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STARENT NETWORKS, CORP. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
TABLE OF CONTENTS 2

As filed with the Securities and Exchange Commission on May 18, 2007.

Registration No. 333-141092



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549


AMENDMENT NO. 4 TO
Form S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933


STARENT NETWORKS, CORP.
(Exact Name of Registrant as Specified in Its Charter)

Delaware
(State or Other Jurisdiction of
Incorporation or Organization)
  3663
(Primary Standard Industrial
Classification Code No.)
  04-3527533
(I.R.S. Employer
Identification No.)

30 International Place
Tewksbury, MA 01876
(978) 851-1100
(Address, including zip code, and telephone number, including area code, of registrant's principal executive offices)

Ashraf M. Dahod
President and Chief Executive Officer
Starent Networks, Corp.
30 International Place
Tewksbury, MA 01876
(978) 851-1100
(Name, address, including zip code, and telephone number, including area code, of agent for service)


Copies to:

Mark G. Borden, Esq.
Philip P. Rossetti, Esq.
Wilmer Cutler Pickering Hale and Dorr LLP
60 State Street
Boston, Massachusetts 02109
(617) 526-6000
  Steven E. Bochner, Esq.
Selim Day, Esq.
Adam M. Dinow, Esq.
Wilson Sonsini Goodrich & Rosati
Professional Corporation
1301 Avenue of the Americas, 40th floor
New York, New York 10019
(212) 999-5800

            Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement is declared effective.


            If any of the securities being registered on this form are offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, as amended (the "Securities Act") please check the following box. o

            If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

            If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

            If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o


CALCULATION OF REGISTRATION FEE


Title of Each Class of Securities to be Registered
  Amount to be Registered(1)
  Proposed Maximum Aggregate Offering Price Per Share(2)
  Proposed Maximum Aggregate Offering Price(2)
  Amount of Registration Fee(3)(4)

Common Stock,par value $.001 per share   12,115,067   $11.00   $133,265,737   $4,092

(1)
Includes 1,580,226 shares of common stock that may be purchased by the underwriters to cover over-allotments, if any.
(2)
Estimated solely for the purpose of computing the registration fee in accordance with Rule 457(a) under the Securities Act of 1933, as amended.
(3)
Calculated pursuant to Rule 457(a) based on an estimate of the proposed maximum aggregate offering price.
(4)
A registration fee of $3,531 has been paid previously in connection with this Registration Statement based on an estimate of the maximum aggregate offering price.

            The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to Section 8(a), may determine.




The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting offers to buy these securities in any state where the offer or sale is not permitted.

Subject to Completion. Dated May 18, 2007

10,534,841 Shares

LOGO

Starent Networks, Corp.

Common Stock


          This is an initial public offering of shares of common stock of Starent Networks, Corp.

          Starent Networks is offering 9,000,000 of the shares to be sold in the offering. The selling stockholders identified in this prospectus, including our president and chief executive officer, are offering an additional 1,534,841 shares. Starent Networks will not receive any of the proceeds from the sale of the shares being sold by the selling stockholders.

          Prior to this offering, there has been no public market for the common stock. It is currently estimated that the initial public offering price per share will be between $9.00 and $11.00. We have applied to have our common stock listed on the Nasdaq Global Market under the symbol "STAR."

          See "Risk Factors" on page 7 to read about factors you should consider before buying shares of common stock.


          Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.


 
  Per share
  Total
Initial public offering price   $     $  
Underwriting discount   $     $  
Proceeds, before expenses, to Starent Networks   $     $  
Proceeds, before expenses, to the selling stockholders   $     $  

          To the extent that the underwriters sell more than 10,534,841 shares of common stock, the underwriters have the option to purchase up to an additional 1,580,226 shares from Starent Networks at the initial public offering price less the underwriting discount.


The underwriters expect to deliver the shares against payment in New York, New York on                          , 2007.

Goldman, Sachs & Co. Lehman Brothers

JPMorgan

Thomas Weisel Partners LLC

Prospectus dated                          , 2007.


GRAPHIC



PROSPECTUS SUMMARY

          This summary highlights information contained elsewhere in this prospectus. You should read the following summary together with the more detailed information appearing in this prospectus, including our consolidated financial statements and related notes, and the risk factors beginning on page 7, before deciding whether to purchase shares of our common stock. Unless the context otherwise requires, we use the terms "Starent," "Starent Networks," "our company," "we," "us" and "our" in this prospectus to refer to Starent Networks, Corp. and its subsidiaries.


Starent Networks

Overview

          Starent Networks is a leading provider of infrastructure hardware and software products and services that enable mobile operators to deliver multimedia services to their subscribers. We have created hardware and software products that provide network functions and services, including access from a wide range of radio networks to the operator's packet core network. A packet core network splits traffic into multiple pieces of data, or packets, that are routed over an Internet Protocol, or IP, network and enables mobile operators to deliver multimedia services. Our products and services also provide management of subscriber sessions moving between networks and application of billing and other session policies. Our products and services provide high performance and system intelligence by combining significant computing power, memory and traffic handling capabilities with a flexible, high availability operating system and other proprietary software. Our products integrate multiple network functions and services needed for the delivery of advanced multimedia services, such as video, Internet access, voice-over-IP, e-mail, mobile TV, photo sharing and gaming.

          Mobile operators are aggressively deploying next-generation wireless networks, such as third generation, or 3G, networks, that are capable of delivering high quality, mobile multimedia services to subscribers. In deploying these new networks, mobile operators are seeking packet core network hardware and software that can deliver multimedia services with high performance and simplicity and provide high reliability. We have developed our multimedia core network platforms and our proprietary software specifically to address the needs of packet-based mobile networks. Our multimedia core network platforms consist of the ST16, which has been deployed since 2003, and our recently announced ST40, which we expect to be generally available in the third quarter of 2007.

          We sell our hardware and software products to leading mobile operators around the world both directly and through OEMs, system integrators and distributors. We believe the deployment of our products by over 60 mobile operators in 25 countries—including many of the world's largest mobile operators—makes Starent Networks a leading provider of infrastructure products and services that enable mobile operators to deliver multimedia services to their subscribers. We became profitable in 2005, and in 2006 our revenues were $94.4 million and our net income was $3.6 million, including interest income of $2.3 million. For the quarter ended March 31, 2007, our revenues were $27.6 million and our net income was $2.3 million, including interest income of $708,000. As of March 31, 2007, we had an accumulated deficit of $103.2 million.

Industry Background

          Mobile operators have been aggressively upgrading their networks for a variety of reasons, including in large part due to increasing mobile subscriber demand for a wide range of multimedia services. Several factors are accelerating the growth of data-rich multimedia traffic on mobile wireless networks, including continued growth in the number of mobile subscribers worldwide, an increasingly mobile and interconnected society in which information is accessible and communications are available all the time regardless of location, and a proliferation of mobile devices designed for multimedia services.

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          In order to deliver a high-quality subscriber experience in this multimedia environment, mobile operators require infrastructure hardware and software products that are able to identify and manage individual communications sessions, handle significant traffic and integrate services. The hardware and software must also allow mobile operators to simplify and easily upgrade their networks, deliver quality of service, reliability and availability and support multiple radio access technologies.

          Historically, mobile operators seeking to address these challenges have been required to retrofit network infrastructure hardware and software originally designed for wireline networks. These products utilizing repurposed network switches, routers and off-the-shelf enterprise servers are unable to sufficiently satisfy the needs of mobile operators to deliver efficient and reliable multimedia services. While routers and network switches are capable of forwarding packets of information, they lack the integrated processing power, memory and software needed to examine individual packets and apply defined business policies and subscriber services to them. To address these shortcomings, mobile operators typically connect repurposed switches and routers with numerous enterprise servers in multi-element configurations. These repurposed products offer limited intelligence about subscriber sessions, can result in limited network performance and reliability and can be costly to operate and upgrade.

Our Products and Services

          Our hardware and software products provide six key, integrated capabilities that create enhanced revenue opportunities and facilitate reduced costs for mobile operators:

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Our Strategy

          Our goal is to strengthen our leadership in the mobile network infrastructure market. Principal elements of our strategy include the following:

Risks Associated with Our Business

          Our business is subject to numerous risks and uncertainties, as more fully described under "Risk Factors" beginning on page 7, which you should carefully consider prior to deciding whether to invest in our common stock. For example:


Corporate Information

          We were incorporated in Delaware in August 2000. Our principal executive offices are located at 30 International Place, Tewksbury, Massachusetts 01876, and our telephone number is (978) 851-1100. Our website address is www.starentnetworks.com. Information contained on our website is not incorporated by reference into this prospectus, and you should not consider information contained on our website to be part of this prospectus or in deciding whether to purchase shares of our common stock.

          "Starent," "ST16," "ST40," the Starent Networks logo and other trademarks or service marks of Starent Networks appearing in this prospectus are the property of Starent Networks. This prospectus contains additional trade names, trademarks and service marks of other companies.

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The Offering

Common stock offered by Starent Networks, Corp.   9,000,000 shares
Common stock offered by the selling stockholders   1,534,841 shares
Common stock to be outstanding after this offering   62,417,462 shares
Use of proceeds   We intend to use the net proceeds from this offering for working capital and other general corporate purposes, including the development of new products, sales and marketing activities and capital expenditures. We may use a portion of the proceeds for the acquisition of, or investment in, companies, technologies, products or assets that complement our business. We will not receive any proceeds from the shares sold by the selling stockholders. The selling stockholders include our president and chief executive officer. See "Use of Proceeds" for more information.
Risk Factors   You should read the "Risk Factors" section and other information included in this prospectus for a discussion of factors to consider carefully before deciding to invest in shares of our common stock.
Proposed Nasdaq Global Market symbol   "STAR"

          The number of shares of our common stock to be outstanding after this offering is based on the number of shares of common stock outstanding as of March 31, 2007, and excludes:



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SUMMARY CONSOLIDATED FINANCIAL DATA

          The following tables summarize the consolidated financial data for our business for the periods presented. You should read the following summary financial data in conjunction with "Selected Consolidated Financial Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations," and the financial statements and related notes, all included elsewhere in this prospectus.

