. We currently have agreements with two OEM customers. We do not expect to commence significant sales to one of these OEM customers in the immediate future because the markets for the products that we are developing for this customer are still developing. The market for our FMC products is still developing. We currently have agreements with five OEM customers to deliver our UMTS femtocell product solutions and agreements with five OEM customers and one operator customer to deliver our CDMA femtocell product solutions, but have not yet had any significant sales to these customers. Our operating results for the foreseeable future will depend to a significant extent on our ability to effect sales to our existing CDMA and UMTS OEM customers and to establish new OEM relationships. Our OEM customers have substantial purchasing power and leverage in negotiating pricing and other contractual terms with us. In addition, further consolidation in the communications equipment market could adversely affect our OEM customer relationships. If we fail to generate significant product and service billings through our existing OEM relationships or if we fail to establish significant new OEM relationships, we will not be able to achieve our anticipated level of sales and our results of operations will suffer.

The unpredictability of our future results may adversely affect the trading price of our common stock.

Our operating results have varied significantly from period to period, and we expect them to continue to vary significantly from period to period for the foreseeable future due to a number of factors in addition to the unpredictable purchasing patterns of operators. The following factors, among others, can contribute to the unpredictability of our operating results:

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the effect of our OEM business model or changes to this model on our revenue recognition;

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the timing of agreements or commitments with our OEM customers for new products or software upgrades;

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the timing of our delivery of software upgrades;

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the timing of our delivery of maintenance and support sold with products;

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the ability of our customers to pay amounts owed to us as they become due;

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the unpredictable deployment and purchasing patterns of operators;

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fluctuations in demand for products of our OEM customers that are sold together with our products, and the timing and size of orders for such products of our OEM customers;

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new product introductions and enhancements by our competitors and us;

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the timing and acceptance of software upgrades sold by our OEM customers to their installed base of operators;

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changes in our pricing policies or the pricing policies of our competitors;

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our ability to develop, introduce and deploy new products and product upgrades that meet customer requirements in a timely manner;

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adjustments in the reporting of royalties and product sales by our OEM customers resulting from reviews and audits of such reports;

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our and our OEM customers’ ability to obtain sufficient supplies of limited source components or materials;

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our and our OEM customers’ ability to attain and maintain production volumes and quality levels for our products; and

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general economic conditions, as well as those specific to the communications, networking, wireless and related industries.

Our operating expenses are largely based on our anticipated organizational and product and service billings growth, especially as we continue to invest significant resources in the development of future products and expand our international presence. Most of our expenses, such as employee compensation, are relatively fixed in the short term. As a result, any shortfall in product and service billings in relation to our expectations could cause significant changes in our operating results from period to period and could result in negative cash flow from operations.

We believe that comparing our operating results on a period-to-period basis may not be meaningful. You should not rely on our past results as an indication of our future performance. It is likely that in some future periods, our revenue, product and service billings, earnings, cash from operations or other operating results will be below the expectations of securities analysts and investors. In that event, the price of our common stock may decrease substantially.

We may not be able to achieve profitability for any period in the future or sustain cash flow from operating activities.

We had a net loss in fiscal 2009. We have only a limited operating history on which you can base your evaluation of our business, including our ability to continue to grow our revenue and billings and to sustain cash flow from operating activities and profitability. The amount and percentage of our operating expenses that are fixed expenses have increased as we have grown our business. As we continue to expand and develop our business, we will need to generate significant billings to maintain positive cash flow from operating activities, and we might not sustain positive cash flow from operating activities for any substantial period of time. We do not expect to achieve profitability for any fiscal year unless we are able to recognize significant revenue from our OEM arrangements in that fiscal year. If we are unable to increase our billings and sustain cash flow from operating activities, the market price of our common stock will likely fall.

Claims by other parties that we infringe their proprietary technology could force us to redesign our products or to incur significant costs.

Many companies in the wireless industry have significant patent portfolios. These companies and other parties may claim that our products infringe their proprietary rights. We may become involved in litigation as a result of allegations that we infringe the intellectual property rights of others. Any party asserting that our products infringe their proprietary rights would force us to defend ourselves, and possibly our customers, against the alleged infringement. These claims and any resulting lawsuit, if successful, could subject us to significant liability for damages and invalidation of our proprietary rights. We also could be forced to do one or more of the following:

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

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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;

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redesign those products that use any allegedly infringing technology, which may be costly and time-consuming; or

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refund deposits and other amounts received for allegedly infringing technology or products.

For example, in 2006, we received a letter from Wi-LAN Inc. asserting that some of our EV-DO products infringe two issued United States patents and an issued Canadian patent relating to wireless communication technologies. A majority of our revenue to date has been derived from the allegedly infringing EV-DO products. We have evaluated various matters relating to Wi-LAN’s assertion and we do not believe that such products infringe any valid claim of the patents identified by Wi-LAN in that letter. In November 2007, we received an additional letter from Wi-LAN asserting that some of our other products infringe one of the previously identified United States patents and that the products identified in the first letter and some of our other products infringe two other United States patents. We have evaluated Wi-LAN’s claims related to the products and patents identified in its November 2007 letter and we do not believe that our products infringe any valid claim of the patents identified by Wi-LAN in that letter. Under certain circumstances we may seek to obtain a license to use the relevant technology from Wi-LAN. We cannot be certain that Wi-LAN would provide such a license or, if provided, what its economic terms would be. If we were to seek to obtain such a license, and such license were available from Wi-LAN, we could be required to make significant payments with respect to past and/or future sales of our products, and such payments may adversely affect our financial condition and operating results. If Wi-LAN determines to pursue claims against us for patent infringement, we might not be able to successfully defend against such claims.

Intellectual property litigation can be costly. Even if we prevail, the cost of such litigation could deplete our financial resources. Litigation is also time consuming and could divert management’s attention and resources away from our business. Furthermore, during the course of litigation, confidential information may be disclosed in the form of documents or testimony in connection with discovery requests, depositions or trial testimony. Disclosure of our confidential information and our involvement in intellectual property litigation could materially adversely affect our business. Some of our competitors may be able to sustain the costs of complex intellectual property litigation more effectively than we can because they have substantially greater resources. In addition, any uncertainties resulting from the initiation and continuation of any litigation could significantly limit our ability to continue our operations.

If we are not successful in obtaining from third parties licenses to intellectual property that are required for GSM/UMTS products that we are developing, we may not be able to expand our business as expected and our business may suffer.

The GSM/UMTS markets are characterized by the presence of many patents held by third parties. We will need to obtain licenses from third parties for intellectual property associated with our development of GSM/UMTS products. Any required license might not be available to us on acceptable terms, or at all. If we succeed in obtaining these licenses, but the payments under these licenses are higher than we anticipate, our costs for these products would increase and our operating results would suffer. If we failed to obtain a required license, our ability to develop GSM/UMTS products would be impaired, we may not be able to expand our business as expected and our business may suffer.

If we do not timely deliver new and enhanced products that respond to customer requirements and technological changes, operators may not buy our products and our revenue and product and service billings may decline significantly.

The market for our products is characterized by rapid technological change, frequent new product introductions and evolving industry standards. To achieve market acceptance for our products, we must effectively anticipate operator requirements, and we must offer products that meet changing operator demands in a timely manner. Operators may require product features and capabilities that our current products do not have. If we fail to develop products that satisfy operator requirements, our ability to create or increase demand for our products will be harmed.

In developing our wireless infrastructure products, we seek to identify the long-term trends of wireless operators and their customers. The development cycle for our products and technologies can take multiple years. The ultimate success of our new products depends, in large part, on the accuracy of our assessments of the long-term needs of the industry, and it is difficult to change quickly the design or function of a planned new product if the market need does not develop as we anticipate.

We may experience difficulties with software development, industry standards, hardware design, manufacturing or marketing that could delay or prevent our development, introduction or implementation of new products and enhancements. The introduction of new products by competitors, including some of our OEM customers, the emergence of new industry standards or the development of entirely new technologies that replace existing product offerings could render our existing or future products obsolete. If our products become technologically obsolete, operators may purchase solutions offered by our competitors and our ability to generate revenue and product and service billings may be impaired.

Our revenue and product and service billings growth will be limited if our OEM customers are unable to continue to sell our products to large wireless operators or if we have to discount our products to support the selling efforts of our OEM customers.

Our future success depends in part on the ability of our OEM customers to sell our products to large wireless operators operating complex networks that serve large numbers of subscribers and transport high volumes of traffic. Our OEM customers operate in a highly competitive environment and may need to reduce the prices they charge for our products in order to maintain or expand their market share. We may reduce the prices we charge our OEM customers for our products in order to support their selling efforts. If our OEM customers incur shortfalls in their sales of mobile broadband solutions to their existing customers or fail to expand their customer base to include additional operators that deploy our products in large-scale networks serving significant numbers of subscribers or if we reduce the prices we charge our OEM customers for our products, our operating results will suffer.

We depend on sole sources for certain components of our products and our business would be harmed if the supply from our sole sources were disrupted.

We depend on sole sources for certain components of our products and also rely on contract manufacturers for the production of our hardware products. We have not entered into long-term agreements with any of our suppliers. We depend on several software vendors for the operating system and other capabilities used in our products. In addition, we and one of our OEM customers purchase from Qualcomm the cell site modem chips used in any base station and base station channel cards. If these cell site modem chips were to become unavailable to us or to our OEM customers, it would take us a significant period of time to develop alternative solutions and it is likely that our operating results would be significantly harmed.

The market for network infrastructure products is highly competitive and continually evolving, and if we are not able to compete effectively, we may not be able to continue to expand our business as expected and our business may suffer.

The market for network infrastructure products is highly competitive and rapidly evolving. The market is subject to changing technology trends, shifting customer needs and expectations and frequent introduction of new products.

We expect competition to persist and intensify in the future as the market for network infrastructure products grows and new and existing competitors devote considerable resources to introducing and enhancing products. For our EV-DO products, we face competition from several of the world’s largest telecommunications equipment providers that provide either a directly competitive product or a product based on alternative technologies, including Alcatel-Lucent, Hitachi, Huawei, and Samsung. In our sales to OEM customers, we face the competitive risk that OEMs might seek to develop internally alternative solutions to those currently purchased from us. Additionally, our OEM customers might elect to purchase technology from our competitors. For our FMC products, our competition includes several public companies, including Cisco, as well as several private companies such as Huawei.

Our current and potential competitors may have significantly greater financial, technical, marketing and other resources than we do and may be able to devote greater resources to the development, promotion, sale and support of their products. In addition, many of our competitors have more extensive customer relationships than we do, and, therefore, our competitors may be in a stronger position to respond quickly to new technologies and may be able to market or sell their products more effectively. Moreover, further consolidation in the communications equipment market could adversely affect our OEM customer relationships and competitive position. Our products may not continue to compete favorably. We may not be successful in the face of increasing competition from new products and enhancements introduced by existing competitors or new companies entering the markets in which we provide products. As a result, we may experience price reductions for our products, order cancellations and increased expenses. Accordingly, our business may not grow as expected and our business may suffer.

Our agreement with our largest OEM customer, Ericsson, provides Ericsson with an option to license some of our intellectual property to develop internally products competitive with the products it currently purchases from us.

Under our OEM agreement with Ericsson, Ericsson has the option to purchase from us the specification for communications among base stations, radio network controllers and network management systems. The specification would enable Ericsson to develop EV-DO software to work with the base station channel card software licensed from us and deployed in the networks of its wireless operator customers. If Ericsson elects to exercise this option, Ericsson will pay us a fixed fee as well as a significant royalty on sales of current and future products that incorporate this specification. The royalty rate varies with annual volume but represents a portion of the license fees we currently receive from our sales to Ericsson. If Ericsson were to exercise the option, Ericsson would receive the current interface specification at the time of option exercise, updated with an upgrade then under development, plus one additional upgrade subject to a development agreement within a limited time after the option exercise for an additional fee. If Ericsson were in the future to develop its own EV-DO software, it could, by exercising this option, enable its own software to communicate with the base station channel cards currently installed in its customers’ networks.

Continued adverse conditions in the global economy and disruption of financial and credit markets could negatively affect our customers’, and therefore our performance.

A prolonged economic downturn in the business or geographic areas in which we sell our products could reduce demand for our products and result in a decline in our revenue and billings. Volatility and disruption of financial and credit markets could limit customers’ ability to obtain adequate financing to maintain operations and invest in network infrastructure and therefore, also could reduce demand for our products and result in a decline in our revenues and billings.

In addition, during economic downturns, customers may slow the rate at which they pay their vendors or become unable to pay their debts as they become due. If any of our significant customers do not pay amounts owed to us in a timely manner or become unable to pay such amounts to us at a time when we have substantial amounts receivable from such customers, our cash flow and results of operations may suffer.

Because our business depends on the continued strength of the communications industry, our operating results will suffer if that industry experiences an economic downturn.

We derive most of our revenue and billings from purchases of our products by customers in the communications industry. Our future success depends upon the continued demand from wireless operators for communications equipment. The communications industry is cyclical and reactive to general economic conditions. In the recent past, worldwide economic downturns, pricing pressures, mergers and deregulation have led to consolidations and reorganizations. These downturns, pricing pressures and restructurings have caused delays and reductions in capital and operating expenditures by many wireless operators. These delays and reductions, in turn, have reduced demand for communications products such as ours. A continuation or recurrence of these industry patterns, as well as general domestic and foreign economic conditions and other factors that reduce spending by companies in the communications industry, could harm our operating results in the future.

The success of our business could be jeopardized if we are unable to protect our intellectual property adequately.