 
  Year Ended December 31,
  Three Months Ended March 31,
 
 
  2004
  2005
  2006
  2006
  2007
 
 
   
   
   
  (unaudited)

 
 
  (in thousands, except per share data)

 
Statement of Operations Data:                                
Revenues:                                
  Product   $ 29,453   $ 51,819   $ 81,061   $ 11,722   $ 24,452  
  Service     4,942     7,841     13,289     2,712     3,190  
   
 
 
 
 
 
    Total revenues     34,395     59,660     94,350     14,434     27,642  
Cost of revenues:                                
  Product     12,633     12,285     25,640     3,893     4,438  
  Service     812     1,358     2,086     341     1,387  
   
 
 
 
 
 
    Total cost of revenues     13,445     13,643     27,726     4,234     5,825  
   
 
 
 
 
 
Gross profit     20,950     46,017     66,624     10,200     21,817  
   
 
 
 
 
 
Operating expenses:                                
  Research and development     13,303     18,107     25,980     3,642     10,066  
  Sales and marketing     18,445     19,785     30,311     5,160     7,069  
  General and administrative     3,185     7,352     8,515     1,516     2,844  
   
 
 
 
 
 
    Total operating expenses     34,933     45,244     64,806     10,318     19,979  
   
 
 
 
 
 
Income (loss) from operations     (13,983 )   773     1,818     (118 )   1,838  
Total other income, net     95     644     2,237     420     710  
   
 
 
 
 
 
Income (loss) before income tax expense     (13,888 )   1,417     4,055     302     2,548  
Income tax expense     (160 )   (513 )   (413 )   (50 )   (243 )
   
 
 
 
 
 
Net income (loss)   $ (14,048 ) $ 904   $ 3,642   $ 252   $ 2,305  
   
 
 
 
 
 
Accretion of redeemable convertible preferred stock     (6,266 )   (7,349 )   (7,988 )   (1,997 )   (1,997 )
   
 
 
 
 
 
Net income (loss) applicable to common stockholders   $ (20,314 ) $ (6,445 ) $ (4,346 ) $ (1,745 ) $ 308  
   
 
 
 
 
 
Net income (loss) per share applicable to common stockholders:                                
  Basic   $ (3.28 ) $ (0.97 ) $ (0.62 ) $ (0.26 ) $ 0.01  
   
 
 
 
 
 
  Diluted   $ (3.28 ) $ (0.97 ) $ (0.62 ) $ (0.26 ) $ 0.00  
   
 
 
 
 
 
Weighted average shares used in computing net income (loss) per share applicable to common shareholders:                                
  Basic     6,197     6,642     7,026     6,746     7,719  
   
 
 
 
 
 
  Diluted     6,197     6,642     7,026     6,746     13,311  
   
 
 
 
 
 
Pro forma net income (loss) per share (unaudited)(1):                                
  Basic               $ 0.07         $ 0.04  
               
       
 
  Diluted               $ 0.07         $ 0.04  
               
       
 
Weighted average shares used in computing pro forma net income (loss) per share (unaudited):                                
  Basic                 51,314           52,007  
               
       
 
  Diluted                 54,706           57,599  
               
       
 

(1)
The pro forma net income (loss) per common share, basic and diluted, has been calculated assuming the conversion of all outstanding redeemable convertible preferred stock into common stock upon the closing of this offering and the elimination of the accretion of redeemable convertible preferred stock.

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          The pro forma balance sheet data give effect to the conversion of all outstanding shares of redeemable convertible preferred stock into common stock and the elimination of accretion of redeemable convertible preferred stock as of March 31, 2007. The pro forma as adjusted balance sheet data also give effect to our sale of 9,000,000 shares of common stock offered by this prospectus at an assumed initial public offering price of $10.00 per share, the mid-point of the estimated price range shown on the cover page of this prospectus, after deducting the estimated underwriting discount and offering expenses payable by us.

 
  As of March 31, 2007
 
  Actual
  Pro Forma
  Pro Forma
as Adjusted

 
   
  (unaudited)
(in thousands)


   
Balance Sheet Data:                  
Cash, cash equivalents and short-term investments   $ 50,242   $ 50,242   $ 132,146
Working capital     20,731     20,731     102,635
Total assets     100,267     100,267     182,171
Indebtedness            
Redeemable convertible preferred stock     132,267        
Total stockholders' equity (deficit)     (103,088 )   29,179     111,083

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RISK FACTORS

          An investment in our common stock involves a high degree of risk. In deciding whether to invest, you should carefully consider the following risk factors. Any of the following risks could have a material adverse effect on our business, financial condition, results of operations or prospects and cause the value of our common stock to decline, which could cause you to lose all or part of your investment. When determining whether to invest, you should also refer to the other information in this prospectus, including the financial statements and related notes.

Risks Related to Our Business and Industry

We compete in new and rapidly evolving markets and have a limited operating history, which makes it difficult to predict our future operating results.

          We were incorporated in August 2000, and deployed our first commercial product in the first quarter of 2003. We have a limited operating history in an industry characterized by rapid technological change, changing customer needs, evolving industry standards and frequent introductions of new products and services. We believe our limited operating history and the characteristics of our industry make it difficult to forecast our future operating results. You should consider and evaluate our prospects in light of risks faced by companies such as ours, which include challenges in accurate financial planning as a result of limited historical data and the uncertainties resulting from a relatively limited time period in which to implement and evaluate our business strategies, as compared to companies with longer operating histories.

Our past operating results have fluctuated significantly, and likely will continue to fluctuate significantly, which makes it difficult to predict our operating results and could cause our operating results to fall below expectations.

          Our operating results have historically fluctuated significantly from period to period and we expect our operating results to continue to fluctuate due to a variety of factors, many of which are outside of our control. As a result, 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. If our revenues or operating results fall below the expectations of investors or securities analysts or below any guidance we may provide to the market, the price of our common stock could decline.

          In addition to other risk factors listed in this "Risk Factors" section, factors that may affect our operating results include:

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We depend on a limited number of customers for a substantial portion of our revenues. The loss of a key customer or any significant adverse change in the size or terms of orders from a key customer could significantly reduce our revenues.

          We derive a substantial portion of our revenues from a limited number of customers partly due to the nature of the mobile communications industry. During any given fiscal period, a small number of customers may account for a significant percentage of our revenues. In each of 2004, 2005 and 2006 and the first three months of 2007, we derived more than 90% of our revenues from our top five customers. In 2004, Verizon Wireless represented more than 40% of our revenues and Samsung Electronics Co., Ltd. and ITOCHU Techno-Solutions Corporation, also known as CTC, each represented more than 20%. In 2005, Verizon Wireless represented 40% of our revenues and CTC and Samsung each represented more than 20%. In 2006, we derived more than 40% of our revenues from our CDMA OEM relationship with Nortel Networks, of which more than half was related to Sprint Nextel, and more than 30% of our revenues from Verizon Wireless. In the first three months of 2007, Verizon Wireless represented approximately 60% of our revenues and Samsung Electronics represented approximately 20%. We terminated our OEM relationships with Nortel Networks in December 2006. See "We recently terminated our OEM relationships with Nortel Networks. If we are unable to establish strong relationships with the mobile operators formerly serviced by Nortel Networks under our CDMA agreement or if we are unable to resolve a dispute with Nortel Networks relating to the termination of our GSM/UMTS agreement, our business will be harmed," for more information.

          We do not have long-term volume purchase contracts with our customers or other commitments that ensure future sales of our products to existing customers. The loss of any key customer, or our inability to generate anticipated revenue from them, would significantly and adversely affect our business, financial condition and results of operations. In addition, a change in the timing or size of a purchase by any one of our key customers can result in significant variations in our revenue and operating results from period to period. Our operating results for the foreseeable future will continue to depend on our ability to effect sales to a small number of customers and any revenue growth will depend on our success selling additional products to our large customers and expanding our customer base to include additional customers that deploy our products in large-scale networks serving significant numbers of subscribers.

          Moreover, many of our key customers are large mobile operators that have substantial purchasing power and leverage in negotiating contractual arrangements with us. These customers may require us to agree to terms and conditions that could result in increased costs and decreased revenues and could adversely affect our operating results.

We rely on a single line of products focused on a single market. If the market for those products does not develop as we anticipate, our revenues may decline or fail to grow, which would adversely affect our operating results.

          We derive, and expect to continue to derive, all of our revenues from a single line of products that provide network functions and services to mobile operators' packet core networks. The market for our products is relatively new and still evolving, and it is uncertain whether our products will achieve and sustain high levels of demand and market acceptance. Our success will depend to a

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substantial extent on the willingness of mobile operators to continue to implement packet-based, multimedia network infrastructure. Factors that could impair the rate of growth of multimedia networks include:

If mobile operators do not continue to implement packet core networks, the market for our products may not continue to develop or may develop more slowly than we expect, either of which would significantly adversely affect our revenues and profitability.

If our new platform, the ST40, does not achieve widespread market acceptance, our operating results will suffer.

          We recently announced our ST40 platform, which we expect will be generally available in the third quarter of 2007. We expect to begin recording revenues from shipments of the ST40 in the fourth quarter of 2007, and a significant portion of our anticipated revenues in the fourth quarter of 2007 and beyond are expected to be generated from sales of the ST40. Our future sales and operating results will depend, to a significant extent, on the successful introduction and marketing of the ST40. In order to achieve market penetration for the ST40, we may be required to incur additional expenses in marketing and sales in advance of the realization of actual sales. The ST40 is not yet generally available for sale to customers and, once it becomes generally available, there can be no assurance that the ST40 will achieve widespread acceptance in the market. If we incur delays in introducing the ST40 or customer testing and verification takes longer than anticipated, the ST40 does not achieve our planned levels of sales or the ST40 does not achieve performance specifications, our operating results will suffer and our competitive position could be impaired. Also, some customers may delay orders for the ST16 as a result of the anticipated availability of the ST40 and any such delays could increase fluctuations in our quarterly operating results.