Our success depends to a degree upon the protection of our software, hardware designs and other proprietary technology. We rely on a combination of patent, copyright, trademark and trade secret laws, and confidentiality provisions in agreements with employees, contract manufacturers, consultants, customers and other third parties to protect our intellectual property rights. Other parties may not comply with the terms of their agreements with us, and we may not be able to enforce our rights adequately against these parties. In addition, unauthorized parties may attempt to copy or otherwise obtain and use our products or technology. Monitoring unauthorized use of our products is difficult, and we cannot be certain that the steps we have taken will prevent unauthorized use of our technology, particularly in foreign countries where the laws may not protect our proprietary rights as fully as in the United States. If competitors are able to use our technology, our ability to compete effectively could be harmed. For example, if a competitor were to gain use of certain of our proprietary technology, it might be able to develop and manufacture similarly designed and equipped mobile broadband solutions at a reduced cost, which could result in a decrease in demand for our products. Furthermore, we have adopted a strategy of seeking limited patent protection both in the United States and in foreign countries with respect to the technologies used in or relating to our products. We do not know whether any of our pending patent applications will result in the issuance of patents or whether the examination process will require us to narrow our claims, and even if patents are issued, they may be contested, circumvented or invalidated over the course of our business. Moreover, the rights granted under any issued patents may not provide us with proprietary protection or competitive advantages, and, as with any technology, competitors may be able to develop and obtain patents for technologies that are similar to or superior to our technologies. If that happens, we may need to license these technologies and we may not be able to obtain licenses on reasonable terms, if at all, thereby causing great harm to our business. In addition, if we resort to legal proceedings to enforce our intellectual property rights, the proceedings could become burdensome and expensive, even if we were to prevail.

We may engage in future acquisitions that could disrupt our business, cause dilution to our stockholders and harm our financial condition and operating results.

We intend to pursue acquisitions of companies or assets in order to enhance our market position or expand our product portfolio. We may not be able to find suitable acquisition candidates and we may not be able to complete acquisitions on favorable terms, if at all. If we do complete acquisitions, we cannot be sure that they will ultimately strengthen our competitive position or that they will not be viewed negatively by customers, securities analysts or investors. In addition, any acquisitions that we make could lead to difficulties in integrating personnel and operations from the acquired businesses and in retaining and motivating key personnel from those businesses. Acquisitions may disrupt our ongoing operations, divert management from day-to-day responsibilities, increase our expenses and harm our operating results or financial condition. Future acquisitions may reduce our cash available for operations and other uses and could result in an increase in amortization expense related to identifiable assets acquired, potentially dilutive issuances of equity securities or the incurrence of debt, which could harm our business, financial condition and operating results.

The outcome of an ongoing IRS examination of our tax returns could adversely affect our cash balance and operating results.

During the first quarter of fiscal 2009, the Internal Revenue Service, or IRS, began an examination of the our U.S. federal income tax returns for the tax years ended December 31, 2006 and December 30, 2007. The IRS recently completed the field work relating to the audit, and in January 2010, the IRS issued to us a Form 4549, Consent to Assessment and Collection of Tax, which details the proposed adjustments to our tax returns and additional tax due by us of $0.3 million. We executed the Form 4549 and paid the additional tax to stop the accrual of interest thereon. The case is currently undergoing review within the IRS and is still subject to acceptance by the IRS. The IRS has indicated that if upon completion of the review no further adjustments are proposed, we will receive a Form 870 closing the case and assessing interest due.

Future interpretations of existing accounting standards or the application of new standards could adversely affect our operating results.

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

For example, we recognize substantially all of our revenue in accordance with the Accounting Standards Codification, or ASC, Software Revenue Recognition, or ASC 985-605. The AICPA and its Software Revenue Recognition Task Force continue to issue interpretations and guidance for applying the relevant accounting standards to a wide range of sales contract terms and business arrangements that are prevalent in software licensing arrangements and arrangements for the sale of hardware products that contain more than an insignificant amount of software. We collaborate with our OEM customers to develop and negotiate pricing for specific features for future product releases and specified software upgrades. Because we do not sell the same products and upgrades to more than one customer, we are unable to establish fair value for these products and upgrades. As a result, under ASC 985-605, we are required to defer most of our revenue from sales to our OEM customers until after we ship specified upgrades that were committed to the OEM customer at the time of sale. Future interpretations of existing accounting standards, including ASC 985-605, or changes in our business practices could result in future changes in our revenue recognition accounting policies that have a material adverse effect on our results of operations.

In August 2008, the SEC decided to seek public comments on the potential mandatory adoption of International Financial Reporting Standards, or IFRS, by all U.S. issuers. The proposed roadmap targets potential mandatory adoption of IFRS in the United States beginning in 2014, but lays out several milestones that would need to be achieved prior to the SEC mandating use of IFRS for all U.S. issuers. The proposed rule would allow certain qualifying domestic issuers to use IFRS as early as fiscal years ending on or after December 15, 2009. Should we be required to adopt IFRS, our operating results for past, current, or future periods may be adversely affected. We have not yet assessed the impact of potentially applying IFRS.

In December 2008, the FASB and the International Accounting Standards Board issued a discussion paper which detailed their preliminary views on a single, assets-and liabilities-based revenue recognition model that they believe will improve financial reporting. If and when a new revenue recognition model is finalized, it may change the way in which we recognize and record revenue and could adversely affect our operating results in current or future periods. We have not yet assessed the impact of this preliminary revenue recognition model.

In September 2009, the Emerging Issues Task Force or EITF finalized two revenue recognition standards which reduced the number of transactions accounted for under ASC 985-605 and modified the scope of this standard. We have not yet fully completed our analysis of the new pronouncements, which will be effective for new or materially modified contracts in fiscal years beginning on or after June 15, 2010.

The loss of key personnel or an inability to attract and retain additional personnel may impair our ability to grow our business.

We are highly dependent upon the continued service and performance of our senior management team and key technical and sales personnel, including our President and Chief Executive Officer, Chief Technical Officer, and Vice President, Femto Business and Corporate Development. None of these officers is a party to an employment agreement with us, and any of them may terminate employment with us at any time with no advance notice. The replacement of these officers likely would involve significant time and costs, and the loss of these officers may significantly delay or prevent the achievement of our business objectives.

We face intense competition for qualified individuals from numerous technology, software and manufacturing companies. For example, our competitors may be able to attract and retain a more qualified engineering team by offering more competitive compensation packages. If we are unable to attract new engineers and retain our current engineers, we may not be able to develop and service our products at the same levels as our competitors and we may, therefore, lose potential customers and sales penetration in certain markets. Our failure to attract and retain suitably qualified individuals could have an adverse effect on our ability to implement our business plan and, as a result, our ability to compete effectively in the mobile broadband solutions market could decrease, our operating results could suffer and our revenues could decrease.

We have incurred, and will continue to incur, significant increased costs as a result of operating as a public company as compared with our history as a private company, and our management is required to devote substantial time to public company compliance initiatives. If we are unable to absorb these increased costs or maintain management focus on development and sales of our product offerings and services, we may not be able to achieve our business plan.

As a public company, we have incurred, and will continue to incur, significant legal, accounting and other expenses that we did not incur as a private company. In addition, the Sarbanes-Oxley Act, as well as rules subsequently implemented by the SEC and the NASDAQ Stock Market, have imposed a variety of requirements on public companies, including requiring changes in corporate governance practices. Our management and other personnel have and will continue to devote a substantial amount of time to these compliance initiatives. Moreover, these rules and regulations have increased our legal and financial compliance costs and have made some activities more time-consuming and costly. For example, we believe these new rules and regulations have made it more difficult and expensive for us to obtain director and officer liability insurance.

We are exposed to potential risks and will continue to incur significant costs as a result of the internal control testing and evaluation process mandated by Section 404 of the Sarbanes-Oxley Act of 2002.

We assessed the effectiveness of our internal control over financial reporting as of January 3, 2010 and assessed all deficiencies on both an individual basis and in combination to determine if, when aggregated, they constitute a material weakness. As a result of this evaluation, no material weaknesses were identified.

We expect to continue to incur significant costs, including increased accounting fees and increased staffing levels, in order to maintain compliance with Section 404 of the Sarbanes-Oxley Act. We continue to monitor our controls for any weaknesses or deficiencies. No evaluation can provide complete assurance that our internal controls will detect or uncover all failures of persons within our company to disclose material information otherwise required to be reported. The effectiveness of our controls and procedures could also be limited by simple errors or faulty judgments. In addition, as we continue to expand globally, the challenges involved in implementing appropriate internal controls will increase and will require that we continue to improve our internal controls over financial reporting.

In the future, if we fail to complete our Sarbanes-Oxley 404 evaluation in a timely manner, or if our independent registered public accounting firm cannot attest in a timely manner to our evaluation, we could be subject to regulatory scrutiny and a loss of public confidence in our internal controls which could adversely impact the market price of our common stock. We or our independent registered public accounting firm may identify material weaknesses in internal controls over financial reporting which may result in a loss of public confidence in our internal controls and adversely impact the market price of our common stock. In addition, any failure to implement required, new or improved controls, or difficulties encountered in their implementation, could harm our operating results or cause us to fail to meet our reporting obligations.

If we are unable to manage our growth and expand our operations successfully, our business and operating results will be harmed and our reputation may be damaged.

We anticipate that further expansion of our infrastructure and headcount may be required to achieve planned expansion of our product offerings and planned increases in our customer base. Our growth has placed, and is expected to continue to place, a significant strain on our administrative and operational infrastructure. Our ability to manage our operations and growth will require us to continue to refine our operational, financial and management controls, human resource policies, and reporting systems and procedures.

We may not be able to implement improvements to our management information and control systems in an efficient or timely manner and may discover deficiencies in existing systems and controls. If we are unable to manage future expansion, our ability to provide high quality products and services could be harmed, which would damage our reputation and brand and substantially harm our business and results of operations.

We may need additional capital in the future, which may not be available to us, and if it is available, may dilute our existing stockholders’ ownership of our common stock.

We may need to raise additional funds through public or private debt or equity financings in order to:

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fund ongoing operations;

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take advantage of opportunities, including more rapid expansion of our business or the acquisition of complementary products, technologies or businesses;

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develop new products; or

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respond to competitive pressures.

Any additional capital raised through the sale of equity may dilute our current stockholders’ percentage ownership of our common stock. Capital raised through debt financing would require us to make periodic interest payments and may impose potentially restrictive covenants on the conduct of our business. Furthermore, additional financings may not be available on terms favorable to us, or at all, particularly in the current economic environment. A failure to obtain additional funding could prevent us from making expenditures that may be required to grow or maintain our operations.

Our ability to sell our products depends in part on the quality of our support and services offerings, and our failure to offer high quality support and services would have a material adverse effect on our sales and operating results.

Once our products are deployed within an operator’s network, the operator and our OEM customer depend on our support organization to resolve issues relating to our products. A high level of support is critical for the successful marketing and sale of our products. If we do not effectively assist operators in deploying our products, succeed in helping operators quickly resolve post-deployment issues, and provide effective ongoing support it would adversely affect our ability to sell our products. As a result, our failure to maintain high quality support and services would have a material adverse effect on our business and operating results.

Our products are highly technical and may contain undetected software or hardware errors, which could cause harm to our reputation and adversely affect our business.

Our products are highly technical and complex and are critical to the operation of many networks. Our products have contained and are expected to continue to contain one or more undetected errors, defects or security vulnerabilities. Some errors in our products may only be discovered after a product has been installed and used by an operator. For example, we have encountered errors in our software products that have caused operators using our products to experience a temporary loss of certain network services. Any errors, defects or security vulnerabilities discovered in our products after commercial release could result in loss of revenue or delay in revenue recognition, loss of customers and increased service and warranty cost, any of which could adversely affect our business, results of operations and financial condition. In addition, we could face claims for product liability, tort or breach of warranty, including claims related to changes to our products made by our OEM customers. Our contracts for the sale of our products contain provisions relating to warranty disclaimers and liability limitations, which in certain cases may not be upheld. Defending a lawsuit, regardless of its merit, is costly and may divert management’s attention and adversely affect the market’s perception of us and our products. In addition, if our business liability insurance coverage proves inadequate or future coverage is unavailable on acceptable terms or at all, our financial condition could be harmed.

Our international operations subject us to additional risks that can adversely affect our operating results.

We have sales personnel in seven countries worldwide, approximately 175 engineers and support staff in Bangalore, India and approximately 60 engineers and support staff in Cambridge, United Kingdom. We expect to continue to add personnel in foreign countries, especially at our Bangalore, India facility. Our international operations subject us to a variety of risks, including:

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the difficulty of managing and staffing foreign offices and the increased travel, infrastructure and legal compliance costs associated with multiple international locations;

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difficulties in enforcing contracts, collecting accounts receivable and longer payment cycles, especially in emerging markets;

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the need to localize our products and licensing programs for international customers;

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tariffs and trade barriers and other regulatory or contractual limitations on our ability to sell or develop our products in certain foreign markets;

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increased exposure to foreign currency exchange rate risk; and

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reduced protection for intellectual property rights in some countries.

As we continue to expand our business globally, our success will depend, in large part, on our ability to anticipate and effectively manage these and other risks associated with our international operations. Our foreign operations incur expenses in local currencies. Because we incur a substantial portion of our operating expenses in India and the United Kingdom, we are subject to currency exchange risks between the U.S. Dollar on the one hand, and the Indian Rupee and British Pound, on the other. We may derive some of our future revenue from customers in foreign countries that pay for our products in the form of their local currency, which also would subject us to currency exchange risks. Our failure to manage any of these risks successfully could harm our international operations and reduce our international sales, adversely affecting our business, operating results and financial condition.

If wireless devices pose safety risks, we may be subject to new regulations, and demand for our products and those of our licensees and customers may decrease.

Concerns over the effects of radio frequency emissions, even if unfounded, may have the effect of discouraging the use of wireless devices, which would decrease demand for our products and those of our licensees and customers. In recent years, the FCC and foreign regulatory agencies have updated the guidelines and methods they use for evaluating radio frequency emissions from radio equipment, including wireless phones and other wireless devices. In addition, interest groups have requested that the FCC investigate claims that wireless communications technologies pose health concerns and cause interference with airbags, hearing aids and other medical devices. Concerns have also been expressed over the possibility of safety risks due to a lack of attention associated with the use of wireless devices while driving. Any legislation that may be adopted in response to these expressions of concern could reduce demand for our products and those of our licensees and customers in the United States as well as foreign countries.

Risks Relating to Ownership of Our Common Stock

The market price of our common stock may be volatile.