The market in which we compete is highly competitive and competitive pressures from existing and new companies may have a material adverse effect on our business, revenues, growth rates and market share.

          We compete in a highly competitive industry that is influenced by many factors, including customer demands for:

          We expect competition in the mobile network infrastructure industry to intensify significantly in the future. Other companies may introduce new products in the same markets we serve or intend

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to enter. This competition could result in increased pricing pressure, reduced profit margins, increased sales and marketing expenses and failure to increase, or the loss of, market share, any of which would likely seriously harm our business, operating results or financial condition.

          Competitive products may in the future have better performance, lower prices and broader acceptance than our products. Our primary competitors include Cisco Systems, Inc., LM Ericsson Telephone Co., Nokia Corporation and UTStarcom, Inc., each of which has a longer operating history, greater name recognition, a larger customer base and significantly greater financial, technical, sales, marketing and other resources than we do. Potential customers may prefer to purchase from their existing suppliers rather than a new supplier regardless of product performance or features. In addition, many of our competitors have a broader range of products and may be able to offer concessions to potential customers on bundled purchases that we are not able to match because we currently offer only a single line of products. We also face competition from a number of companies with more limited market share generally or by geography and newer market entrants.

          If our market continues to develop and expand, we could face increased competition from other established companies, as well as emerging companies. For example, OEMs, system integrators and distributors currently selling our products could market products and services that compete with our products and services. In addition, some of our competitors have made acquisitions or entered into partnerships or other strategic relationships with one another to offer a more comprehensive solution than they individually had offered. We expect this trend to continue as companies attempt to strengthen or maintain their market positions in an evolving industry and as companies enter into partnerships, or are acquired. Many of the companies driving this consolidation trend have significantly greater financial, technical and other resources than we do and are better positioned to acquire and offer complementary products and technologies. The companies resulting from these possible consolidations may create more compelling product offerings and be able to offer greater pricing flexibility, making it more difficult for us to compete effectively, including on the basis of price, sales and marketing programs, technology or product functionality. Continued industry consolidation may adversely impact customers' perceptions of the viability of smaller and even medium-sized technology companies and consequently customers' willingness to purchase from such companies. These pressures could materially adversely affect our business, operating results and financial condition.

Our sales cycles can be long and unpredictable, and our sales efforts require considerable time and expense.

          Our sales cycles typically are long and unpredictable, and our sales efforts require considerable time and expense. Our sales efforts involve educating our customers about the use and benefit of our products, including their technical capabilities and potential cost savings. Customers typically undertake a significant evaluation process before making a purchase, in some cases over twelve months. We spend substantial time and resources in our sales efforts without any assurance that our efforts will produce any sales. In addition, product purchases are frequently subject to budget constraints, multiple approvals, and unplanned administrative, processing and other delays. Our long sales cycle may cause our revenues and operating results to fluctuate significantly.

Demand for our products depends on the rate that mobile operators expand and enhance their mobile networks in order to provide multimedia services.

          Our future success as a provider of network infrastructure products and services for mobile operators ultimately depends on the continued growth of the mobile communications industry and, in particular, the continued deployment and expansion of mobile multimedia services. Increased

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demand by mobile subscribers for voice communications and multimedia services delivered over mobile network systems will be necessary to justify capital expenditure commitments by mobile operators to invest in the improvement and expansion of their networks. Demand for multimedia services might not continue to increase if there is limited availability or market acceptance of mobile devices designed for such services, the multimedia content offered through mobile networks does not attract widespread interest or the quality of service available through mobile networks does not meet customer expectations. If long-term expectations for mobile multimedia services are not realized or do not support a sustainable business model, operators may not commit significant capital expenditures to upgrade their networks to provide these services, the demand for our products and services will decrease, and we may not be able to sustain or increase our levels of revenues or profitability in the future.

A significant portion of our future revenues depends on our ability to further penetrate the GSM/UMTS market and our failure to do so could significantly interfere with our future growth.

          The two principal radio access interfaces in use today for mobile communications are Code Division Multiple Access, or CDMA, and Global System for Mobile Communications/Universal Mobile Telecommunications System, or GSM/UMTS. To date, we have achieved our highest number of deployments in the CDMA market, which has transitioned faster to high-bandwidth networks. However, significantly more operators worldwide currently utilize GSM/UMTS than CDMA technologies. In order to continue our growth, we believe it is important that we continue to expand into the GSM/UMTS market. To date, we have established a relationship with a major GSM/UMTS operator, and we intend to devote significant sales and marketing resources to further penetrate the GSM/UMTS market. If GSM/UMTS operators do not transition or delay their transition to high-bandwidth networks, or if we are unable to establish relationships with additional GSM/UMTS operators, we may not be able to grow our business as expected and our results of operations will be adversely affected.

We rely on OEMs, system integrators and distributors to sell some of our products, and our failure to develop and manage our distribution channels could adversely affect our business.

          For our sales to mobile operators, we rely in part on establishing and maintaining successful relationships with original equipment manufacturers, or OEMs, system integrators and distributors. A significant amount of our revenues is derived through these indirect sales. Accordingly, our revenues depend in large part on the effective performance of these distribution relationships. By relying on these indirect sales channels we may have less contact with the end users of our products, thereby potentially making it more difficult for us to establish brand awareness, ensure proper delivery and installation of our products, service ongoing customer requirements and respond to evolving customer needs. Developing relationships with qualified OEMs, system integrators and distributors and training them in our technology and product offerings requires significant time and resources. In order to develop and expand our distribution channels, we must continue to scale and improve our processes and procedures that support our OEM, system integrator and distributor relationships, including investment in systems and training. We have no minimum purchase commitments with any of our OEMs, system integrators or distributors, and our contracts with them do not prohibit them from offering products or services that compete with ours. Our competitors may be effective in providing incentives to existing and potential OEMs, system integrators and distributors to favor their products or to prevent or reduce sales of our products. Our OEMs, system integrators and distributors may choose not to offer our products exclusively or at all. Our failure to establish and maintain successful relationships with our OEMs, system integrators and distributors would likely materially adversely affect our business, operating results and financial condition.

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We recently terminated our OEM relationships with Nortel Networks. If we are unable to establish strong relationships with the mobile operators formerly serviced by Nortel Networks under our CDMA agreement or if we are unable to resolve a dispute with Nortel Networks relating to the termination of our GSM/UMTS agreement, our business will be harmed.

          We had two OEM agreements with Nortel Networks, one relating to the CDMA market and one relating to the GSM/UMTS market. We terminated the agreement relating to the CDMA market effective March 2007 because we were no longer strategically aligned with Nortel Networks on future packet core products for mobile operators and to allow specific major mobile operators to purchase directly from us. Sales to Nortel Networks, all of which were made under the CDMA agreement, accounted for more than 40% of our revenues in 2006. Nortel Networks serviced a significant number of mobile operators under this agreement in 2006, the largest of which, Sprint Nextel, accounted for over 50% of our sales to Nortel Networks and the largest 10 of which accounted for over 80% of our sales to Nortel Networks. Although Nortel Networks has acknowledged our right to terminate the CDMA agreement, under the terms of the agreement Nortel Networks has a right to continue to purchase our CDMA products for delivery through December 2008. The termination of the CDMA agreement could disrupt our relationships with CDMA mobile operators formerly serviced by Nortel Networks. We are currently seeking to establish direct sales relationships with some of the CDMA operators formerly serviced by Nortel Networks, including Sprint Nextel, and are currently exploring a new reseller relationship with Nortel Networks to continue to service other CDMA operators. Our business will be harmed if we are unable to establish a direct relationship with Sprint Nextel, or if we are unable to directly or indirectly continue selling our products to the other CDMA operators formerly serviced by Nortel Networks. In addition, our business may be adversely affected if we are unable to enter into a new CDMA reseller relationship with Nortel Networks.

          We also terminated the agreement relating to the GSM/UMTS market effective December 2006 because there was a lack of strategic alignment on future packet core products for mobile operators between us and Nortel Networks and because there had been no sales of our products under that agreement. Although we believe we had valid grounds to terminate the GSM/UMTS agreement, Nortel Networks has disputed our right to terminate that agreement. The agreement contains provisions granting Nortel Networks the exclusive rights to sell our products to specified GSM/UMTS operators until May 2009. If we are unable to resolve the dispute regarding our termination of the GSM/UMTS agreement, Nortel Networks could seek to enjoin us from selling our products and associated services directly to these specified GSM/UMTS operators, seek indemnification for damages under the agreement and/or seek payment of commissions for sales we make to these specified GSM/UMTS operators. Depending on our sales to these specified operators, the amount of damages or commissions sought may be substantial. The growth of our business may be limited if we are enjoined from or otherwise unable to establish direct or indirect sales relationships with these GSM/UMTS mobile operators. We are currently exploring a new reseller relationship with Nortel Networks to service GSM/UMTS operators. The growth of our business may be limited if we are unable to enter into a new GSM/UMTS reseller relationship with Nortel Networks.

We have a significant accumulated deficit, and we may not be able to maintain profitability.

          Although we were profitable in 2005 and 2006 and for the three months ended March 31, 2007, we incurred net losses for the preceding three years. Our net losses were approximately $25.8 million in 2002, $26.4 million in 2003 and $14.0 million in 2004. As a result of our net losses, we had an accumulated deficit of $103.2 million as of March 31, 2007. We will need to generate significant revenues and limit our operating expenses and other expenditures to maintain

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profitability, and we cannot be sure that we will remain profitable for any substantial period of time. If we are unable to remain profitable, the market price of our common stock could decline.

If network functions and services similar to those offered by our products are incorporated into existing or new mobile network infrastructure products, demand by mobile operators for our products may diminish.

          Mobile network infrastructures are continually evolving with changing industry standards and the introduction of new technologies and network elements. Network functions and services provided by our products located on the packet core network may be provided by different network elements within these networks. Other providers of mobile network infrastructure products may add network functions and services provided by our products to their existing products or offer new products with similar characteristics for different parts of the network infrastructure.