Our common stock has a limited trading history. The trading prices of the securities of technology companies have been highly volatile. Some of the factors that may cause the market price of our common stock to fluctuate include:

•

fluctuations in our quarterly financial results or the quarterly financial results of companies perceived to be similar to us;

•

fluctuations in our revenue as a result of our revenue recognition policy, even during periods of significant sales activity;

•

changes in estimates of our financial results or recommendations by securities analysts;

•

failure of any of our products to achieve or maintain market acceptance;

•

any adverse change in our relationship with Ericsson;

•

any adverse resolution of the IRS examination of our U.S. federal income tax returns for the years ended December 31, 2006 and December 30, 2007;

•

changes in market valuations of similar companies;

•

success of competitive products;

•

changes in our capital structure, such as future issuances of securities or the incurrence of debt;

•

announcements by us or our competitors of significant products, contracts, acquisitions or strategic alliances;

•

regulatory developments in the United States, foreign countries or both;

•

litigation involving our company, our general industry or both;

•

additions or departures of key personnel;

•

general perception of the future of CDMA technology;

•

investors’ general perception of us; and

•

changes in general economic, industry and market conditions.

In addition, if the market for technology stocks or the stock market in general experiences a loss of investor confidence, the trading price of our common stock could decline for reasons unrelated to our business, financial condition or results of operations. If any of the foregoing occurs, it could cause our stock price to fall and may expose us to class action lawsuits that, even if unsuccessful, could be costly to defend and a distraction to management.

If equity research analysts do not publish research or reports about our business or if they issue unfavorable commentary or downgrade our common stock, the price of our common stock could decline.

The trading market for our common stock will rely in part on the research and reports that equity research analysts publish about us and our business. We do not control these analysts. The price of our stock could decline if one or more equity analysts downgrade our stock or if those analysts issue other unfavorable commentary or cease publishing reports about us or our business.

A significant portion of our total outstanding shares may be sold into the public market in the near future, which could cause the market price of our common stock to drop significantly, even if our business is doing well.

If our existing stockholders sell a large number of shares of our common stock or the public market perceives that existing stockholders might sell shares of common stock, the market price of our common stock could decline significantly.

The holders of a majority of our common stock have rights, subject to some conditions, to require us to file registration statements under the Securities Act or to include their shares in registration statements that we may file in the future for ourselves or other stockholders. If we register their shares of common stock, they could sell those shares in the public market.

Our directors and management may exercise significant control over our company.

Our directors and executive officers and their affiliates beneficially owned a majority of our outstanding common stock as of January 3, 2010. As a result, these stockholders, if they act together, will be able to influence our management and affairs and all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions. This concentration of ownership may have the effect of delaying or preventing a change in control of our company and might affect the market price of our common stock.

Provisions in our certificate of incorporation, our by-laws or Delaware law might discourage, delay or prevent a change in control of our company or changes in our management and, therefore, depress the trading price of our common stock.

Provisions of our certificate of incorporation, our by-laws or Delaware law may discourage, delay or prevent a merger, acquisition or other change in control that stockholders may consider favorable, including transactions in which our stockholders might otherwise receive a premium for their shares of our common stock. These provisions may also prevent or frustrate attempts by our stockholders to replace or remove our management. These provisions include:

•

limitations on the removal of directors;

•

a classified board of directors so that not all members of our board are elected at one time;

•

advance notice requirements for stockholder proposals and nominations;

•

the inability of stockholders to act by written consent or to call special meetings;

•

the ability of our board of directors to make, alter or repeal our by-laws; and

•

the ability of our board of directors to designate the terms of and issue new series of preferred stock without stockholder approval, which could be used to institute a rights plan, or a poison pill, that would work to dilute the stock ownership of a potential hostile acquirer, likely preventing acquisitions that have not been approved by our board of directors.

In addition, Section 203 of the Delaware General Corporation Law prohibits a publicly-held Delaware corporation from engaging in a business combination with an interested stockholder, generally a person which together with its affiliates owns, or within the last three years has owned, 15% of our voting stock, for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in a prescribed manner.

The existence of the foregoing provisions and anti-takeover measures could limit the price that investors might be willing to pay in the future for shares of our common stock. They could also deter potential acquirers of our company, thereby reducing the likelihood that stockholders could receive a premium for their common stock in an acquisition.

We do not currently intend to pay dividends on our common stock and, consequently, the ability to achieve a return on an investment in our common stock will depend on appreciation in the price of our common stock.

Although we paid a special cash dividend on our capital stock in April 2007, we do not intend to pay any cash dividends on our common stock for the foreseeable future. We currently intend to invest our future earnings, if any, to fund our growth. Therefore, stockholders are not likely to receive any dividends on shares of common stock for the foreseeable future.

Item 1B.	Unresolved Staff Comments

None.

Item 2.	Properties

We lease approximately 85,000 square feet of office space in Chelmsford, Massachusetts pursuant to leases that expire in April 2012. We lease approximately 35,000 square feet of office space in Bangalore, India pursuant to a lease that expires in March 2012. We lease approximately 10,000 square feet of office space in Cambridge, United Kingdom pursuant to leases that expire in February 2012 and August 2012. We also maintain sales offices in Dallas, Texas; Madrid, Spain; Darmstadt, Germany; Beijing, China; Singapore; and Tokyo, Japan. We believe that our current facilities are suitable and adequate to meet our current needs. We intend to add new facilities or expand existing facilities as we add employees, and we believe that suitable additional or substitute space will be available as needed to accommodate any such expansion of our operations.

Item 3.	Legal Proceedings

On December 18, 2009, we, our directors, SAC PCG, Parent, GSO, Sankaty Advisors, LLC and ZelnickMedia, LLC were named as defendants in a putative class action complaint, captioned Israni v. Airvana, Inc., et al., C.A. No. 5153-CC, filed in the Court of Chancery of the State of Delaware. That action, purportedly brought on behalf of a class of stockholders, alleges that our directors breached their fiduciary duties in connection with the proposed merger by, among other things, failing to fully inform themselves of Airvana’s market value, maximize stockholder value, obtain the best financial and other terms, and act in the best interests of public stockholders, and seeking to benefit themselves improperly. The complaint further alleges that the non-Airvana defendants aided and abetted the directors’ purported breaches. The plaintiff seeks injunctive and other equitable relief, including to enjoin us and Parent from consummating the merger, in addition to fees and costs. On December 31, 2009, the plaintiff served document requests on us.

On December 31, 2009, a second putative class action complaint was filed against us, our directors, SAC PCG, Parent, GSO, Sankaty Advisors, LLC and ZelnickMedia, LLC in the Court of Chancery of the State of Delaware in an action captioned Gittleson v. Airvana, Inc., et al., C.A. No. 5179-CC. That action, purportedly brought on behalf of a class of stockholders, also alleges that our directors breached their fiduciary duties in connection with the proposed merger by, among other things, failing to fully inform themselves of Airvana’s market value, maximize shareholder value, obtain the best financial and other terms, and act in the best interest of public stockholders, and seeking to benefit themselves improperly. The complaint further alleges that the non-Airvana defendants aided and abetted the directors’ purported breaches. The plaintiff seeks injunctive and other equitable relief, including to enjoin us and Parent from consummating the merger, in addition to fees and costs.

On January 12, 2010, we, our directors, Dr. Eyuboglu, Merger Sub, 72 Mobile Investors, LLC, SAC PCG, GSO, Sankaty Advisors, LLC and ZelnickMedia LLC were named as defendants in a third putative class action complaint, captioned Willis v. Airvana, Inc. et al., C.A. No. 5200, filed in the Court of Chancery of the State of Delaware. That action, purportedly brought on behalf of a class of stockholders, alleges that our directors breached their fiduciary duties in connection with the proposed merger by, among other things, failing to fully inform themselves of our market value, maximize shareholder value, obtain the best financial and other terms, and act in the best interest of public stockholders, and seeking to benefit themselves improperly. The complaint further alleges that the non-Airvana defendants aided and abetted the purported breaches by the directors and Dr. Eyuboglu. The plaintiff seeks declaratory, injunctive and other equitable relief, including to enjoin us and affiliates of Parent from consummating the merger, in addition to unspecified damages, fees and costs.

The above three actions have been consolidated into a single proceeding captioned “In re Airvana Shareholders Litigation.” On February 2, 2010, the plaintiffs submitted a consolidated class action complaint re-alleging the substance of the allegations from the pre-consolidation complaints and further alleging that the January 14 preliminary proxy omitted material information concerning the merger. On February 5, 2010, the plaintiffs filed: (i) a motion to enjoin defendants from consummating the proposed transaction and (ii) a motion for an order directing discovery to proceed on an expedited basis and scheduling a hearing on plaintiffs’ motion for a preliminary injunction. On February 14, 2010, the defendants filed an opposition to the plaintiffs’ request for emergency relief. On February 15, 2010, the court denied plaintiffs’ application for expedited proceedings and declined to schedule a hearing on plaintiffs’ motion for a preliminary injunction.

On December 28, 2009, we, our directors, S.A.C. Private Capital Partners LP (a nonexistent entity), Parent, GSO, Sankaty Advisors, LLC and ZelnickMedia, LLC were named as defendants in a putative class action complaint, captioned Mountney v. Airvana, Inc., et al., C.A. No. 09-5470, filed in the Superior Court, Business Litigation Session, of Suffolk County of the Commonwealth of Massachusetts. That action, purportedly brought on behalf of a class of stockholders, alleges that our directors breached their fiduciary duties in connection with the proposed merger by, among other things, failing to fully inform themselves of Airvana’s market value, maximize shareholder value, obtain the best financial and other terms, and act in the best interest of public stockholders, and seeking to benefit themselves improperly. The complaint further alleges that we and the non-Airvana defendants aided and abetted the directors’ purported breaches. The plaintiff seeks declaratory, injunctive and other equitable relief, including to enjoin us and Parent from consummating the merger, in addition to fees and costs.

On January 6, 2010, we, our directors, Parent and Merger Sub were named as defendants in a separate putative class action complaint, captioned Short v. Airvana, Inc., et al., C.A. No. 10-0042, filed in the Superior Court, Business Litigation Session, of Suffolk County of the Commonwealth of Massachusetts. That action, purportedly brought on behalf of a class of stockholders, alleges that our directors breached their fiduciary duties in connection with the proposed merger by, among other things, failing to fully inform themselves of our market value, maximize shareholder value, obtain the best financial and other terms, and act in the best interest of public stockholders, and seeking to benefit themselves improperly. The complaint further alleges that we, Parent and Merger Sub aided and abetted the directors’ purported breaches. The plaintiff seeks declaratory, injunctive and other equitable relief, including to enjoin us and affiliates of Parent from consummating the merger, in addition to fees and costs.

On January 28, 2010, the Company and its directors moved to stay the Massachusetts lawsuits in favor of the consolidated Delaware action. On February 8, 2010 the plaintiffs in the Short action served an opposition to the motion to stay. The defendants’ reply has yet to be served.

We believe that the claims asserted in these suits are without merit.

Item 4.	Reserved

Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Our common stock has traded on the Nasdaq Global Market under the symbol “AIRV” since our initial public offering on July 19, 2007. Prior to our initial public offering, there was no public market for our common stock.

The following table sets forth for the indicated periods the high and low sales prices of our common stock as reported by the Nasdaq Global Market.

Fiscal Year Ended December 28, 2008		High				Low
First Quarter		$	6.19			$	4.00
Second Quarter		$	6.95			$	4.82
Third Quarter		$	6.70			$	4.85
Fourth Quarter		$	6.00			$	3.36

Fiscal Year Ended January 3, 2010		High				Low
First Quarter		$	6.15			$	4.34
Second Quarter		$	6.19			$	4.84
Third Quarter		$	7.00			$	5.84
Fourth Quarter		$	7.65			$	5.80

The last reported sale price for our common stock on the Nasdaq Global Market on March 4, 2010 was $7.67 per share.

As of March 4, 2010, there were 129 stockholders of record of our common stock.

Dividends

In April 2007, prior to our initial public offering, we paid a special cash dividend of $1.333 per share on shares of our capital stock, totaling an aggregate of $72.7 million. We have not declared any cash dividends since this date. Based on our current financial plans and expected cash balances, we do not expect to declare any cash dividends for the foreseeable future.

Securities Authorized for Issuance Under Equity Compensation Plans

Information relating to our equity compensation plans will be included in our proxy statement in connection with our 2010 Annual Meeting of Stockholders, under the caption “Equity Compensation Plan Information.” That portion of our proxy statement is incorporated herein by reference.

Recent Sales of Unregistered Securities

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

Share Repurchase Program

On August 8, 2008, our board of directors authorized the repurchase of up to $20.0 million of our common stock. As part of the authorized share repurchase program, we entered into a written trading plan in compliance with Rule 10b5-1 under the Securities Exchange Act of 1934 to purchase up to an aggregate of $20.0 million of our common stock. On February 10, 2009, our board of directors authorized the repurchase of up to an additional $20.0 million of our common stock following the completion of the initial stock repurchase program approved in August 2008.

We did not repurchase any shares of our common stock during the fourth quarter of fiscal 2009.

Stock Performance Graph

The following performance graph and related information shall not be deemed “soliciting material” or to be “filed” with the Securities and Exchange Commission, nor shall such information be incorporated by reference into any future filing under the Securities Act of 1933 or Securities Exchange Act of 1934, each as amended, except to the extent that we specifically incorporate it by reference into such filing.

The comparative stock performance graph below compares the cumulative total stockholder return (assuming reinvestment of dividends, if any) from investing $100 on July 20, 2007, the date on which our common stock was first publicly traded, to the close of the last trading day of 2009, in each of (i) our common stock, (ii) the NASDAQ Composite Index and (iii) the Dow Jones Wilshire 5000 Telecommunications Equipment Index, or DJ Wilshire Telecommunications Index.

		7/07				9/07				12/07				3/08				6/08				9/08				12/08				3/09				6/09				9/09				1/10
Airvana Inc			100.00				84.38				77.96				72.94				74.76				82.15				80.89				81.59				88.84				94.42				106.00
NASDAQ Composite			100.00				102.21				100.43				85.91				86.76				77.58				59.50				57.60				69.14				80.08				85.81
DJ Wilshire Telecommunications			100.00				101.98				94.99				80.78				78.26				66.59				63.26				58.51				61.30				65.20				69.84

Item 6.	Selected Financial Data

The following selected consolidated financial data should be read in conjunction with our audited consolidated financial statements and related notes thereto and with Management’s Discussion and Analysis of Financial Condition and Results of Operations which are included elsewhere in this Annual Report. The historical results are not necessarily indicative of the results to be expected for any future period. Our fiscal year ends on the Sunday closest to December 31. The consolidated statement of operations data for the fiscal years ended 2007, 2008 and 2009 and the selected consolidated balance sheet data as of December 28, 2008 and January 3, 2010 are derived from, and are qualified by reference to, the audited consolidated financial statements included in this Annual Report on Form 10-K. The consolidated statement of operations data for the fiscal years ended 2005 and 2006, and the consolidated balance sheet data as of January 1, 2006, December 31, 2006 and December 30, 2007 are derived from audited consolidated financial statements, which are not included in this Annual Report. In fiscal 2007, we acquired 3-Way Networks Limited. We used the purchase method of accounting in accordance with ASC 805, Business Combinations to account for the acquisition. On May 22, 2007, our Board of Directors approved, and on June 18, 2007, our stockholders approved, a 1-for-1.333 reverse stock split of our common stock, which was effective on June 29, 2007. All share and per-share data have been retroactively restated to reflect this stock split for all periods presented.

We recognize revenue from the sale of products and services under our OEM agreements only after we deliver specified software upgrades that were committed at the time of sale. We further delay recognition of portions of our revenue when we are unable to establish VSOE of fair value for maintenance and support services that we sell with our products. We record as deferred revenue the product and service billings that we are unable to recognize as revenue. This revenue is recognized later upon delivery of these specified software upgrades. As a result, we believe that our revenue, taken in isolation, provides limited insight into the performance of our business. Therefore, we also present in the following tables: product and service billings, which reflects our sales activity in a period; cost related to product and service billings, which reflects the cost associated with our product and service billings; gross profit on product and service billings, which reflects our product and service billings less cost related to product and service billings; operating income on product and service billings, which represents gross profit on billings less operating expenses; deferred revenue at the end of the period, which reflects the cumulative billings that we were unable to recognize under our revenue recognition policy; deferred product and service cost at the end of a period, which reflects the cost associated with our deferred revenue; and cash flow from operating activities. We evaluate our performance by assessing our product and service billings and the cost related to product and service billings, in addition to other financial metrics presented in accordance with GAAP.

		Fiscal Year
		2005				2006				2007				2008				2009
		(In thousands, except per share amounts)
Consolidated Statement of Operations Data:
Revenue		$	2,347			$	170,270			$	305,785			$	138,173			$	64,594
Cost of revenue			6,533				45,295				41,904				11,462				13,569
Gross (loss) profit			(4,186	)			124,975				263,881				126,711				51,025
Operating expenses:
Research and development			42,922				55,073				76,638				74,826				73,676
Sales and marketing			5,237				7,729				12,055				14,933				16,307
General and administrative			3,253				5,068				7,453				8,976				12,772
In-process research and development			—				—				2,340				—				—
Total operating expenses			51,412				67,870				98,486				98,735				102,755
Operating (loss) income			(55,598	)			57,105				165,395				27,976				(51,730	)
Interest income, net			3,459				6,602				9,846				7,240				6,693
(Loss) income before tax expense (benefit) and cumulative effect of change in accounting principle			(52,139	)			63,707				175,241				35,216				(45,037	)
Income tax expense (benefit)			10,875				(10,742	)			21,898				13,923				(20,045	)
(Loss) income before cumulative effect of change in accounting principle			(63,014	)			74,449				153,343				21,293				(24,992	)
Cumulative effect of change in accounting principle			—				(330	)			—				—				—
Net (loss) income		$	(63,014	)		$	74,119			$	153,343			$	21,293			$	(24,992	)
Net (loss) income per common share:
Basic		$	(5.42	)		$	1.21			$	2.63			$	0.33			$	(0.40	)
Diluted		$	(5.42	)		$	1.12			$	2.19			$	0.30			$	(0.40	)
Shares used in computing net (loss) income per common share:
Basic			12,959				13,542				36,238				64,278				62,499
Diluted			12,959				18,947				43,496				70,091				62,499

		Fiscal Year
		2005				2006				2007				2008				2009
		(In thousands)
Other GAAP and Non-GAAP Financial Data:
Product and service billings (“Billings”)(1)		$	157,420			$	140,564			$	142,174			$	125,055			$	174,167
Cost related to Billings(2)			45,303				12,543				8,740				13,625				19,300
Gross profit on Billings(3)			112,117				128,021				133,434				111,430				154,867
Operating income on Billings(4)			60,705				60,151				34,948				12,695				52,112
Deferred revenue, at end of period			273,124				243,418				79,978				66,860				176,433
Deferred product and service costs, at end of period			66,966				34,214				1,050				3,213				8,944
Cash flow from operating activities			67,390				25,138				91,771				12,569				44,396

		January 1,				December 31,				December 30,				December 28,				January 3,
		2006				2006				2007				2008				2010
		(In thousands)
Consolidated Balance Sheet Data:
Cash, cash equivalents and investments		$	135,470			$	160,123			$	221,963			$	228,366			$	263,167
Working capital			11,225				3,253				131,886				156,532				130,161
Total assets			219,547				264,207				261,566				257,336				338,717
Redeemable convertible preferred stock			121,714				130,042				—				—				—
Total stockholders’ (deficit) equity			(190,657	)			(122,790	)			145,175				162,882				140,023

		Fiscal Year
		2005				2006				2007				2008				2009
		(In thousands)
Revenue		$	2,347			$	170,270			$	305,785			$	138,173			$	64,594
Deferred revenue, at end of period			273,124				243,418				79,978				66,860				176,433
Less: Deferred revenue acquired			—				—				(171	)			—				—
Less: Deferred revenue, at beginning of period			(118,051	)			(273,124	)			(243,418	)			(79,978	)			(66,860	)
Billings		$	157,420			$	140,564			$	142,174			$	125,055			$	174,167

		Fiscal Year
		2005				2006				2007				2008				2009
		(In thousands)
Cost of revenue		$	6,533			$	45,295			$	41,904			$	11,462			$	13,569
Deferred product and service costs, at end of period			66,966				34,214				1,050				3,213				8,944
Less: Deferred product cost, at beginning of period			(28,196	)			(66,966	)			(34,214	)			(1,050	)			(3,213	)
Cost related to Billings		$	45,303			$	12,543			$	8,740			$	13,625			$	19,300

		Fiscal Year
		2005				2006				2007				2008				2009
		(In thousands)
Gross (loss) profit		$	(4,186	)		$	124,975			$	263,881			$	126,711			$	51,025
Deferred revenue, at end of period			273,124				243,418				79,978				66,860				176,433
Less: Deferred revenue acquired			—				—				(171	)			—				—
Less: Deferred revenue, at beginning of period			(118,051	)			(273,124	)			(243,418	)			(79,978	)			(66,860	)
Deferred product and service costs, at beginning of period			28,196				66,966				34,214				1,050				3,213
Less: Deferred product cost, at end of period			(66,966	)			(34,214	)			(1,050	)			(3,213	)			(8,944	)
Gross profit on Billings		$	112,117			$	128,021			$	133,434			$	111,430			$	154,867

		Fiscal Year
		2005				2006				2007				2008				2009
		(In thousands)
Operating (loss) profit		$	(55,598	)		$	57,105			$	165,395			$	27,976			$	(51,730	)
Deferred revenue, at end of period			273,124				243,418				79,978				66,860				176,433
Less: Deferred revenue acquired			—				—				(171	)			—				—
Less: Deferred revenue, at beginning of period			(118,051	)			(273,124	)			(243,418	)			(79,978	)			(66,860	)
Deferred product and service costs, at beginning of period			28,196				66,966				34,214				1,050				3,213
Less: Deferred product and service costs, at end of period			(66,966	)			(34,214	)			(1,050	)			(3,213	)			(8,944	)
Operating profit on billings		$	60,705			$	60,151			$	34,948			$	12,695			$	52,112

Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations

This Annual Report on Form 10-K contains “forward-looking statements” that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. The statements contained in this Annual Report on Form 10-K that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such forward-looking statements include expectations regarding the timing of the merger of Airvana and 72 Mobile Holdings, LLC; statements regarding the ability to complete the merger; any expectation of earnings, revenues, billings or other financial items; development of femtocell alliances and shipments; any statements of the plans, strategies and objectives of management for future operations; factors that may affect our operating results; statements concerning new products or services; statements related to future capital expenditures; statements related to future economic conditions or performance; statements as to industry trends and other matters that do not relate strictly to historical facts or statements of assumptions underlying any of the foregoing. These statements are often identified by the use of words such as, but not limited to, “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “will,” “plan,” “target,” “continue,” and similar expressions or variations intended to identify forward-looking statements. These statements are based on the beliefs and assumptions of our management based on information currently available to management. Such forward-looking statements are subject to risks, uncertainties and other important factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified below, and those discussed in the section titled “Risk Factors” included elsewhere in this Annual Report on Form 10-K and in our other filings with the SEC. Furthermore, such forward-looking statements speak only as of the date of this report. We undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements.

Overview

We are a leading provider of network infrastructure products used by wireless operators to provide mobile broadband services. We specialize in helping operators transform the mobile experience of users worldwide. Our high performance technology and products, from emerging comprehensive femtocell solutions to core mobile network infrastructure, enable operators to deliver broadband services to mobile subscribers, wherever they are.

Most of our current products are based on a wireless communications standard known as CDMA2000 1xEV-DO, or EV-DO. In 2002, we began delivering commercial infrastructure products based on the first generation EV-DO standard known as Rev 0. The second generation EV-DO standard is known as Rev A and supports push-to-talk, Voice-over-IP, or VoIP, and faster Internet services. We delivered our first Rev A software release in April 2007. Prior to 2008, most of our EV-DO sales were driven by operator deployments focused on coverage — with operators extending their broadband services across larger portions of their subscriber geographies. Data traffic and service revenue growth continues to outpace voice growth at many major wireless operators around the world. Our EV-DO sales in 2008 and 2009 were driven by capacity growth as operators looked to expand their capacity to accommodate increased data traffic fueled by greater consumer use of handheld devices, web browsing and 3G multimedia applications, although operators in some markets continue to deploy our products to expand coverage. Over the longer term, we expect our EV-DO sales to continue to be driven by capacity growth as operators acquire more broadband subscribers that consume more broadband data.

We have developed a special business model to serve mobile operators and our original equipment manufacturer, or OEM, customers with embedded software products. Our software is deployed in an OEM’s installed base of wireless networks. These networks are designed to deliver high quality wireless services to millions of consumers and are built and regularly upgraded over long periods of time, often 10 to 15 years. A key element of our strategy is to deliver significant increases in performance and functionality to both our OEM customers and to operators through software upgrades to these networks. In 2007, we delivered two major EV-DO software releases that provide for deployment of high-performance multi-media applications by enabling faster downlink and uplink speeds, supporting push-to-talk services, and adding new proprietary “clustering” features that are designed to dramatically improve network scalability. In 2008, we delivered two additional EV-DO software releases which enable mobile operators to more efficiently increase capacity and accelerate the roll-out of next-generation multimedia services. In 2009, we delivered one additional EV-DO software release which increased the capacity and performance of operators’ mobile broadband networks by redistributing the resources within the network to serve smartphone and data card traffic in an effective manner, optimizes the way network “control messages” are transmitted so the existing infrastructure can handle more devices, call activity, and in-session user mobility, and increases radio network performance resulting in higher data rates for users in weak signal areas.

We are also investing significantly in fixed mobile convergence, or FMC, products that transform the experience of using mobile devices indoors, providing benefits such as better coverage, better quality and performance of broadband applications, and lower costs for both users and operators. Our FMC products enable operators to take advantage of wireline broadband connections such as cable, DSL and fiber that already exist in most offices and homes to connect mobile devices to an operator’s services. To accomplish this, operators can place a personal base station, or what the industry refers to as a femtocell access point, in the home or office. We have developed femtocell access points to support networks based on either of the world’s most prevalent wireless standards, code division multiple access, or CDMA, and universal mobile telephone standard, or UMTS. Currently, there is significant operator interest in our femtocells, as they work with existing handsets and provide indoor coverage for both residential and enterprise users. Our femtocell products are an important component of our growth and diversification strategy.

We were founded in March 2000 and sold our first product in the second quarter of fiscal 2002. Our growth has been driven primarily by sales through our OEM customers to wireless operators already using our EV-DO products as they increase the capacity and geographic coverage of their networks, and by an increase in the number of wireless operators that decide to deploy our EV-DO products on their networks. We have sold over 70,000 channel card licenses for use by over 70 operators worldwide.

In April 2007, we acquired 3Way Networks, a United Kingdom-based provider of femtocell products and solutions for UMTS networks, for an aggregate purchase price of approximately $11.0 million in cash and 441,845 shares of common stock. The acquisition furthered our strategy to address the UMTS market and to deliver FMC and in-building mobile broadband solutions.

In July 2007, we completed our IPO, in which we sold and issued 8.3 million shares of our common stock at an issue price of $7.00 per share. We raised a total of $58.1 million in gross proceeds from our IPO, or $50.8 million in net proceeds after deducting underwriting discounts and commissions of $4.1 million and other offering costs of approximately $3.2 million.

In August 2007, we entered into an agreement with Nokia Siemens Networks to certify interoperability of our UMTS femtocell product with Nokia Siemens Networks’ femtocell gateway product. We and Nokia Siemens Networks plan to provide a joint solution to operators, and cooperate in joint marketing, sales and support programs. The agreement is non-exclusive and sets forth the terms under which we may use their proprietary interface specifications of their products.

In September 2007, we entered into an agreement with Nortel Networks, amending certain provisions of the Development and Purchase and Sale Agreement for CDMA High Data Rate (1xEV-DO) Products, dated as of October 1, 2001, between us and Nortel Networks, in which we agreed to pricing for our products and services, including pricing for software products and upgrades that were under development at the time and were subsequently delivered in June 2008.

In January 2008, we entered into a global sourcing agreement with Thomson to supply our UMTS femtocell technology. Pursuant to the agreement, Thomson may use our femtocell products in conjunction with its own residential gateway offerings. The agreement is non-exclusive and sets forth the terms and conditions under which Thomson may purchase our femtocell products. The term of the agreement extends through January 2011, with automatic annual renewals. Either party may terminate the agreement with 90 days notice.