          The inclusion of, or the announcement of an intent to include, functionality and services perceived to be similar to those offered by our products in competitor products within or outside the packet core network could have an adverse effect on our ability to market and sell our products. Furthermore, even if the network functions and services offered by our competitors are more limited than those provided by our products, a significant number of customers may elect to accept limited functionality or services in lieu of adding our products to their network. The adoption of these competitive products or different approaches to their network infrastructure by mobile operators could have an adverse effect on our business, operating results and financial condition.

The applications of existing or future accounting standards could result in significant fluctuations in our operating results.

          We recognize our product software license revenue in accordance with AICPA Statement of Position, or SOP, 97-2, Software Revenue Recognition, and related amendments and interpretations and SOP 98-9, Modification of SOP 97-2, Software Revenue Recognition with Respect to Certain Transactions. Under these accounting standards, even if we deliver products to, and collect cash from, a customer in a given fiscal period, we may be required to defer recognizing revenue from the sale of such product until a future period when all the conditions necessary for revenue recognition have been satisfied. Conditions that can cause delays in revenue recognition include software arrangements that have undelivered elements for which we have not yet established vendor specific objective evidence of fair value; requirements that we deliver services for significant enhancements or modifications to customize our software for a particular customer; or material customer acceptance criteria. Our customer contracts typically include one or more of these types of conditions. Therefore, we often must defer revenue recognition for a period of time after our products are delivered and billed to a customer, and such deferral may extend over one or more fiscal quarters. The period of deferral, if any, depends on the specific terms and conditions of each customer contract, and therefore it is difficult for us to predict with accuracy at the beginning of any fiscal period the amount of revenues that we will be able to recognize from anticipated customer shipments in that period. Moreover, any changes in interpretations and guidance as to SOP 97-2 could have a significant effect on our reported financial results.

We may have difficulty acquiring new customers due to the high costs of switching mobile network infrastructure providers or equipment.

          Mobile network operators typically make substantial investments when deploying a mobile network infrastructure. Once a mobile network operator has deployed a mobile network infrastructure for a particular portion of their network, it is often difficult and costly to switch to another vendor's infrastructure. Unless we are able to persuasively demonstrate that our products offer performance, functionality or cost advantages that materially outweigh a customer's expense

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of switching from a competitor's product, it will be difficult for us to generate sales once that competitor's equipment has been deployed. Accordingly, if a customer has already deployed a competitor's product for their network infrastructure, it may be difficult for us to sell our products to that customer.

Our ability to sell our products is highly dependent 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 results of operations.

          Once our products are deployed within our customers' networks, our customers 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 and future enhancements. If we, or our OEMs, system integrators or distributors, do not effectively assist our customers in deploying our products, help our customers quickly resolve post-deployment issues, and provide effective ongoing support, it would adversely affect our ability to sell our products to existing customers and could harm our reputation with potential customers. In addition, as we expand our operations internationally, our support organization will face additional challenges, including those associated with delivering support, training and documentation in languages other than English. As a result, our failure to maintain high quality support and services could have a material adverse effect on our business, operating results and financial condition.

The mobile network infrastructure industry is, and likely will continue to be, characterized by rapid technological changes in networks and standards, which will require us to develop new products and product enhancements, and could render our existing products obsolete.

          Mobile operators have been aggressively upgrading their networks, and new industry standards for access technologies, such as third generation, or 3G, and more advanced fourth generation, or 4G, technologies continue to evolve. Continuing technological changes in the mobile communications industry and in the mobile network infrastructure industry could undermine our competitive position or make our products obsolete, either generally or for particular types of services. Our future success will depend upon our ability to accurately predict and respond to new technology standards. We must develop and introduce a variety of new capabilities and enhancements to our existing product offerings, as well as introduce new product offerings, to address the changing standards and technological needs of the network infrastructure market. A failure to accurately predict and respond to evolving technologies, to introduce on a timely basis new products and enhancements in response to evolving technologies and standards, or to address changing needs in our current markets or expand into new markets may cause existing and potential customers to forego purchases of our products or purchase from our competitors. The introduction of new products embodying new technologies or the emergence of new industry standards could render our existing products uncompetitive from a pricing standpoint, obsolete or unmarketable.

Our products are complex and may take longer to develop than anticipated and we may not recognize revenues from new products or product enhancements until after we have incurred significant development costs.

          Some of our products must be tailored to meet customer specifications. As a result, we often develop new features and enhancements to our products. These product enhancements often take substantial time to develop because of their complexity and because customer specifications sometimes change during the development cycle. We often do not recognize revenue from our new products or enhancements until we have incurred significant development costs, and our operating results will suffer if sales of new products or enhancements fail to meet our expectations.

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There is no assurance that our research and development investments will lead to successful new products or enhancements.

          We will continue to invest in research and development for the introduction of new products and enhancements to existing products designed to improve the capacity, data processing rates and features of our products and services. We must also continue to develop new features and functionality for our products based on specific customer requests and anticipated market needs. However, research and development in the mobile network infrastructure industry is complex, expensive and subject to uncertainty. In 2005 and 2006, our research and development expenses were $18.1 million, or approximately 30% of our total revenues, and $26.0 million, or approximately 28% of our total revenues, respectively; and for the quarter ended March 31, 2007 these expenses were $10.1 million, or approximately 36% of our total revenues. We believe that we must continue to dedicate a significant amount of resources to our research and development efforts to maintain our competitive position. If we continue to expend a significant amount of resources on research and development and our efforts do not lead to the successful introduction of products or product enhancements that are competitive in the marketplace, there could be a material adverse effect on our business, operating results, financial condition and market share. We may not be able to anticipate market needs and develop products and product enhancements that meet those needs, and any new products or product enhancements that we introduce may not achieve any significant degree of market acceptance.

If our products do not interoperate with our customers' networks, installations will be delayed or cancelled, which would harm our business.

          Our products must interoperate with our customers' existing networks, which often have different specifications, utilize multiple protocol standards and products from multiple vendors, and contain multiple generations of products that have been added over time. If we find errors in the existing software or defects in the hardware used in our customers' networks or problematic network configurations or settings, as we have in the past, we may have to modify our software or hardware so that our products will interoperate with our customers' networks. This could cause longer installation times for our products or order cancellations and could harm our relationship with existing and future customers, any of which would adversely affect our business, operating results and financial condition.

          In addition, our customers may require that we demonstrate that our products interoperate with network elements offered by our competitors, and we may need our competitors' cooperation to conduct such testing and validation. Any unwillingness of our competitors to cooperate with us in performing these interoperability tests or our inability to demonstrate interoperability would likely have an adverse effect on our ability to market our products.

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. When deployed, they are critical to the mobile operator networks. Our products have contained and may contain undetected errors, defects or security vulnerabilities. Some errors in our products may only be discovered after a product has been installed and used by mobile operators. Any errors, defects or security vulnerabilities discovered in our products after commercial release could result in loss of revenues or delay in revenue recognition, loss of customers and increased service and warranty cost, any of which could adversely affect our business, operating results and financial condition. In addition, we could face claims for product liability, tort or breach of warranty, including claims relating to changes to our products made by our OEMs, system integrators or distributors. Our contracts with customers generally contain provisions relating to warranty disclaimers and liability limitations, which may be

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ineffective. Defending a lawsuit, regardless of its merit, is costly and may divert management's attention away from the business and adversely affect the market's perception of us and our products. In addition, if our business liability insurance coverage is inadequate or future coverage is unavailable on acceptable terms or at all, our operating results and financial condition could be adversely impacted.

We are susceptible to shortages or price fluctuations in our supply chain. Any shortages or price fluctuations in components used in our products could delay shipment of our products, which could materially adversely affect our business.

          Shortages in components that we use in our products are possible and our ability to predict the availability of such components may be limited. Some of these components are available only from single or limited sources of supply. The process of qualifying alternate sources for components, if available at all, may be time consuming, difficult and costly. In addition, the lead times associated with certain components are lengthy and preclude rapid changes in quantity requirements and delivery schedules. Any growth in our business or the economy is likely to create greater pressures on us and our suppliers to project overall component demand accurately and to establish appropriate component inventory levels. In addition, increased demand by third parties for the components we use in our products may lead to decreased availability and higher prices for those components. We carry very little inventory of our products and product components, and we rely on our suppliers to deliver necessary components to our contract manufacturer in a timely manner based on forecasts we provide. We generally rely on purchase orders rather than long-term contracts with our suppliers. As a result, even if available, we may not be able to secure sufficient components at reasonable prices or of acceptable quality to build products in a timely manner, which would seriously impact our ability to deliver products to our customers, and our business, operating results and financial condition would be adversely affected.

We depend on a single contract manufacturer with whom we do not have a long-term supply contract, and changes to this relationship may result in delays or disruptions that could harm our business.

          We depend on Plexus Corp., an independent contract manufacturer, to manufacture and assemble our products. We rely on purchase orders with our contract manufacturer and do not have long-term supply arrangements in place. As a result, our contract manufacturer is not obligated to supply products to us for any specific period, quantity or price. Our orders may represent a relatively small percentage of the overall orders received by our contract manufacturer from its customers. As a result, fulfilling our orders may not be considered a priority by our contract manufacturer in the event the contract manufacturer is constrained in its ability to fulfill all of its customer obligations in a timely manner.

          It is time consuming and costly to qualify and implement a contract manufacturer relationship. Therefore, if our contract manufacturer suffers an interruption in its business, or experiences delays, disruptions or quality control problems in its manufacturing operations, or we have to change or add additional contract manufacturers, our ability to ship products to our customers would be delayed and our business, operating results and financial condition would be adversely affected.

If we fail to predict accurately our manufacturing requirements, we could incur additional costs or experience manufacturing delays that could harm our business.

          We provide demand forecasts to our contract manufacturer. If we overestimate our requirements, our contract manufacturer may assess charges or we may have liabilities for excess inventory, each of which could negatively affect our gross margins. Conversely, because lead times for required materials and components vary significantly and depend on factors such as the specific

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supplier, contract terms and the demand for each component at a given time, if we underestimate our requirements, our contract manufacturer may have inadequate materials and components required to produce our products, which could interrupt manufacturing of our products and result in delays in shipments and deferral or loss of revenues.