In February 2008, we entered into a global OEM agreement with Motorola to provide our CDMA femtocell solution products. The agreement is non-exclusive and sets forth the terms and conditions under which Motorola may purchase our femtocell and UAG products. The initial term of the agreement extends through May 2010, with automatic annual renewals. Following the initial term, Motorola may terminate the agreement with 180 days notice.

In June 2008, we entered into an agreement with Alcatel-Lucent to develop an integrated IP Multimedia Subsystem, or IMS, femtocell solution for CDMA network operators that combines Airvana’s femtocell access point and femtocell network gateway with Alcatel-Lucent’s IMS core network infrastructure. The development agreement was terminated by Alcatel-Lucent in the second quarter of fiscal 2009.

In July 2008, we entered into an agreement with Hitachi to develop a joint CDMA femtocell solution that integrates our femtocell products with Hitachi’s core radio access network infrastructure that Hitachi offers in Japan.

In September 2008, we entered into a supply agreement with Hitachi under which Hitachi will provide marketing, sales and support activities for our femtocell products. The initial term of the supply agreement extends through June 2014 and provides for automatic annual renewals, unless either party gives 180 days notice of its intent not to renew.

In November 2008, we entered into another agreement with Nortel Networks amending certain provisions of the Development and Purchase and Sale Agreement for CDMA High Data Rate (1xEV-DO) Products, dated as of October 1, 2001, between us and Nortel Networks, in which we agreed to pricing for software products and upgrades that were under development at the time.

In December 2008, we entered into a sourcing agreement with Pirelli Broadband Solutions to add wireless broadband connectivity to Pirelli’s portfolio of consumer broadband devices by using our UMTS femtocell technology. The agreement is non-exclusive and sets forth the terms and conditions under which Pirelli may purchase our femtocell products. The initial term of the agreement extends through November 2010, with automatic annual renewals, unless either party gives 90 days notice of its intent not to renew.

In June 2009, we entered into a global reseller agreement with a multinational infrastructure provider to supply and support our femtocell service manager and UAG products. The agreement is non-exclusive and sets forth the terms and conditions under which the customer may purchase our FMC products. The initial term of the agreement extends through May 2012.

In June 2009, we entered into an agreement with a multinational infrastructure provider for the licensing and support of our femtocell service manager. The agreement is non-exclusive and sets forth the terms and conditions under which the customer may purchase our product. The initial term of the agreement extends through June 2014, with automatic annual renewals, unless either party gives 90 days notice of its intent not to renew.

In June 2009, we entered into a master purchase agreement with Sprint/United Management Company, or (Sprint) to supply and support femtocell products. Under the agreement, we will provide our HubBub CDMA femtocell for Sprint’s commercial 3G femtocell service offerings. The agreement is non-exclusive and sets forth the terms and conditions under which Sprint may purchase our femtocell product and services. The term of the agreement extends through December 2014.

In September 2009, we entered into a supply and licensing agreement with a multinational infrastructure provider to supply our UMTS and CDMA 2000 Femtocell technology for integration into its products such as stand alone femtocell access points or residential gateways, and resale of such products to its customers. The agreement is non-exclusive and sets forth the terms and conditions under which it may purchase our femtocell products and services. The term of the agreement extends through September 2012.

On January 14, 2009, Nortel Networks Corporation announced that it, Nortel Networks Limited, and certain of its other Canadian subsidiaries filed for creditor protection under the Companies’ Creditors Arrangement Act in Canada. Also on January 14, 2009, some of Nortel Networks Corporation’s U.S. subsidiaries, including Nortel Networks Inc., filed Chapter 11 voluntary petitions in the State of Delaware. On July 28, 2009, the United States and Canadian bankruptcy courts approved a bid for Nortel Networks’ CDMA business by Ericsson, subject to satisfaction of regulatory and other conditions. This acquisition was completed in November 2009 and our OEM agreement with Nortel was assigned to Ericsson.

In December 2009, we entered into another agreement with Ericsson amending certain provisions of the Development and Purchase and Sale Agreement for CDMA High Data Rate (1xEV-DO) Products, dated as of October 1, 2001, between us and Ericsson, in which we agreed to pricing for software products and upgrades that were under development at the time and subsequently delivered in December 2009.

On December 17, 2009, we entered into an Agreement and Plan of Merger, or the Merger Agreement, with 72 Mobile Holdings, LLC, a Delaware limited liability company, or Parent, and 72 Mobile Acquisition Corp or Merger Sub, a wholly-owned subsidiary of Parent. Parent is a newly formed entity to be owned, directly and indirectly, by affiliates of S.A.C. Private Capital Group, LLC, GSO Capital Partners LP, Sankaty Advisors LLC and ZelnickMedia. Under the terms of the Merger Agreement, upon closing of the merger, Merger Sub will be merged with and into Airvana, with Airvana continuing as the surviving corporation or the merger, and the holders of our common stock will receive $7.65 in cash per share of common stock. Following the closing of the merger, Parent will own all of the outstanding capital stock of the surviving corporation and we will no longer be a publicly traded company. We expect to close the merger in the first half of 2010.

In January 2010, we entered into a global reseller agreement with a multinational infrastructure provider to supply and support our UMTS femtocells. The agreement is non-exclusive and sets forth the terms and conditions under which the customer may purchase our femtocell products. The initial term of the agreement is five years, with automatic annual renewals, unless either party gives nine months written notice of its intent not to renew.

Our OEM Business Model

We operate in the highly consolidated and competitive market for mobile broadband equipment. To compete in this market, we have developed OEM channels, unique products and a business approach that targets the needs of large equipment vendors and their end customers, wireless operators. Wireless operators invest significantly in building out large-scale wireless networks, which are very costly to replace. Equipment vendors compete aggressively to win market share and they retain their market position by upgrading their installed systems regularly, thereby enabling their wireless operator customers to deliver new services to their subscribers. These vendors develop detailed product roadmaps and look to us to design and deliver software upgrades that are consistent with their roadmaps.

We collaborate with our OEM customers to develop specific features for products that they sell to their wireless operator customers. We expect to continue to develop, for each OEM customer, products based on our core technology that are configured specifically to meet the requirements of each OEM and its customers. We also offer our OEM customers the option to purchase and make available to their wireless operator customers new products and specified upgrades at prices that we set prior to general availability of the new product or specified upgrade. We expect that we will release one or more specified upgrades per year.

Our OEM customers typically are also potential competitors of ours in the markets that they serve. We face the competitive risk that our OEM customers might develop internally alternative solutions or purchase alternative products from our competitors. Our future success depends on our ability to continue to develop products that offer advantages over alternative solutions that our OEM customers might develop or purchase from others.

Our typical sales arrangements involve multiple elements, including: perpetual licenses for our software products and specified software upgrades; the sale of hardware, maintenance and support services; and the sale of professional services, including training. Software is more than incidental to all of our products and, as a result, we recognize revenue in accordance with Accounting Standards Codification, or ASC, Topic 985-605, Software Revenue Recognition, or ASC 985-065.

Impact of ASC 985-605, Software Revenue Recognition

To recognize revenue from current product shipments, we must establish vendor specific objective evidence, or VSOE, of fair value for all undelivered elements of our sales arrangements, including our specified software upgrades. The best objective evidence of fair value would be to sell these specified software upgrades separately to multiple customers for the same price. However, because of our OEM business model, the features and functionality delivered in our software upgrades are defined in collaboration with our OEMs based on each OEM’s particular requirements. As a result, it is highly unlikely that we will ever be able to sell the same standalone software upgrade to a different OEM customer and thus establish VSOE of fair value for such upgrade.

As a result, we defer all revenue from sales to OEMs until all elements without VSOE of fair value have been delivered. This deferral is required because there is no basis to allocate revenue between the delivered and undelivered elements of the arrangement without VSOE of fair value. The revenue deferral is necessary even though (1) our specified software upgrades are not essential to the standalone functionality of any product currently deployed, (2) the purchase of our upgrades are based on separate decisions by our OEM customers and generally require separate payment at the time of delivery and (3) there is no refund liability for payments received on any previously shipped and installed product in the event we are not able to deliver the specified upgrade.

We recognize deferred revenue from sales to an OEM customer only when we deliver a specified upgrade that we have previously committed. When we commit to an additional upgrade before we have delivered a previously committed upgrade, we defer all revenue from product sales after the date of such commitment until we deliver the additional upgrade. Any revenue that we had deferred prior to the additional commitment is recognized when the previously committed upgrade is delivered.

We anticipate that the revenue recognition related to the our fixed-mobile convergence products will be complex given that a number of our current arrangements for the development and supply of these products contain significant customization services, volume discounts, specified upgrades and multiple elements for new service offerings for which VSOE of fair value does not currently exist. To date, there have been no material revenues recognized with respect to these products.

The following diagram presents a hypothetical example of how software product releases and commitments to specified upgrades affect the relationship between product billings, product revenue and deferred product revenue under a business model similar to our current EV-DO OEM business model. The diagram does not reflect the actual timing of any of our software releases, the actual level of our product and service billings, revenue or deferred revenue in any period, the actual timing of recognition of our product and service revenues, or the deferral of product revenue that can result from the inability to establish VSOE of fair value for maintenance and support services.

As illustrated in this example, we begin to recognize our revenue in periods during which we deliver specified upgrades. When we have such revenue recognition events, we begin to recognize revenue from sales invoiced during multiple prior periods. As a result, we believe that our revenue, taken in isolation, provides limited insight into the performance of our business. We evaluate our performance by also assessing: product and service billings, which reflects our sales activity in a period; cost related to product and service billings, which reflects the cost associated with our product and service billings; deferred revenue at the end of the period, which reflects the cumulative billings that we were unable to recognize under our revenue recognition policy; deferred product cost at the end of a period, which reflects the cumulative costs that we were unable to recognize under our revenue recognition policy associated with our deferred product revenue; and cash flow from operating activities. We expect this pattern of commitments and delivery of future specified upgrades and the resulting impact on the timing of revenue recognition to continue with respect to our OEM business. As we introduce new products, the variability of the total revenue recognized in any fiscal period may moderate, provided that we are able to establish VSOE of fair value for these new products or upgrades to these new products, and as sales of these new products represent a larger percentage of our overall business.

Key Elements of Financial Performance

Revenue

Our revenue consists of product revenue and service revenue from sales through our OEM customers and directly to our end customers.

Product Revenue. Our product revenue is principally currently derived from the sale of our EV-DO mobile network products that are used by wireless operators to provide mobile broadband services. These products include four major components: base stations or OEM base station channel cards; radio network controllers; network management systems; and software upgrades to the OEM’s installed base. We have sold OEM base station channel cards both as hardware/software combinations and as software licenses when the OEM customer chooses to have the hardware manufactured for it by a third party. RNCs and network management systems are usually sold as software licenses as the OEM customer procures off-the-shelf hardware from third party suppliers. Almost all of our revenue and product and service billings to date have been derived from sales of our EV-DO products through our OEM agreement with Ericsson, formerly Nortel Networks. Revenue from our FMC products has not been material to date.

We first derived revenue and product and service billings in fiscal 2002 from the sale of first generation EV-DO mobile network products based on the Rev 0 version of the standard. Prior to the third quarter of fiscal 2006, we sold Rev 0-based base station channel cards, which were manufactured for us by a third party, and licensed Rev 0 software for these OEM base station channel cards, as well as for RNCs and network management systems. In connection with the transition to products based on the Rev A version of the standard, Nortel Networks exercised its right to license our hardware design in order to manufacture the OEM base station channel cards that support Rev A instead of purchasing this hardware from us. As a result, beginning in the third quarter of fiscal 2006, our product sales to Nortel Networks are derived solely from the license of software for OEM base station channel cards, RNCs, network management systems and system upgrades.

Under our revenue recognition policy described above, we begin to recognize revenue from sales to an OEM customer only after we deliver a specified upgrade to which we have previously committed. When we commit to an additional upgrade before we have delivered an upgrade to which we previously committed, we defer all revenue from product sales after the date of such commitment until we deliver the additional upgrade.

Our product revenue in fiscal 2007 consisted primarily of software license fees and hardware shipments to our primary OEM customer from April 2005 through May 2007 and was recognized upon the delivery of two specified upgrades during fiscal 2007. Our April 2005 specified upgrade, or software version 4.0, was delivered in the second quarter of fiscal 2007 and as a result, we recognized product revenue of $141.5 million that consisted primarily of software license fees and hardware shipments to our primary OEM customer from April 2005 through September 2006, which is when we made another commitment for a specified future software upgrade. Our September 2006 specified upgrade or software version 5.0 was delivered in the fourth quarter of fiscal 2007 and as a result, we recognized product revenue of $137.4 million that consisted primarily of billings from software license fees to our primary OEM customer from September 2006 through June 2007 at which time we made another commitment for a specified software upgrade.

Our product revenue in fiscal 2008 consisted primarily of software license fees billed to our primary OEM customer from June 2007 through July 2008 and was recognized upon the delivery of two additional specified upgrades during fiscal 2008. Our June 2007 specified upgrade or software version 6.0, was delivered in the second quarter of fiscal 2008 and as a result, we recognized product revenue of $59.0 million that consisted primarily of billings from software license fees to our primary OEM customer from June 2007 through December 2007, when we made another commitment for a specified future software upgrade. Our December 2007 specified upgrade or software version 7.0, was delivered in the fourth quarter of fiscal 2008 and as a result, we recognized product revenue of $57.1 million that consisted primarily of billings from software license fees to our primary OEM customer from December 2007 through July 2008, when we made another commitment for a specified future software upgrade.

Our product revenue in fiscal 2009 consisted primarily of software license fees billed to our primary OEM customer from July 2008 through October 2008 and was recognized upon the delivery of a specified software upgrade, software version 8.0, in the fourth quarter of fiscal 2009. As a result, we recognized product revenue of $36.4 million in fiscal 2009.

In October 2008, we made an additional commitment to a specified software upgrade, which we refer to as the October 2008 specified upgrade or software version 8.1. In May 2009, we made another commitment for a specified software upgrade, which we refer to as the May 2009 specified upgrade or software version 8.2. In December 2009, we made another commitment for a specified software upgrade, which we refer to as the December 2009 specified upgrade. As of January 3, 2010, there were three specified software upgrades that we had not yet delivered, software version 8.1, which we expect to deliver in the first half of fiscal 2010, software version 8.2, which we expect to deliver in the first half of fiscal 2010 and the December 2009 specified upgrade, which we expect to deliver in the second half of fiscal 2010.

Service Revenue. Our service revenue is derived from support and maintenance services, which we refer to as post-contract customer support, or PCS, for our EV-DO products and other professional services, including training. Our support and maintenance services consist of the repair or replacement of defective hardware, around-the-clock help desk support, technical support and the correction of bugs in our software. Our annual support and maintenance fees are based on a fixed-dollar amount associated with, or a percentage of the initial sales price for, the applicable hardware and software products. Included in the price for the product, we provide maintenance and support during our product warranty period, which is two years for our base station channel cards and one year for our software products.

As discussed above, we defer all revenue, including revenue related to maintenance and support services, until all specified upgrades outstanding at the time of shipment have been delivered. When VSOE of fair value for PCS does not exist, all revenue related to product sales and software-only license fees, including bundled PCS, is deferred until all specified software upgrades outstanding at the time of shipment are delivered. At the time of the delivery of all such upgrades, we recognize a proportionate amount of all such revenue previously deferred based on the portion of the applicable warranty period that has elapsed at the time of such delivery. The unearned revenue is recognized ratably over the remainder of the applicable warranty period. When VSOE of fair value for PCS exists, we allocate a portion of the initial product revenue and software-only license fees to the bundled PCS based on the fees we charge for annual PCS when sold separately. When all specified software upgrades outstanding at the time of shipment are delivered, under the residual method, we recognize the previously deferred product revenue and software-only license fees, as well as the earned PCS revenue, based on the portion of the applicable warranty period that has elapsed. The unearned PCS revenue is recognized ratably over the remainder the applicable warranty period. Notwithstanding our inability to establish VSOE of fair value of maintenance and support services to Ericsson under ASC 985-605 for revenue recognition purposes, we are permitted to present product revenue and service revenue separately on our consolidated statements of operations based on historical maintenance and support services renewal rates at the time of sale, which we believe are substantive rates.

Our support and maintenance arrangements for our EV-DO products are typically renewable for one-year periods. We invoice our support and maintenance fees in advance of the applicable maintenance period, and we recognize revenue from maintenance and support services ratably over the term of the applicable maintenance and support period as services are delivered.

We also offer professional services such as deployment optimization, network engineering and radio frequency deployment planning, and provide training for network planners and engineers. We generally recognize revenue for these services as the services are performed.

Product and Service Billings

Product and service billings, which is a non-GAAP measure, represents the amount invoiced for products and services that are delivered and services that are to be delivered to our end customers directly or through our OEM channels for which we expect payment will be made in accordance with normal payment terms. Software-only product sales under our OEM agreements are invoiced monthly upon notification of sale by the OEM customer. We present the product and service billings metric because we believe it provides a consistent basis for understanding our sales activity and our OEM channel sales from period to period. We use product and service billings as a measure to assess our business performance and as a key factor in our incentive compensation program.

Wireless operators generally purchase communications equipment in stages — driven first by coverage and later by capacity. The initial stage involves deploying new services in selected parts of their networks, often those geographic regions with the highest concentration of customers. Wireless operators then typically expand coverage throughout their network. Later purchases are driven by a desire to expand capacity as the usage of new services grows. Initial purchases usually occur around the time that we and our OEM customers offer products that substantially improve the performance of the network. Subsequent purchases to expand the geographic coverage and capacity of an operator’s wireless network are difficult to predict because they are typically related to consumer demand for mobile broadband services. As a result, our product and service billings have fluctuated significantly from period to period and we expect them to continue to fluctuate significantly from period to period for the foreseeable future.

On January 14, 2009, Nortel Networks announced that it had filed for bankruptcy protection. At the time of that filing, we had outstanding invoices to Nortel Networks in the amount of $21.8 million from the quarter and year ended December 28, 2008. Since the collection of these amounts was subject to Nortel Networks’ bankruptcy proceedings, they were accounted for on a cash basis and excluded from billings in fiscal 2008. This $21.8 million was included in billings in fiscal 2009 after being collected in the fourth quarter of fiscal 2009.

Our product and service billings were $142.2 million in fiscal 2007, $125.1 million in fiscal 2008 and $174.2 million in fiscal 2009. Product and service billings to Nortel Networks were 98% of billings in fiscal 2007 and 93% of billings in fiscal 2008. Product and service billings to Ericsson were 94% of billings in fiscal 2009.

The following table reconciles revenue to product and service billings:

		Fiscal Year
		2007				2008				2009
Revenue		$	305,785			$	138,173			$	64,594
Deferred revenue, at end of period			79,978				66,860				176,433
Less: Deferred revenue acquired			(171	)			—				—
Less: Deferred revenue, at beginning of period			(243,418	)			(79,978	)			(66,860	)
Product and service billings		$	142,174			$	125,055			$	174,167

Deferred Revenue

Product and service billings for invoiced shipments and software license fees, and related maintenance services, as well as non-recurring engineering and other development services for which revenue is not recognized in the current period are recorded as deferred revenue. Deferred revenue increases each fiscal period by the amount of product and service billings that are deferred in the period and decreases by the amount of revenue recognized in the period. We classify deferred revenue that we expect to recognize during the next twelve months as current deferred revenue on our balance sheet and the remainder as long-term deferred revenue. As of January 3, 2010, $167.4 million of deferred revenue is included in current liabilities and $9.0 million of deferred revenue is included in long-term liabilities.

Under our revenue recognition policy described above, we recognize revenue from sales to an OEM customer only when we deliver a specified upgrade to which we had previously committed. When we commit to an additional upgrade before we have delivered an upgrade to which we previously committed, we defer all revenue from product sales after the date of such commitment until we deliver the additional upgrade.

We committed to a specified future software upgrade in April 2005, which we refer to as our April 2005 specified upgrade. We delivered the April 2005 specified upgrade in April 2007. We committed to a subsequent specified upgrade in September 2006, which we refer to as our September 2006 specified upgrade. We delivered the September 2006 specified upgrade in November 2007. We committed to an additional subsequent specified upgrade in June 2007, which we refer as our June 2007 specified upgrade. We delivered the June 2007 specified upgrade in June 2008. We committed to an additional subsequent specified upgrade in December 2007, which we refer to as our December 2007 specified upgrade. We delivered the December 2007 specified upgrade in the fourth quarter of fiscal 2008. We committed to an additional subsequent specified upgrade in July 2008, which we refer to as our July 2008 specified upgrade. We delivered the July 2008 specified upgrade in the fourth quarter of fiscal 2009. We had outstanding commitments for additional specified upgrades committed to in October 2008, May 2009 and December 2009, which we refer to as our October 2008 specified upgrade, our May 2009 specified upgrade and our December 2009 specified upgrade, respectively. We expect to deliver the October 2008, May 2009 and December 2009 specified upgrades in 2010.

At December 28, 2008 and January 3, 2010, other deferred revenue primarily related to sales and development services for our new fixed-mobile convergence related products.

Deferred revenue and deferred product and service costs at December 28, 2008 consists of the following:

		Current				Long-Term				Total
Deferred revenue related to December 2007 specified upgrade		$	7,397			$	—			$	7,397
Deferred revenue related to July 2008 specified upgrade			37,775				—				37,775
Deferred revenue related to October 2008 specified upgrade			13,663				—				13,663
Other deferred revenue			2,475				5,550				8,025
Total deferred revenue		$	61,310			$	5,550			$	66,860
Deferred product cost related to December 2007 specified upgrade		$	79			$	—			$	79
Deferred product cost related to July 2008 specified upgrade			742				—				742
Deferred product cost related to October 2008 specified upgrade			566				—				566
Other deferred product and service costs			526				1,300				1,826
Total deferred product and service costs		$	1,913			$	1,300			$	3,213

Deferred revenue and deferred product and service costs at January 3, 2010 consists of the following:

		Current				Long-Term				Total
Deferred revenue related to October 2008 specified upgrade		$	83,346			$	—			$	83,346
Deferred revenue related to May 2009 specified upgrade			69,866				—				69,866
Deferred revenue related to December 2009 specified upgrade			12,768				—				12,768
Other deferred revenue			1,410				9,043				10,453
Total deferred revenue		$	167,390			$	9,043			$	176,433
Deferred product cost related to October 2008 specified upgrade		$	1,707			$	—			$	1,707
Deferred product cost related to May 2009 specified upgrade			1,229				—				1,229
Deferred product cost related to December 2009 specified upgrade			136				—				136
Other deferred product and service costs			307				5,565				5,872
Total deferred product and service costs		$	3,379			$	5,565			$	8,944

Cost of Revenue

Cost of product revenue consists primarily of:

	•		cost for channel card hardware provided by contract manufacturers;
	•		cost of hardware for our RNCs and network management systems;
	•		license fees for third-party software and other intellectual property used in our products; and
	•		other related overhead costs.

Cost of service revenue consists primarily of salaries, benefits and stock-based compensation for employees that provide support services to customers and manage the supply chain.

Some of the technology that we incorporate into our EV-DO products and sell to Ericsson is licensed from Qualcomm. In the fourth quarter of fiscal 2008 and the first quarter of fiscal 2009, Qualcomm undertook an audit of the royalties that we paid to Qualcomm in respect of the EV-DO products that we sold between 2003 and 2007. Qualcomm determined that we do not owe them any additional royalties beyond the amounts we had accrued.

Cost Related to Product and Service Billings

Cost related to product and service billings, which is a non-GAAP measure, includes the cost of products delivered and invoiced to our customers, the cost directly attributable to the sale of software-only products by our OEM partners and the cost of services in the current period. Cost related to product billings is recorded as deferred product and service cost until such time as the related deferred revenue is recognized as revenue. At the time of revenue recognition, we expense the related deferred product and service costs in our income statement as cost of revenue.

Deferred Product and Service Costs

Cost related to product billings for invoiced shipments and software-only license fees for which revenue is not recognized in the current period is recorded as deferred product cost. In addition, when we perform development services that are essential to the functionality of the initial delivery of a new product where the associated revenues have been deferred due to the fact that they do not qualify as units of accounting separate from the delivery of the software, we defer direct and incremental development costs. The costs deferred consist of employee compensation and benefits for those employees directly involved with performing the development, as well as other direct and incremental costs. All costs incurred in excess of the related revenues are expensed as incurred. Deferred product and service costs increases each fiscal period by the amount of product and service costs associated with product and service billings that are deferred in the period and decreases by the amount of product and service costs associated with revenue recognized in the period. We classify deferred product cost that we expect to recognize during the next twelve months as current deferred product and service costs on our balance sheet. As of January 3, 2010, $3.4 million of deferred product cost was included in current assets and $5.6 million of deferred service cost was included in long-term assets.

Gross Profit

Our gross profit represents revenue recognized during the period less related cost and is primarily attributable to OEM product shipments and software license fees. Our gross profit varies from period to period according to the mix of revenue from hardware products, software products and services.

Gross Profit on Billings

Our gross profit on billings, a non-GAAP measure, represents product and service billings during the period less cost related to product and service billings and is primarily attributable to OEM product shipments and software license fees. Our gross profit on billings varies from period to period according to our mix of billings from hardware products, software products and services.

Due to the Nortel Networks’ bankruptcy filing on January 14, 2009, we excluded the $21.8 million of pre-bankruptcy filing outstanding invoices to Nortel Networks from billings for the year ended December 28, 2008. As a result, our gross profit on billings was reduced by the same amount for the year ended December 28, 2008. This $21.8 million of pre-bankruptcy filing outstanding invoices was included in billings and gross profit on billings for the year ended January 3, 2010 after being collected in the fourth quarter of fiscal 2009.

Operating Expenses

Research and Development. Research and development expense consists primarily of:

	•		salaries, benefits and stock-based compensation related to our engineers;
	•		cost of prototypes and test equipment relating to the development of new products and the enhancement of existing products;
	•		payments to suppliers for design and consulting services; and
	•		other related overhead costs.

We expense all research and development cost as it is incurred. Our research and development is performed by our engineering personnel in the United States, India and the United Kingdom. We intend to continue to invest significantly in our research and development efforts, which we believe are essential to maintaining our competitive position and the development of new products for new markets. We expect research and development expense to remain similar in amount through fiscal 2010.

Sales and Marketing. Sales and marketing expense consists primarily of:

	•		salaries, benefits and stock-based compensation related to our sales, marketing and customer support personnel;
	•		commissions payable to our sales personnel;
	•		travel, lodging and other out-of-pocket expenses;
	•		marketing program expenses; and
	•		other related overhead costs.

We expense sales commissions at the time they are earned, which typically is when the associated product and service billings are recorded or when a customer agreement is executed. We expect sales and marketing expense to increase in amount and as a percentage of product and service billings for the foreseeable future as we continue to augment our sales and marketing functions, primarily outside the United States.

General and Administrative. General and administrative expense consists primarily of:

	•		salaries, benefits and stock-based compensation related to our executive, finance, legal, human resource and administrative personnel;
	•		professional services costs; and
	•		other related overhead costs.

General and administrative expense increased in 2009 as we incurred one-time charges related to the proposed merger, partially offset by reduction in initial fees related to Sarbanes-Oxley compliance incurred in fiscal 2008.

Stock-Based Compensation Expense

We adopted the requirements of ASC 718, Stock Compensation, or ASC 718, in the first quarter of fiscal 2006. ASC 718 addresses all forms of shared-based payment awards, including shares issued under employee stock purchase plans, stock options, restricted stock and stock appreciation rights. ASC 718 requires us to expense share-based payment awards with compensation cost for share-based payment transactions measured at fair value.

Operating Income on Billings

Operating income on billings, which is a non-GAAP measure, varies from period to period according to the amount of gross profit on billings less operating expenses for the period.

Interest Income, Net

Interest income, net, primarily relates to interest earned on our cash, cash equivalents and investments. In fiscal 2009, interest income also included $3.2 million received from Ericsson related to accrued interest on the Nortel Networks pre-bankruptcy filing invoices collected in the fourth quarter of fiscal 2009.