If we fail to retain our key personnel, we may not be able to achieve our anticipated level of growth and our business could suffer.

          Our future depends, in part, on our ability to attract and retain key personnel, including the continued contributions of our executive officers and other key technical personnel, each of whom would be difficult to replace. In particular, Ashraf M. Dahod, our president, chief executive officer and chairman is critical to the management of our business and operations, as well as the development of our strategic direction. The loss of services of Mr. Dahod or other executive officers or key personnel or the inability to continue to attract qualified personnel could have a material adverse effect on our business. Mr. Dahod is not a party to an employment agreement with us and, therefore, may terminate his employment with us at any time, with no advance notice. The replacement of Mr. Dahod would involve significant time and expense and may significantly delay or prevent the achievement of our business objectives.

Competition for our employees is intense, and we may not be able to attract and retain the highly skilled employees that we need to support our business.

          Competition for highly skilled technical personnel is extremely intense and we continue to face difficulty identifying and hiring qualified personnel in many areas of our business. In particular, we face significant challenges hiring and retaining personnel in India for research and development activities because the market for such personnel is increasingly competitive. We may not be able to hire and retain such personnel at compensation levels consistent with our existing compensation and salary structure. Many of the companies with which we compete for hiring experienced employees have greater resources than we have and may be able to offer more attractive terms of employment. In addition, we invest significant time and expense in training our employees, which increases their value to competitors who may seek to recruit them. If we fail to retain our employees, we could incur significant expenses replacing employees and the quality of our products and services and our ability to provide such products and services could diminish, resulting in a material adverse affect on our business. Furthermore, in making employment decisions, particularly in high-technology industries, candidates often consider the value of the equity they are to receive in connection with their employment. Therefore, significant volatility in the price of our stock after this offering may adversely affect our ability to attract or retain personnel.

Our international sales and operations subject us to additional risks that may adversely affect our operating results.

          Over the last several years, we derived a significant portion of our revenues from customers outside the United States, and we continue to expand our international operations. As of March 31, 2007, approximately 58% of our employees were located abroad, including 226 employees located in India. In addition, we have sales and technical support personnel in numerous countries worldwide. We expect to continue to add personnel in additional countries. Any continued expansion into international markets will require significant resources and management attention and will subject us to new regulatory, economic and political risks, and we cannot be sure that any further international expansion will be successful. Among the risks we believe are most likely to affect us with respect to our international operations are:

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          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 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.

We may need additional capital in the future, which may not be available to us on favorable terms, or at all, and may dilute your ownership of our common stock.

          We have historically relied on outside financing and cash from operations to fund our operations, capital expenditures and expansion. We may require additional capital from equity or debt financing in the future to:

          We may not be able to secure timely additional financing on favorable terms, or at all. The terms of any additional financing may place limits on our financial and operating flexibility. If we raise additional funds through further issuances of equity, convertible debt securities or other securities convertible into equity, our existing stockholders could suffer significant dilution in their percentage ownership of our company, and any new securities we issue could have rights, preferences and privileges senior to those of holders of our common stock, including shares of common stock sold in this offering. If we are unable to obtain adequate financing or financing on terms satisfactory to us, if and when we require it, our ability to grow or support our business and to respond to business challenges could be significantly limited.

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

          While we currently have no acquisitions of other businesses pending or planned, we have, from time to time, evaluated acquisition opportunities and may pursue acquisition opportunities in the future. We have very little experience consummating acquisitions, and therefore our ability as an organization to make acquisitions is unproven. 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 may not ultimately strengthen our competitive position or achieve our goals, or such acquisitions may be viewed negatively by customers, financial markets 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 these

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businesses. Acquisitions may disrupt our ongoing operations, divert management from day-to-day responsibilities, increase our expenses or adversely impact our business, operating results and 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, operating results and financial condition.

If we fail to manage future growth effectively, our business could be harmed.

          We have expanded our operations significantly since inception and anticipate that further significant expansion will be required. For example, our revenues increased from $34.4 million in 2004 to $94.4 million in 2006, and the number of our employees increased from 117 at the beginning of 2004 to 458 as of March 31, 2007. This growth has placed significant demands on our management, as well as our financial and operational resources. If we do not effectively manage our future growth, the efficiency of our operations and the quality of our products could suffer, which could adversely affect our business and operating results. To effectively manage this growth, we will need to continue to:

We will incur significant increased costs as a result of operating as a public company, and our management will be required to devote substantial time to new compliance initiatives.

          As a public company, we will incur significant legal, accounting and other expenses that we did not incur as a private company. In addition, the Sarbanes-Oxley Act of 2002, and rules subsequently implemented by the Securities and Exchange Commission and the Nasdaq Stock Market's Global Market, impose additional requirements on public companies, including requiring changes in corporate governance practices. Our management and other personnel will need to devote a substantial amount of time to these compliance initiatives. Moreover, these rules and regulations will increase our legal and financial compliance costs and will make some activities more time-consuming and costly. For example, we expect these rules and regulations to make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced policy limits and coverage or incur substantial additional costs to maintain the same or similar coverage. These rules and regulations could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, our board committees or as executive officers.

          In addition, the Sarbanes-Oxley Act requires, among other things, that we maintain effective internal control over financial reporting and disclosure controls and procedures. In particular, for the year ending December 31, 2008, we must perform system and process evaluation and testing of our internal control over financial reporting to allow management and our independent registered public accounting firm to report on the effectiveness of our internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act. Our testing, or the subsequent testing by our independent registered public accounting firm, may reveal deficiencies in our internal control over financial reporting that are deemed to be material weaknesses. Our compliance with Section 404 will require that we incur substantial expense and expend significant management time on compliance-related issues. We will need to hire additional accounting and financial staff with appropriate public company experience and technical accounting knowledge. Moreover, if we are

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not able to comply with the requirements of Section 404 in a timely manner, or if we or our independent registered public accounting firm identify deficiencies in our internal control over financial reporting that are deemed to be material weaknesses, the market price of our stock could decline and we could be subject to sanctions or investigations by the Nasdaq Stock Market's Global Market, the Securities and Exchange Commission or other regulatory authorities, which would require additional financial and management resources.

We are subject to governmental export and import controls that could subject us to liability or impair our ability to compete in international markets.

          Our products are subject to United States export controls and may be exported outside the United States only with the required level of export license or through an export license exception, because we incorporate encryption technology into our products. In addition, various countries regulate the import of certain encryption technology and have enacted laws that could limit our ability to distribute our products or could limit our customers' ability to implement our products in those countries. Changes in our products or changes in export and import regulations may create delays in the introduction of our products in international markets, prevent our customers with international operations from deploying our products throughout their networks or, in some cases, prevent the export or import of our products to certain countries altogether. Any change in export or import laws and regulations, shifts in approach to the enforcement or scope of existing laws and regulations, or change in the countries, persons or technologies targeted by such regulations, could result in decreased use of our products by, or in our decreased ability to export or sell our products to, existing or potential customers with international operations. Any decreased use of our products or limitation on our ability to export or sell our products would likely adversely affect our business, operating results and financial condition.

Compliance with environmental matters and worker health and safety laws could be costly, and noncompliance with these laws could have a material adverse effect on our results of operations, expenses and financial condition.

          Some of our operations use substances regulated under various federal, state, local and international laws governing the environment and worker health and safety, including those governing the discharge of pollutants into the ground, air and water, the management and disposal of hazardous substances and wastes, and the cleanup of contaminated sites. Some of our products are subject to various federal, state, local and international laws governing chemical substances in electronic products. We could be subject to increased costs, fines, civil or criminal sanctions, third-party property damage or personal injury claims if we violate or become liable under environmental and/or worker health and safety laws.

          In January 2003, the European Union, or EU, issued two directives relating to chemical substances in electronic products. The Waste Electrical and Electronic Equipment Directive, referred to as WEEE, requires producers of electrical goods to pay for specified collection, recycling, treatment and disposal of past and future covered products. The deadline for enacting and implementing the WEEE directive was August 13, 2004, although extensions were granted in some countries. Producers became financially responsible under WEEE related legislation beginning in August 2005. The other directive, the Restriction on the use of certain Hazardous Substances, referred to as RoHS, restricts lead and other hazardous substances in electronic equipment placed on the EU market after July 1, 2006. If we fail to comply with these directives, we may suffer a loss of revenues, be unable to sell our products in certain markets and countries, be subject to penalties and fines or suffer a competitive disadvantage. Similar legislation could be enacted in other jurisdictions, including in China, Japan or the United States, and the scope of new legislation with respect to currently unregulated substances is uncertain. Costs to comply with WEEE or RoHS related legislation or similar future legislation, if applicable, could include costs associated with

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modifying our products, recycling and other waste processing costs, legal and regulatory costs and insurance costs. We are currently in compliance with these directives; however, we have incurred significant costs related to compliance with current requirements. The costs to comply with current and future environmental and worker health and safety laws may have a material adverse effect on our results of operations, expenses and financial condition.

Risks Related to our Intellectual Property

Our ability to compete and the success of our business could be jeopardized if we are unable to rely on our patent rights.

          Our success and ability to compete depends in part upon our ability to obtain protection in the United States and other countries for our products by establishing and maintaining intellectual property rights relating to or incorporated into our technology and products. We own a variety of patents and patent applications in the United States and corresponding patents and patent applications in foreign jurisdictions. However, we have not obtained patent protection in each market in which we plan to compete. To date, our patent portfolio has not prevented other companies from competing against us, and we do not know how successful we would be if we sought to enforce our patent rights against suspected infringers. Our pending and future patent applications may not issue as patents or, if issued, may not issue in a form that will be advantageous to us. Even if issued, patents may be challenged, narrowed, invalidated or circumvented, which could limit our ability to stop competitors from marketing similar products or limit the length of term of patent protection we may have for our products. Changes in either patent laws or in interpretations of patent laws in the United States and other countries may diminish the value of our intellectual property or narrow the scope of our patent protection. Any circumstance or change that results in patent protection not being available for our products could adversely affect our business, financial condition and results of operations.