Cash Flow from Operating Activities

Customer collections and, consequently, cash flow from operating activities are driven by sales transactions and related product and service billings, rather than recognized revenues. We believe cash flow from operating activities is a useful measure of the performance of our business because, in contrast to income statement profitability metrics that rely principally on revenue, cash flow from operating activities captures the contribution of changes in deferred revenue and deferred charges. We present cash flow from operating activities because it is a metric that management uses to track business performance and, as such, is a key factor in our incentive compensation program. In addition, management believes this metric is frequently used by securities analysts, investors and other interested parties in the evaluation of software companies with significant deferred revenue balances.

Cash and Investments

We had unrestricted cash and cash equivalents and investments totaling $228.4 million as of December 28, 2008 and $263.2 million as of January 3, 2010. Our existing cash and cash equivalents and investments are invested primarily in money market funds, high grade government sponsored enterprises (AAA/A1+), high-grade commercial paper (A1+/P1), and high grade corporate notes (A1/A+). We do not invest in any types of asset backed securities such as those backed by mortgages or auto loans. None of our investments have incurred defaults or have been downgraded. We do not hold auction rate securities. We hold unrestricted cash and cash equivalents for working capital purposes. We do not enter into investments for trading or speculative purposes. The primary objectives of our investment activities are to preserve principal, maintain proper liquidity to meet operating needs, maximize yields and maintain proper fiduciary control over our investments. We have an investment policy that guides our investing activities. In connection with our proposed merger, we have begun to liquidate our available for sale securities.

We enter into derivative instruments for risk management purposes only and we do not enter into derivative instruments for speculative purposes. Our derivative program does not qualify for hedge accounting treatment. We operate internationally and, in the normal course of business, are exposed to fluctuations in foreign exchange rates. These fluctuations can increase the costs of financing, investing and operating the business. To limit further our exposure to currency exchange rate fluctuations, we also occasionally exchange U.S. Dollars for other currencies in which we incur expenses significantly in advance of our need to make payments in those currencies.

We use forward foreign currency exchange contracts to hedge our exposure to forecasted foreign currency denominated transactions based in the United Kingdom. These forward contracts are not designated as cash flow, fair value or net investment hedges; are marked-to-market with changes in fair value recorded to earnings; and are entered into for periods consistent with currency transaction exposures, generally less than one year. These derivative instruments do not subject our earnings or cash flows to material risk since gains and losses on these derivatives generally offset losses and gains on the expenses and transactions being hedged. In addition, changes in currency exchange rates related to any unhedged transactions may impact our earnings and cash flows. Gains and losses on the changes in fair value recorded to earnings are classified as other income and amounted to a $0.8 million gain for the year ended January 3, 2010. We had no outstanding forward foreign currency exchange contracts as of January 3, 2010.

Fiscal Year

Our fiscal year ends on the Sunday closest to December 31. Our fiscal quarters end on the Sunday that falls closest to the last day of the third calendar month of the quarter.

Critical Accounting Policies and Estimates

This management’s discussion and analysis of financial condition and results of operations is based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, management evaluates its estimates and judgments, including those related to revenue recognition. Management bases its estimates and judgments on historical experience and on various other factors that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

We regard an accounting estimate or assumption underlying our financial statements as a “critical accounting estimate” where (i) the nature of the estimate or assumption is material due to the level of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change; and (ii) the impact of the estimates and assumptions on financial condition or operating performance is material.

Revenue Recognition

We derive revenue from the licensing of software products and software upgrades; the sale of hardware products, maintenance and support services; and the sale of professional services, including training. Our products incorporate software that is more than incidental to the related hardware. Accordingly, we recognize revenue in accordance with ASC 985-605.

Under multiple-element arrangements where several different products or services are sold together, we allocate revenue to each element based on VSOE of fair value. We use the residual method when fair value does not exist for one or more of the delivered elements in a multiple-element arrangement. Under the residual method, the fair value of the undelivered elements are deferred and subsequently recognized when earned. For a delivered item to be considered a separate element, the undelivered items must not be essential to the functionality of the delivered item and there must be VSOE of fair value for the undelivered items in the arrangement. Fair value is generally limited to the price charged when we sell the same or similar element separately or, when applicable, the stated substantive renewal rate. If evidence of the fair value of one or more undelivered elements does not exist, all revenue is deferred and recognized when delivery of those elements occurs or when fair value can be established. For example, in situations where we sell a product during a period when we have a commitment for the delivery or sale of a future specified software upgrade, we defer revenue recognition until the specified software upgrade is delivered.

Significant judgments in applying the accounting rules and regulations to our business practices principally relate to the timing and amount of revenue recognition given our current concentration of revenues with one customer and our inability to establish VSOE of fair value for specified software upgrades.

We sell our products primarily through OEM arrangements with telecommunications infrastructure vendors such as Ericsson. We have collaborated with our OEM customers on a best efforts basis to develop initial product features and subsequent enhancements for the products that are sold by a particular OEM to its wireless operator customers. For each OEM customer, we expect to continue to develop products based on our core technology that are configured for the requirements of the OEM’s base stations and its operator customers.

This business practice is common in the telecommunications equipment industry and is necessitated by the long planning cycles associated with wireless network deployments coupled with rapid changes in technology. Large and complex wireless networks support tens of millions of subscribers and it is critical that any changes or upgrades be planned well in advance to ensure that there are no service disruptions. The evolution of our infrastructure technology therefore must be planned, implemented and integrated with the wireless operator’s plans for deploying new applications and services and any equipment or technology provided by other vendors.

Given the nature of our business, the majority of our sales are generated through multiple-element arrangements comprised of a combination of products, maintenance and support services and, importantly, specified product upgrades. We have established a business practice of negotiating with OEMs the pricing for future purchases of new product releases and specified software upgrades. We expect that we will release one or more optional specified upgrades annually. To determine whether these optional future purchases are elements of current purchase transactions, we assess whether such new products or specified upgrades will be offered to the OEM customer at a price that represents a significant and incremental discount to current purchases. Because we sell uniquely configured products through each OEM customer, we do not maintain a list price for our products and specified software upgrades. Additionally, as we do not sell these products and upgrades to more than one customer, we are unable to establish VSOE of fair value for these products and upgrades. Consequently, we are unable to determine if the license fees we charge for the optional specified upgrades include a significant and incremental discount. As such, we defer all revenue related to current product sales, software-only license fees, maintenance and support services and professional services until all specified upgrades committed at the time of shipment have been delivered. For example, we recognize deferred revenue from sales to an OEM customer only when we deliver a specified upgrade that we had previously committed. However, when we commit to an additional upgrade before we have delivered a previously committed upgrade, we defer all revenue from product sales after the date of such commitment until we deliver the additional upgrade. Any revenue that we have deferred prior to the additional commitment is recognized after the previously committed upgrade is delivered.

If there are no commitments outstanding for specified upgrades, we recognize revenue when all of the following have occurred: (1) delivery (FOB origin), provided that there are no uncertainties regarding customer acceptance; (2) there is persuasive evidence of an arrangement; (3) the fee is fixed or determinable; and (4) collection of the related receivable is reasonably assured, as long as all other revenue recognition criteria have been met. If there are uncertainties regarding customer acceptance, we recognize revenue and related cost of revenue when those uncertainties are resolved. Any adjustments to software license fees are recognized when reported to us by an OEM customer.

For arrangements where we receive initial licensing fees or customization fees for new products under development, we defer recognition of these fees until the final product has been delivered and accepted, and then we recognize the fees over the expected customer relationship period. Revenue from pre-production units is deferred and recognized once the final product has been delivered and accepted, provided that the other criteria for revenue recognition are met, including but not limited to the establishment of VSOE of fair value for post-contract support. If VSOE of fair value cannot be established for undelivered elements, we defer all revenues until VSOE of fair value can be established or the undelivered element is delivered. If the only remaining undelivered element is post-contract support, we recognize revenue ratably over the contractual post-contract support period.

For arrangements that include annual volume commitments and pricing levels, where such discounts are significant and incremental and where the maximum discount to be provided cannot be quantified prior to the expiration of the arrangement, we recognize revenue, provided that delivery and acceptance has occurred and provided that no other commitments such as specified upgrades are outstanding, based on the lowest pricing level stated in the arrangement. Any amounts invoiced in excess of the lowest pricing level are deferred and recognized ratably over the remaining discount period, which typically represents the greater of the PCS period or the remaining contractual period.

For our direct sales to end user customers, which have not been material to date, we recognize product revenue upon delivery provided that all other revenue recognition criteria have been met.

Our support and maintenance services consist of the repair or replacement of defective hardware, around-the-clock help desk support, technical support and the correction of bugs in our software. Our annual support and maintenance fees are based on a percentage of the initial sales or list price of the applicable hardware and software products and may include a fixed amount for help desk services. Included in the price of the product, we provide maintenance and support during the product warranty period, which is typically one year. As discussed above, we defer all revenue, including revenue related to maintenance and support services (“post-contract customer support” or “PCS”), until all specified upgrades outstanding at the time of shipment have been delivered. In connection with an amendment to our OEM arrangement in 2007, we can no longer assert VSOE of fair value for PCS to Ericsson (formerly Nortel Networks). When VSOE of fair value for PCS cannot be established, all revenue related to product sales and software-only license fees, including bundled PCS, is deferred until all specified software upgrades outstanding at the time of shipment are delivered. At the time of the delivery of all such upgrades, we recognize a proportionate amount of all such revenue previously deferred based on the portion of the applicable warranty period that has elapsed as of the time of such delivery. The unearned revenue is recognized ratably over the remainder of the applicable warranty period. When VSOE of fair value for PCS can be established, we allocate a portion of the initial product revenue and software-only license fees to the bundled PCS based on the fees we charge for annual PCS when sold separately. When all specified software upgrades outstanding at the time of shipment are delivered, under the residual method, we recognize the previously deferred product revenue and software-only license fees, as well as the earned PCS revenue, based on the portion of the applicable warranty period that has elapsed. The unearned PCS revenue is recognized ratably over the remainder the applicable warranty period. Notwithstanding our inability to establish VSOE of fair value of maintenance and support services to Ericsson for revenue recognition purposes, we present product revenue and service revenue separately on our consolidated statements of income based on historical maintenance and support services renewal rates at the time of sale.

For maintenance and service renewals, we recognize revenue for such services ratably over the service period as services are delivered.

We provide professional services for deployment optimization, network engineering and radio frequency deployment planning, and provide training for network planners and engineers. We generally recognize revenue for these services as the services are performed as we have deemed such services not essential to the functionality of our products. We have not issued any refunds on products sold. As such, no provisions have been recorded against revenue or related receivables for potential refunds.

In addition, certain of our contracts include guarantees regarding failure rates. Historically, we have not incurred substantial costs relating to these guarantees and we currently expense such costs as they are incurred. We review these costs on a regular basis as actual experience and other information becomes available; and should they become more substantial, we would accrue an estimated exposure and consider the potential related effects of the timing of recording revenue on our license arrangements. We have not accrued any costs related to these warranties in the accompanying consolidated financial statements.

In accordance with ASC 605-45, Principal Agent Considerations, or ASC 605-45, we classify the reimbursement by customers of shipping and handling costs as revenue and the associated cost as cost of revenue. We record reimbursable out-of-pocket expenses in both product and services revenues and as a direct cost of product and services. For fiscal 2008 and the first three quarters of fiscal 2009, shipping and handling and reimbursable out-of-pocket expense were not material.

We have neither issued nor do we anticipate issuing any refunds on products sold. As such, no provisions have been recorded against deferred revenues, revenue or any related receivables for potential refunds.

We anticipate that the revenue recognition related to the our fixed-mobile convergence products will be complex given that a number of our current arrangements for the development and supply of these products contain significant customization services, volume discounts, specified upgrades and multiple elements for new service offerings for which vendor-specific evidence of fair value does not currently exist. To date, there have been no material revenues recognized with respect to these products.

Investments and Restricted Investments

We determine the appropriate categorization of investments in securities at the time of purchase. As of December 28, 2008 our investments were categorized as held-to-maturity and were presented at their amortized cost. As of January 3, 2010, due to the proposed merger, we no longer intended to hold some of our investments to maturity and, accordingly, reclassified certain of our investments from held-to-maturity to available-for-sale. Held-to-maturity investments are presented at their amortized cost and available-for-sale investments are presented at fair market value with unrealized gains and losses considered to be temporary in nature reported as a separate component of other comprehensive income (loss). The amortized cost of held-to-maturity debt securities is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization and accretion is included in interest or other income (expense). We classify securities on our balance sheet as short-term or long-term based on the date we reasonably expect the securities to mature or liquidate.

Stock-Based Compensation

Through the year ended January 1, 2006, we accounted for our stock-based awards to employees using the intrinsic value method and elected the disclosure-only requirements. Under the intrinsic value method, compensation expense is measured on the date of the grant as the difference between the deemed fair value of our common stock and the exercise or purchase price multiplied by the number of stock options or restricted stock awards granted. We followed the provisions of ASC 505-50, Equity Based Payments to Non-Employees, to account for grants made to non-employees.

ASC 718 requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their estimated fair values. In accordance with ASC 718, we recognize the compensation cost of share-based awards on a straight-line basis over the vesting period of the award, which is generally four to five years, and have elected to use the Black-Scholes option pricing model to determine fair value. ASC 718 eliminated the alternative of applying the intrinsic value method to stock compensation awards. We adopted the accounting standards of ASC 718 on the first day of fiscal 2006 using the prospective-transition method. As such, we will continue to apply the intrinsic value method in future periods to equity awards granted prior to the adoption of ASC 718.

As there was no public market for our common stock prior to July 19, 2007, the date of our IPO, we determined the volatility percentage used in calculating the fair value of stock options we granted based on an analysis of the historical stock price data for a peer group of companies that issued options with substantially similar terms. The expected volatility percentage used in determining the fair value of stock options granted in the year ended December 28, 2008 was between 54% and 58% and in the year ended January 3, 2010 between 50% and 51%. The expected life of options has been determined utilizing the “simplified” method as prescribed by the SEC’s Staff Accounting Bulletin No. 110. The expected life of options granted during the year ended December 28, 2008 and January 3, 2010 was 6.25 years. For the years ended December 28, 2008 and January 3, 2010, the weighted-average risk free interest rate used was 3.16% and 2.45%, respectively. The risk-free interest rate is based on a weighted average of a 7-year treasury instrument whose term is consistent with the expected life of the stock options. Although we paid a one-time special cash dividend in April 2007, the expected dividend yield is assumed to be zero as we do not currently anticipate paying cash dividends on our common stock in the future. In addition, ASC 718 requires companies to utilize an estimated forfeiture rate when calculating the expense for the period, whereas prior FASB accounting guidance permitted companies to record forfeitures based on actual forfeitures, which was our historical policy. As a result, we applied an estimated forfeiture rate between 3% and 6% for the year ended December 28, 2008 and 6% for the year ended January 3, 2010 in determining the expense recorded in our consolidated statements of operations. These rates were derived by review of our historical forfeitures since 2000.

For the years ended December 28, 2008 and January 3, 2010, we recorded expense of $4,844 and $6,317, respectively, in connection with share-based awards and related tax benefit of approximately $704 and $1,232 for fiscal 2008 and 2009, respectively. As of January 3, 2010, future expense for non-vested stock options of $15,715 was expected to be recognized over a weighted-average period of 2.52 years.

Income Taxes

We are subject to income taxes in both the United States and foreign jurisdictions, and we use estimates in determining our provision for income taxes. We account for income taxes under the provisions of ASC 740, Income Taxes, or ASC 740, which requires the recognition of deferred income tax assets and liabilities for expected future tax consequences of events that have been recognized in our financial statements or tax returns. Under ASC 740, we determine the deferred tax assets and liabilities based upon the difference between the financial statements and the tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. We must then periodically assess the likelihood that our deferred tax assets will be recovered from our future taxable income, and, to the extent we believe that it is more likely than not our deferred tax assets will not be recovered, we must establish a valuation allowance against our deferred tax assets.

In July 2006, the FASB issued accounting guidance which creates a single model to address uncertainty in tax positions and clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with ASC 740 by prescribing the minimum threshold a tax position is required to meet before being recognized in an enterprise’s financial statements. We adopted this guidance on January 1, 2007. We did not recognize any liability for unrecognized tax benefits as a result of adopting this guidance as of January 1, 2007. Our liability, including interest, was $5.7 million at December 28, 2008 and $6.1 million at January 3, 2010. We did not recognize any interest or penalties in the year ended December 30, 2007. During the year ended December 28, 2008, we recognized approximately $184 of interest and $0 in penalties as a component of income tax expense. During the year ended January 3, 2010, we recognized approximately $153 thousand of interest and $0 in penalties as a component of income tax expense.

Results of Operations

The following table sets forth our results of operations for the periods shown:

AIRVANA, INC.

CONSOLIDATED STATEMENTS OF INCOME

		Year Ended
		December 30,				December 28,				January 3,
		2007				2008				2010
		(In thousands)
Revenue:
Product		$	279,133			$	123,295			$	45,121
Service			26,652				14,878				19,473
Total revenue			305,785				138,173				64,594
Cost of revenue:
Product			34,794				3,267				3,195
Service			7,110				8,195				10,374
Total cost of revenue			41,904				11,462				13,569
Gross profit			263,881				126,711				51,025
Operating expenses:
Research and development			76,638				74,826				73,676
Selling and marketing			12,055				14,933				16,307
General and administrative			7,453				8,976				12,772
In-process research and development			2,340				—				—
Total operating expenses			98,486				98,735				102,755
Operating income			165,395				27,976				(51,730	)
Interest and other income (expense)
Interest and other income			9,881				7,241				6,693
Interest expense			(35	)			(1	)			—
Total interest and other income			9,846				7,240				6,693
Income (loss) before income tax expense (benefit)			175,241				35,216				(45,037	)
Income tax expense (benefit)			21,898				13,923				(20,045	)
Net income (loss)		$	153,343			$	21,293			$	(24,992	)
Other GAAP and Non-GAAP Financial Data(1):
Product and service billings		$	142,174			$	125,055			$	174,167
Cost related to product and service billings			8,740				13,625				19,300
Gross profit on Billings			133,434				111,430				154,867
Operating income on Billings			34,948				12,695				52,112
Deferred revenue, at end of period			79,978				66,860				176,433
Deferred product and service costs, at end of period			1,050				3,213				8,944
Cash flow from operating activities			91,771				12,569				44,396

Comparison of Fiscal 2008 and Fiscal 2009

Revenue and Product and Service Billings

		Fiscal Year								Period-to-Period
		2008				2009				Change
		(In thousands)
Revenue		$	138,173			$	64,594			$	(73,579	)
Deferred revenue, at end of period			66,860				176,433
Less: Deferred revenue, at beginning of period			(79,978	)			(66,860	)
Product and service billings		$	125,055			$	174,167			$	49,112

Revenue in fiscal 2009 was derived principally from the recognition of $37.8 million of software license and maintenance revenues related to the delivery in December 2009 of our July 2008 software release version 8.0 specified upgrade, $7.4 million of software license and maintenance revenues related to the delivery in November 2008 of our December 2007 software release version 7.0 specified upgrade and $9.5 million from maintenance and support services performed during the year. In addition, we recognized $6.5 million of revenue associated with fees related to a development agreement with Qualcomm that was terminated by Qualcomm in the fourth quarter of fiscal 2009. Revenue in fiscal 2008 was derived principally from the recognition of $61.3 million of software license and maintenance revenues related to the delivery in June 2008 of our June 2007 software release version 6.0 specified upgrade and $60.3 million of software license and maintenance revenues related to the delivery in November 2008 of our December 2007 software release version 7.0 specified upgrade. The revenue related to our June 2007 specified upgrade consisted of billings from June 2007 through November 2007; the revenue related to our December 2007 specified upgrade consisted of billings from December 2007 through June 2008; and the revenue related to our July 2008 specified upgrade consisted of billings from July 2008 through October 2008.

The increase in product and service billings in fiscal 2009 was due primarily to the collection of $21.8 million of pre-bankruptcy filing outstanding invoices to Nortel Networks that were being accounted for on a cash basis. As a result, these amounts were excluded from billings in fiscal 2008 and included in billings in fiscal 2009 when collected.

Cost of Revenue and Cost Related to Product and Service Billings

		Fiscal Year								Period-to-Period
		2008				2009				Change
		(In thousands)
Cost of revenue		$	11,462			$	13,569			$	2,107
Deferred product and service costs, at end of period			3,213				8,944
Less: Deferred product cost, at beginning of period			(1,050	)			(3,213	)
Cost related to product and service billings		$	13,625			$	19,300			$	5,675

The increase in cost of revenue in fiscal 2009 was due primarily to an increase in cost of service revenue associated with an increase in customer service headcount to support a larger installed base of product.

The increase in cost related to product and service billings was due primarily to initial sales of prototype units and costs related to NRE billings for custom development of our FMC products.

Gross Profit and Gross Profit on Billings

		Fiscal Year								Period-to-Period
		2008				2009				Change
		(In thousands)
Gross profit		$	126,711			$	51,025			$	(75,686	)
Deferred revenue, at end of period			66,860				176,433
Less: Deferred revenue acquired			—				—
Less: Deferred revenue, at beginning of period			(79,978	)			(66,860	)
Deferred product cost, at beginning of period			1,050				3,213
Less: Deferred product and service costs, at end of period			(3,213	)			(8,944	)
Gross profit on Billings		$	111,430			$	154,867			$	43,437

The decrease in gross profit was due primarily to a decrease in revenue of $73.6 million to $64.6 million in fiscal 2009 and an increase in cost of revenue of $2.1 million to $13.6 million in fiscal 2009. We expect gross profit on our revenue to continue to fluctuate significantly in the future based on the time period between commitments for future software upgrades and the volume of sales in those time intervals.

Gross profit on Billings increased primarily due to an increase in product and service billings of $49.1 million to $174.2 million in fiscal 2009, partially offset by an increase in cost related to product and service billings of $5.7 million to $19.3 million in fiscal 2009.

Operating Expenses

		Fiscal Year								Period-to-Period Change
		2008				2009				Amount				Percentage
		(In thousands)
Research and development		$	74,826			$	73,676			$	(1,150	)			1.5	%
Sales and marketing			14,933				16,307				1,374				9.2	%
General and administrative			8,976				12,772				3,796				42.3	%
Total operating expenses		$	98,735			$	102,755			$	4,020				4.1	%

Research and Development. The decrease in research and development expense in fiscal 2009 was due primarily to a decrease in outside service expense and development tools expense related to non-recurring engineering programs and reduced reliance on outside services for the outsourcing of new product development, as well as an increase in development costs allocated to deferred cost for our FMC products, partially offset by an increase in temporary staffing related to the assistance of ongoing development projects in fiscal 2009 and an increase in salary and benefit expense associated with annual salary raises in fiscal 2009. Outside service expense decreased by $0.7 million to $2.3 million in fiscal 2009. Development tools expense decreased by $1.1 million to $1.3 million in fiscal 2009. Development costs allocated to deferred cost increased by $3.3 million to $6.9 million in fiscal 2009. Temporary staffing expense increased by $2.2 million to $5.9 million in fiscal 2009. Salary and benefit expense increased by $1.6 million to $48.7 million in fiscal 2009.

Sales and Marketing. The increase in sales and marketing expense in fiscal 2009 was primarily due to an increase in salary and benefit expense associated with an increase in the number of sales, marketing and customer support employees to support a larger installed base and expansion of our international sales offices, partially offset by a decrease in sales commission expense. Salary and benefit expense associated with the increase in headcount increased by $2.2 million to $12.2 million in fiscal 2009. Commission expense decreased by $0.5 million to $1.2 million in fiscal 2009.

General and Administrative. The increase in general and administrative expense in fiscal 2009 was primarily due to $3.2 million in professional fees incurred associated with our proposed merger as well as an increase in salary and benefit expense associated with annual salary raises in fiscal 2009. Salary and benefit expense increased by $0.5 million to $4.4 million in fiscal 2009.

Operating Profit (Loss) and Operating Profit on Billings

		Fiscal Year								Period-to-Period
		2008				2009				Change
		(In thousands)
Operating profit		$	27,976			$	(51,730	)		$	(79,706	)
Deferred revenue, at end of period			66,860				176,433
Less: Deferred revenue, at beginning of period			(79,978	)			(66,860	)
Deferred product cost, at beginning of period			1,050				3,213
Less: Deferred product and service costs, at end of period			(3,213	)			(8,944	)
Operating profit on billings		$	12,695			$	52,112			$	39,417

The decrease in operating profit in fiscal 2009 was due primarily to the decrease in our gross profit, described above, coupled with an increase in operating expenses in fiscal 2009 described above.

The increase in operating profit (loss) on billings in fiscal 2009 was due primarily to the increase in our gross profit on billings, described above, coupled with an increase in operating expenses in fiscal 2009, described above.

Interest and Other Income, Net. Interest and other income, net, consists primarily of interest generated from the investment of our cash balances. The decrease in interest income of $0.5 million to $6.7 million in fiscal 2009 was due primarily to lower interest rates, partially offset by other income of $0.8 million associated with gains on our hedging program and the collection of $3.2 million of interest associated with Nortel Networks pre-bankruptcy outstanding invoices.

Income Tax Expense. We recorded an income tax benefit of $20.0 million for fiscal 2009. This benefit is primarily related to losses incurred and tax credits generated from operations in the United States, which will be carried back to offset taxes paid in prior years, and the impact of the reduction of valuation allowance against our U.K. net operating loss carryforwards as a result of implementing a sale of intellectual property from our U.K. subsidiary to the U.S. parent company. This benefit is partially offset by increases in reserves for uncertain tax positions and nondeductible stock compensation charges. We recorded income tax expense of $13.9 million for fiscal 2008. This expense relates primarily to profits in the United States taxed at the federal statutory rate, losses from foreign operations for which no tax benefits can be recognized, and increases in unrecognized tax benefits. This tax is reduced by the benefit from federal research credits and manufacturing deductions.

When our FMC products begin to ship in the United States in significant volumes, our effective state tax rate may increase and we may realize benefits from our state tax credit carryforwards.

Comparison of Fiscal 2007 and Fiscal 2008

Revenue and Product and Service Billings

		Fiscal Year								Period-to-Period
		2007				2008				Change
		(In thousands)
Revenue		$	305,785			$	138,173			$	(167,612	)
Deferred revenue, at end of period			79,978				66,860
Less: Deferred revenue acquired			(171	)			—
Less: Deferred revenue, at beginning of period			(243,418	)			(79,978	)
Product and service billings		$	142,174			$	125,055			$	(17,119	)

Revenue in fiscal 2008 was derived principally from the recognition of $61.3 million of software license and maintenance revenues related to the delivery in June 2008 of our June 2007 software release version 6.0 specified upgrade and $60.3 million of software license and maintenance revenues related to the delivery in November 2008 of our December 2007 software release version 7.0 specified upgrade. The revenue related to our June 2007 specified upgrade consisted of billings from June 2007 through November 2007 and the revenue related to our December 2007 specified upgrade consisted of billings from December 2007 through June 2008. Revenue in fiscal 2007 was derived principally from product shipments and sales of software licenses, maintenance and support related to our April 2005 specified upgrade and our September 2006 specified upgrade. The revenue related to our April 2005 specified upgrade consisted of billings from April 2005 through August 2006 and the revenue related to our September 2006 specified upgrade consisted of billings from September 2006 through May 2007. We recognized this revenue as a result of the delivery of specified upgrades in April 2007 and November 2007.

The decrease in product and service billings in fiscal 2008 was due primarily to the exclusion of $21.8 million of outstanding invoices to Nortel Networks that were subject to Nortel Networks’ bankruptcy proceedings and accounted for on a cash basis. They were collected and included in product and service billings in fiscal 2009.

Cost of Revenue and Cost Related to Product and Service Billings

		Fiscal Year								Period-to-Period
		2007				2008				Change
		(In thousands)
Cost of revenue		$	41,904			$	11,462			$	(30,442	)
Deferred product and service costs, at end of period			1,050				3,213
Less: Deferred product cost, at beginning of period			(34,214	)			(1,050	)
Cost related to product and service billings		$	8,740			$	13,625			$	4,885