If we are unable to protect the confidentiality of our unpatented proprietary information and know-how, the value of our technology and products could be adversely affected.

          In addition to patented technology, we rely upon unpatented proprietary technology, processes and know-how. We generally seek to protect this information in part by confidentiality agreements with our employees, consultants and third parties. These agreements may be breached, and we may not have adequate remedies for any such breach. In addition, our trade secrets may otherwise become known or be independently developed by competitors. If we are unable to protect the confidentiality of our proprietary information and know-how, the value of our technology and products could be adversely affected, which could in turn adversely affect our business, financial condition and results of operations.

Claims by others that we infringe their proprietary technology could force us to incur significant costs.

          Third parties have asserted, and may assert in the future, claims that our products infringe patents or patent applications under which we do not hold licenses or other rights. Third parties may own or control these patents and patent applications in the United States and abroad. These third parties have brought, and could in the future bring, claims against us that would cause us to incur substantial expenses and, if successfully asserted against us, could cause us to pay substantial damages. Further, if a patent infringement suit were brought against us, we could be forced to stop or delay manufacturing or sales of the product that is the subject of the suit. In addition we could be forced to redesign the product that uses any allegedly infringing technology.

          We are presently defending two patent infringement lawsuits brought by UTStarcom, Inc. In February 2005, UTStarcom filed a lawsuit asserting infringement of a patent in the United States

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District Court for the Northern District of California relating to a prepaid billing function we provided to one of our customers. This patent lawsuit by UTStarcom has been stayed pending a reissue proceeding of the patent asserted in the case. Such a reissue proceeding may take a year or longer to complete. After the reissue proceeding, the stay of the lawsuit likely will be lifted and the lawsuit may proceed. If this occurs, we will continue to defend ourselves in this litigation, which will require a significant investment of time and financial resources. A finding that we have infringed this patent may require us to pay damages based on our past sale of the prepaid billing function and, in addition, may force us to limit or cease development, manufacturing and sales of the prepaid billing function. This could adversely affect our business, financial condition and results of operations.

          In May 2007, UTStarcom filed a lawsuit against us and a number of our employees and former employees in the United States District Court for the Northern District of Illinois alleging violations of the Illinois trade secrets act, infringement of five patents assigned to UTStarcom, intentional interference with UTStarcom's business relations and declarations of ownership relating to one of our patents and three of our patent applications. The complaint contains allegations, among others, that a number of former employees of a business unit UTStarcom acquired, who subsequently worked for us, took UTStarcom's trade secrets with them and improperly used those trade secrets to develop, manufacture and market our 3G wireless products, and that such products incorporate UTStarcom confidential technical information, including UTStarcom's proprietary virtual private network and EV-DO features. UTStarcom further alleges that we have disclosed UTStarcom's trade secrets in one of our patents and three of our patent applications, and that these patent applications legally belong to UTStarcom based on the inventors' previous work at the business unit acquired by UTStarcom. In the lawsuit, UTStarcom seeks unspecified monetary damages, injunctive relief, declarations of ownership relating to the specified patent and patent applications owned by us, costs and attorneys fees. We will vigorously defend ourselves in this litigation, which will require significant investment of time and financial resources. A finding in UTStarcom's favor in this lawsuit may require us to pay substantial damages based on the past sales of our ST16 product, may force us to limit or cease development, manufacturing and sales of the ST16 and ST40, which are our only product platforms, may require that key employees be transferred to other positions or functions, or temporarily prohibited from working for us, and may result in the loss or assignment of ownership of a specified patent and three patent applications owned by us. This could adversely affect our business, financial condition and results of operations.

          As a result of patent infringement claims, or in order to avoid potential claims, we may choose or be required to seek a license from the third party and be required to pay license fees or royalties or both. These licenses may not be available on acceptable terms, or at all. Even if we were able to obtain a license, the rights may be nonexclusive, which could result in our competitors gaining access to the same intellectual property. Ultimately, we could be forced to cease some aspect of our business operations if, as a result of actual or threatened patent infringement claims, we are unable to enter into licenses on acceptable terms. This could significantly and adversely affect our business, financial condition and results of operations.

          In addition to infringement claims against us, we may become a party to other types of patent litigation and other proceedings, including interference proceedings declared by the United States Patent and Trademark Office and opposition proceedings in the European Patent Office, regarding intellectual property rights with respect to our products and technology. The cost to us of any patent litigation or other proceeding, even if resolved in our favor, could be substantial. Some of our competitors may be able to sustain the costs of such litigation or proceedings more effectively than we can because of their greater financial resources. Uncertainties resulting from the initiation and continuation of patent litigation or other proceedings could have a material adverse effect on our

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ability to compete in the marketplace. Patent litigation and other proceedings may also require significant commitments of time by our management.

Our use of open source could impose limitations on our ability to commercialize our products.

          We incorporate open source software into our products. Although we monitor our use of open source software closely, the terms of many open source licenses to which we are subject have not been interpreted by United States or foreign courts, and there is a risk that such licenses could be construed in a manner that imposes unanticipated conditions or restrictions on our ability to commercialize our products. In such event, we could be required to seek licenses from third parties in order to continue offering our products, to re-engineer our products or to discontinue sales of our products, any of which could materially adversely affect our business.

We rely on the availability of licenses for intellectual property from third parties, and if these licenses are not available to us on commercially reasonable terms, product sales and development may be delayed.

          We incorporate certain third-party technologies, including software programs, into our products and may need to utilize additional third-party technologies in the future. However, licenses to relevant third-party technology may not continue to be available to us on commercially reasonable terms, or at all. Therefore, we could face delays in product releases until alternative technology can be identified, licensed or developed, and integrated into our current products. These delays, if they occur, could materially adversely affect our business.

Risks Related to this Offering and Ownership of Our Common Stock

The market price of our common stock may be volatile, and you may not be able to resell shares of our common stock at or above the price you paid.

          Prior to this offering there has been no public market for shares of our common stock, and an active public market for these shares may not develop or be sustained after this offering. The initial public offering price for our common stock will be determined through negotiations with the representatives of the underwriters. This price will not necessarily reflect the price at which investors in the market will be willing to buy and sell our shares following this offering. In addition, the trading price of our common stock is likely to be highly volatile and could be subject to wide fluctuations in response to various factors. Some of the factors that may cause the market price of our common stock to fluctuate include:

23


          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.

Future sales of shares by existing stockholders could cause our stock price to decline.

          If our existing stockholders sell, or indicate an intention to sell, substantial amounts of our common stock in the public market after the contractual lock-up agreements described below expire, subject to extension or modification as discussed below, and other restrictions on resale lapse, the trading price of our common stock could decline below the initial public offering price. Based on shares outstanding as of March 31, 2007, upon completion of this offering, we will have outstanding 62,417,462 shares of common stock, assuming no exercise of the underwriters' over-allotment option. Of these shares, 48,716,402 shares of common stock will be subject to a 180-day contractual lock-up with the underwriters. Goldman, Sachs & Co. and Lehman Brothers Inc., acting as co-representatives of the underwriters, may permit our officers, directors, employees and current stockholders who are subject to the contractual lock-up to sell shares prior to the expiration of the lock-up agreements.

          The 180-day contractual lock-up period may be extended or reduced if we announce, or are scheduled to announce, earnings or other material news or event within 15 days before or after the last day of the 180-day lock-up period. If during the last 15 days of the 180-day contractual lock-up period we issue an earnings release or announce material news or a material event, the contractual lock-up period will continue to apply until the expiration of the 18-day period beginning on the issuance of the earnings release or the announcement of the material news or material event. Prior to the expiration of the 180-day contractual lock-up period, if we announce that we will release earnings results during the 15-day period following the last day of the contractual lock-up period, the lock-up restrictions on resale will expire on the day 18 days prior to the scheduled earnings release so long as we issue a press release and accompanying current report on Form 8-K announcing the early release date at least three days before the early release date. If we do not publicly announce the early release date by such time, the lock-up restrictions will instead continue to apply until the expiration of the 18-day period beginning on the issuance of the earnings release.

          In addition, there will also be 4,701,060 shares of common stock subject to a 180-day contractual lock-up with us. We may release these shares from these restrictions at our discretion without the prior written consent of either Goldman, Sachs & Co. or Lehman Brothers Inc.

          After each of the lock-up agreements pertaining to this offering expire 180 days from the date of this prospectus, or such shorter or longer period described above, up to an additional 53,417,462 shares will be eligible for sale in the public market, 40,041,451 of which are held by directors, executive officers and other affiliates and will be subject to volume limitations under Rule 144 under the Securities Act and, in certain cases, various vesting agreements. In addition, after this offering, we intend to register approximately 11,928,763 shares of our common stock that we have issued or may issue under our equity incentive plans. Once we register these shares, they can be freely sold in the public market upon issuance, subject to the lock-up agreements, applicable vesting schedules and, for directors, executive officers and other affiliates, volume

24



limitations under Rule 144. If these additional shares are sold, or if it is perceived that they will be sold, in the public market, the trading price of our common stock could decline.

          Some of our existing stockholders have demand and incidental registration rights to require us to register with the Securities and Exchange Commission up to 45,064,641 shares of our common stock. If we register these shares of common stock, the stockholders would be able to sell those shares freely in the public market.

          See the section titled "Shares Eligible for Future Sale" for a discussion of the lock-up agreements and other transfer restrictions.

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

          We do not expect to pay cash dividends on our common stock, including the common stock issued in this offering. Any future dividend payments are within the absolute discretion of our board of directors and will depend on, among other things, our results of operations, working capital requirements, capital expenditure requirements, financial condition, contractual restrictions, business opportunities, anticipated cash needs, provisions of applicable law and other factors that our board of directors may deem relevant. We may not generate sufficient cash from operations in the future to pay dividends on our common stock. See "Dividend Policy."

As a new investor, you will experience substantial dilution as a result of this offering and future equity issuances.

          The initial public offering price per share is substantially higher than the pro forma net tangible book value per share of our common stock outstanding prior to this offering. As a result, investors purchasing common stock in this offering will experience immediate substantial dilution of $8.22 per share, based on an assumed initial public offering price of $10.00 per share, the mid-point of the estimated price range on the cover of this prospectus. In addition, we have issued options to acquire common stock at prices significantly below the initial public offering price. To the extent outstanding options are ultimately exercised, there will be further dilution to investors in this offering. This dilution is due in large part to the fact that our earlier investors paid substantially less than the initial public offering price when they purchased their shares of common stock. In addition, if the underwriters exercise their over-allotment option or if we issue additional equity securities, you will experience additional dilution.

Insiders will continue to have substantial control over us after this offering and will be able to influence corporate matters.

          Upon completion of this offering, our directors and executive officers and their affiliates will beneficially own, in the aggregate, approximately 64.6% of our outstanding common stock, assuming no exercise of the underwriters' over-allotment option. As a result, these stockholders will be able to exercise significant influence over all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions, such as a merger or other sale of our company or its assets. This concentration of ownership could limit your ability to influence corporate matters and may have the effect of delaying or preventing a third-party from acquiring control over us. For information regarding the ownership of our outstanding stock by our executive officers and directors and their affiliates, see the section titled "Principal and Selling Stockholders."

25



If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, our stock price and trading volume could decline.

          The trading market for our common stock will depend in part on the research and reports that securities or industry analysts publish about us or our business. We do not currently have and may never obtain research coverage by securities and industry analysts. If no securities or industry analysts commence coverage of our company, the trading price for our stock would be negatively impacted. In the event we obtain securities or industry analyst coverage, if one or more of the analysts who covers us downgrades our stock or publishes inaccurate or unfavorable research about our business, our stock price would likely decline. If one or more of these analysts ceases coverage of our company or fails to publish reports on us regularly, demand for our stock could decrease, which could cause our stock price and trading volume to decline.

Anti-takeover provisions in our charter documents and Delaware law could discourage, delay or prevent a change in control of our company and may affect the trading price of our common stock.

          We are a Delaware corporation and the anti-takeover provisions of the Delaware General Corporation Law may discourage, delay or prevent a change in control by prohibiting us from engaging in a business combination with an interested stockholder for a period of three years after the person becomes an interested stockholder, even if a change in control would be beneficial to our existing stockholders. In addition, our restated certificate of incorporation and amended and restated bylaws may discourage, delay or prevent a change in our management or control over us that stockholders may consider favorable. Our restated certificate of incorporation and amended and restated bylaws, which will be in effect as of the closing of this offering:

          For more information regarding these and other provisions, see the section titled "Description of Capital Stock — Anti-Takeover Effects of Our Charter and Bylaws and Delaware Law."

Our management will have broad discretion over the use of the proceeds we receive in this offering and might not apply the proceeds in ways that increase the value of your investment.

          Our management will have broad discretion to use the net proceeds from this offering, and you will be relying on the judgment of our management regarding the application of these proceeds. Our management might not apply the net proceeds of this offering in ways that increase the value of your investment. We expect to use the net proceeds from this offering for general corporate purposes, including working capital and capital expenditures, which may in the future include investments in, or acquisitions of, complementary businesses, services or technologies. We have not allocated these net proceeds for any specific purposes. You will not have the opportunity to influence our decisions on how to use the net proceeds from this offering.

26



SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

          This prospectus contains forward-looking statements that involve substantial risks and uncertainties. All statements, other than statements of historical facts, included in this prospectus regarding our strategy, future operations, future financial position, future revenues, projected costs, prospects, plans, objectives of management and expected market growth are forward-looking statements. The words "anticipate," "believe," "estimate," "expect," "intend," "may," "plan," "predict," "project," "will," "would" and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. These forward-looking statements include, among other things, statements about:

          We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements we make. We have included important factors in the cautionary statements included in this prospectus, particularly in the "Risk Factors" section, that could cause actual results or events to differ materially from the forward-looking statements that we make. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments we may make.

          You should read this prospectus and the documents that we have filed as exhibits to the registration statement, of which this prospectus is a part, completely and with the understanding that our actual future results may be materially different from what we expect. We do not assume any obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

27



USE OF PROCEEDS

          We estimate that we will receive net proceeds from this offering of approximately $81.9 million, based on an assumed initial public offering price of $10.00 per share, which is the midpoint of the price range set forth on the cover of this prospectus, and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us. If the underwriters exercise their option to purchase additional shares, we estimate that we will receive an additional $14.7 million in net proceeds. At an assumed public offering price of $10.00 per share, the selling stockholders will receive $14.3 million from their sale of our common stock in this offering, after deducting the underwriting discount. We will not receive any proceeds from the sale of shares of common stock by the selling stockholders. Our president and chief executive officer is selling shares of common stock in this offering. See "Principal and Selling Stockholders."

          A $1.00 increase (decrease) in the assumed initial public offering price of $10.00 would increase (decrease) the net proceeds to us from this offering by $8.4 million and increase (decrease) the net proceeds to the selling stockholders from this offering by $1.4 million, assuming the number of shares offered by us and the selling stockholders, as set forth on the cover of this prospectus, remains the same.

          We intend to use the net proceeds from this offering for working capital and other general corporate purposes, which may include financing our growth, developing new products, and funding capital expenditures, acquisitions and investments. In addition, the other principal purposes for this offering are to:

We have not yet determined with any certainty the manner in which we will allocate these net proceeds. Management will retain broad discretion in the allocation and use of the net proceeds from this offering. The amounts and timing of these expenditures will vary depending on a number of factors, including the amount of cash generated by our operations, competitive and technological developments, and the rate of growth, if any, of our business. For example, if we were to expand our operations more rapidly than anticipated by our current plans, a greater portion of the proceeds would likely be used for the construction and expansion of facilities, working capital and other capital expenditures. Alternatively, if we were to engage in an acquisition that contained a significant cash component, some or all of the proceeds might be used for that purpose.

          Although we may use a portion of the proceeds for the acquisition of, or investment in, companies, technologies, products or assets that complement our business, we have no present understandings, commitments or agreements to enter into any acquisitions or make any investments. We cannot assure you that we will make any acquisitions or investments in the future.

          Pending specific utilization of the net proceeds as described above, we intend to invest the net proceeds of the offering in short-term investment grade and U.S. government securities.

28




DIVIDEND POLICY

          We have never paid or declared any cash dividends on our common stock. We currently intend to retain earnings, if any, to finance the growth and development of our business, and we do not expect to pay any cash dividends on our common stock in the foreseeable future. Payment of future dividends, if any, will be at the discretion of the board of directors and will depend on our financial condition, results of operations, capital requirements, restrictions contained in current or future financing instruments, and other factors the board deems relevant.

29



CAPITALIZATION

          The following table sets forth our capitalization as of March 31, 2007:

          You should read this table together with our financial statements and the related notes appearing at the end of this prospectus and the "Management's Discussion and Analysis of Financial Condition and Results of Operations" section of this prospectus.

 
  As of March 31, 2007
 
 
  Actual
  Pro Forma
  Pro Forma
As Adjusted

 
 
  (unaudited)
(in thousands, except share and per share data)

 
Redeemable convertible preferred stock, $0.01 par value:                    
64,587,861 shares authorized, issued and outstanding, actual; no shares authorized, issued or outstanding, pro forma and pro forma as adjusted   $ 132,267   $   $  
Stockholders' equity (deficit):                    
  Preferred stock, $0.001 par value:                    
no shares authorized, issued or outstanding, actual and pro forma; 5,000,000 shares authorized and no shares issued or outstanding, pro forma as adjusted              
  Common stock, $0.001 par value:                    
80,000,000 shares authorized and 8,587,744 shares issued and outstanding, actual; 250,000,000 shares authorized and 52,875,729 shares issued and outstanding pro forma; 250,000,000 shares authorized and 61,875,729 shares issued and outstanding, pro forma as adjusted(1)     9     53     62  
Additional paid-in capital     120     132,343     214,238  
Accumulated other comprehensive loss     (5 )   (5 )   (5 )
Accumulated deficit     (103,212 )   (103,212 )   (103,212 )
   
 
 
 
    Total stockholders' equity (deficit)   $ (103,088 ) $ 29,179   $ 111,083  
   
 
 
 

(1)
For accounting purposes only, the number of issued and outstanding shares does not include 541,733 shares of restricted stock. These shares are subject to repurchase by us until such shares are vested. See Note 11 to our consolidated financial statements for more information.

30


          A $1.00 increase (decrease) in the assumed initial public offering price of $10.00 would increase (decrease) each of additional paid-in capital and total stockholders' equity in the pro forma as adjusted column by $8.4 million, assuming the number of shares offered by us, as set forth on the cover of this prospectus, remains the same and after deducting the estimated underwriting discount and offering expenses payable by us.

          The table above is based on 53,417,462 shares of our common stock outstanding as of March 31, 2007 (as adjusted to give effect to a two-for-three reverse stock split that was effected on May 1, 2007) and does not include:

31



DILUTION

          If you invest in our common stock, your interest will be diluted immediately to the extent of the difference between the initial public offering price per share you will pay in this offering and the pro forma as adjusted net tangible book value per share of our common stock after this offering. Our pro forma net tangible book value as of March 31, 2007 was $29.2 million, or $0.55 per share of common stock. Our pro forma net tangible book value per share set forth below represents our total tangible assets less total liabilities, divided by the number of shares of our common stock outstanding on March 31, 2007, and assumes the conversion of all of our outstanding preferred stock into shares of our common stock immediately prior to the closing of this offering.

          After giving effect to our issuance and sale of 9,000,000 shares of common stock in this offering at an assumed initial public offering price of $10.00 per share, the mid-point of the estimated price range shown on the cover of this prospectus, after deducting the estimated underwriting discounts and offering expenses payable by us, the pro forma as adjusted net tangible book value as of March 31, 2007 would have been $111.1 million, or $1.78 per share. This represents an immediate increase in net tangible book value to existing stockholders of $1.23 per share. The initial public offering price per share will significantly exceed the net tangible book value per share. Accordingly, new investors who purchase shares of common stock in this offering will suffer an immediate dilution of their investment of $8.22 per share. The following table illustrates this per share dilution to the new investors purchasing shares of common stock in this offering without giving effect to the over-allotment option granted to the underwriters:

Assumed initial public offering price per share         $ 10.00
Pro forma net tangible book value per share as of March 31, 2007   $ 0.55      
Increase per share attributable to sale of shares of common stock in this offering     1.23      
   
     
Pro forma as adjusted net tangible book value per share after the offering           1.78
         
Dilution per share to new investors         $ 8.22
         

          A $1.00 increase (decrease) in the assumed initial public offering price of $10.00 per share would increase (decrease) the pro forma net tangible book value by $8.4 million, the pro forma net tangible book value per share after this offering by $0.13 per share and the dilution in pro forma net tangible book value per share to investors in this offering by $0.87 per share, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discount and offering expenses payable by us.

          If the underwriters exercise their over-allotment option in full, the pro forma as adjusted net tangible book value will increase to $1.97 per share, representing an immediate increase to existing stockholders of $0.19 per share and an immediate dilution of $8.03 per share to new investors. If any shares are issued in connection with outstanding options, you will experience further dilution.

          The following table summarizes, on a pro forma basis as of March 31, 2007, giving effect to the conversion of all outstanding preferred stock into common stock, the differences between the number of shares of common stock purchased from us, the total consideration paid to us, and the average price per share paid by existing stockholders and by new investors purchasing shares of common stock in this offering. The calculation below is based on an assumed initial public offering price of $10.00 per share, the mid-point of the estimated price range shown on the cover of this

32



prospectus, before the deduction of the estimated underwriting discount and offering expenses payable by us:

 
  Shares Purchased
  Total Consideration
   
 
  Average Price
Per Share

 
  Number
  %
  Amount
  %
Existing stockholders   53,417,462   85.6 % $ 100,349,000   52.7 % $ 1.88
New investors   9,000,000   14.4     90,000,000   47.3   $ 10.00
   
 
 
 
     
Total   62,417,462   100 % $ 190,349,000   100 %    
   
 
 
 
     

          The tables above assume no exercise of options to purchase shares of common stock outstanding as of March 31, 2007. At March 31, 2007, there were 7,548,235 shares of common stock issuable upon exercise of outstanding options at a weighted average exercise price of $2.01 per share. In addition, the table above excludes 139,091 shares of common stock available for future issuance under our option plan at March 31, 2007.

          If the underwriters exercise their over-allotment option in full, the number of shares held by new investors will increase to 10,580,226, or 16.5% of the total number of shares of common stock outstanding after this offering.

33



SELECTED CONSOLIDATED FINANCIAL DATA

          The following tables summarize our consolidated financial data for the periods presented. You should read the following selected consolidated financial data in conjunction with our financial statements and the related notes appearing at the end of this prospectus and the "Management's Discussion and Analysis of Financial Condition and Results of Operations" section of this prospectus.

          We have derived the statement of operations data for the years ended December 31, 2004, 2005 and 2006 and the balance sheet data as of December 31, 2005 and 2006 from our audited consolidated financial statements, which are included in this prospectus. We have derived the statement of operations data for the year ended December 31, 2003 and the balance sheet data as of December 31, 2003 and 2004 from our audited consolidated financial statements, which are not included in this prospectus. We have derived the statement of operations data for the year ended December 31, 2002 and the balance sheet data as of December 31, 2002 from our unaudited consolidated financial statements, which are not included in this prospectus. We derived the consolidated financial data for the three months ended March 31, 2006 and 2007 and as of March 31, 2007 from our unaudited consolidated financial statements, which are included elsewhere in this prospectus. In the opinion of management, the unaudited consolidated financial statements have been prepared on the same basis as our audited financial statements and include all adjustments, consisting of normal recurring adjustments and accruals, necessary for the fair statement of the financial information set forth in those statements. Our historical results for any prior period are not necessarily indicative of results to be expected for any future period.

 
  Year Ended December 31,
  Three Months Ended March 31,
 
 
  2002
  2003
  2004
  2005
  2006
  2006
  2007
 
 
  (unaudited)

   
   
   
   
  (unaudited)

 
 
  (in thousands, except per share data)

 
Statement of Operations Data:                                            
Revenues   $   $ 182   $ 34,395   $ 59,660   $ 94,350   $ 14,434   $ 27,642  
Cost of revenues     410     1,109     13,445     13,643     27,726     4,234     5,825  
   
 
 
 
 
 
 
 
Gross profit     (410 )   (927 )   20,950     46,017     66,624     10,200     21,817  
   
 
 
 
 
 
 
 
Operating expenses:                                            
  Research and development     18,500     14,748     13,303     18,107     25,980     3,642     10,066  
  Sales and marketing     4,417     8,289     18,445     19,785     30,311     5,160     7,069  
  General and administrative     1,954     2,470     3,185     7,352     8,515     1,516     2,844  
   
 
 
 
 
 
 
 
  Total operating expenses     24,871     25,507     34,933     45,244     64,806     10,318     19,979  
   
 
 
 
 
 
 
 
Income (loss) from operations     (25,281 )   (26,434 )   (13,983 )   773     1,818     (118 )   1,838  
Other income (expense), net     (484 )   (8 )   95     644     2,237     420     710  
   
 
 
 
 
 
 
 
Income (loss) before income tax expense     (25,765 )   (26,442 )   (13,888 )   1,417     4,055     302     2,548  
Income tax expense             (160 )   (513 )   (413 )   (50 )   (243 )
   
 
 
 
 
 
 
 
Net income (loss)   $ (25,765 ) $ (26,442 ) $ (14,048 ) $ 904   $ 3,642   $ 252   $ 2,305  
   
 
 
 
 
 
 
 
Accretion of redeemable convertible preferred stock     (2,723 )   (4,397 )   (6,266 )   (7,349 )   (7,988 )   (1,997 )   (1,997 )
   
 
 
 
 
 
 
 
Net income (loss) applicable to common stockholders   $ (28,488 ) $ (30,839 ) $ (20,314 ) $ (6,445 ) $ (4,346 ) $ (1,745 ) $ 308  
   
 
 
 
 
 
 
 
                                             

34


Net income (loss) per share applicable to common stockholders:                                            
  Basic   $ (8.84 ) $ (6.39 ) $ (3.28 ) $ (0.97 ) $ (0.62 ) $ (0.26 ) $ 0.01  
   
 
 
 
 
 
 
 
  Diluted   $ (8.84 ) $ (6.39 ) $ (3.28 ) $ (0.97 ) $ (0.62 ) $ (0.26 ) $ 0.00  
   
 
 
 
 
 
 
 

Weighted average shares used in computing net income (loss) per share applicable to common shareholders:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
  Basic     3,223     4,825     6,197     6,642     7,026     6,746     7,719  
   
 
 
 
 
 
 
 
  Diluted     3,223     4,825     6,197     6,642     7,026     6,746     13,311  
   
 
 
 
 
 
 
 

Pro forma net income (loss) per share (unaudited)(1):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
  Basic                           $ 0.07         $ 0.04  
                           
       
 
  Diluted                           $ 0.07         $ 0.04  
                           
       
 

Weighted average shares used in computing pro forma net income (loss) per share (unaudited):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
  Basic                             51,314           52,007  
                           
       
 
  Diluted                             54,706           57,599  
                           
       
 

(1)
The pro forma net income (loss) per common share, basic and diluted, has been calculated assuming the conversion of all outstanding redeemable convertible preferred stock into common stock upon the closing of this offering and the elimination of the accretion of redeemable convertible preferred stock.

 
  As of December 31,
   
 
 
  March 31,
2007

 
 
  2002
  2003
  2004
  2005
  2006
 
 
  (unaudited)

   
   
   
   
  (unaudited)

 
 
  (in thousands)

 
Balance Sheet Data:                                      
Cash, cash equivalents and short-term investments   $ 13,653   $ 2,036   $ 20,819   $ 37,489   $ 60,154   $ 50,242  
Working capital     11,090     1,889     10,002     41,490     19,305     20,731  
Total assets     21,412     17,262     63,892     84,353     104,267     100,267  
Indebtedness             197     33          
Redeemable convertible preferred stock     56,786     64,153     97,043     122,282     130,270     132,267  
Total stockholders' deficit     (46,434 )   (77,091 )   (97,092 )   (103,202 )   (105,511 )   (103,088 )

35



MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

          You should read the following discussion and analysis of our financial condition and results of operations together with our financial statements and the related notes and other financial information included elsewhere in this prospectus. Some of the information contained in this discussion and analysis or set forth elsewhere in this prospectus, including information with respect to our plans and strategy for our business and related financing, includes forward-looking statements that involve risks and uncertainties. You should review the "Risk Factors" section of this prospectus for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

Overview

          Starent Networks is a leading provider of infrastructure hardware and software products and services that enable mobile operators to deliver multimedia services to their subscribers. We have created hardware and software products that provide network functions and services, including access from a wide range of radio networks to the operator's packet core network. Our products and services also provide management of subscriber sessions moving between networks and application of billing and other session policies. Our products and services provide high performance and system intelligence by combining significant computing power, memory and traffic handling capabilities with a flexible, high availability operating system and other proprietary software. Our products integrate multiple network functions and services needed for the delivery of advanced multimedia services, such as video, Internet access, voice-over-IP, e-mail, mobile TV, photo sharing and gaming.

          Our products consist of both hardware and software and can be configured to meet a number of customer needs. A typical purchase consists of our ST16, the Starent operating system and other proprietary software, and our Starent Web EMS management system. We recently announced the ST40, which provides improved performance, capacity and functionality and is expected to be generally available in the third quarter of 2007. A customer typically purchases our products with specific capacity and functionality, and may upgrade their system over time through a combination of software and hardware purchases. We sell our products and services to mobile operators around the world both directly and indirectly through our relationships with OEMs, system integrators and distributors. Since the first commercial deployment of our products in 2003, our products have been deployed by over 60 mobile operators in 25 countries. To date, we have had the greatest success in the CDMA market, but have begun to focus on the GSM/UMTS market. We believe penetration of the GSM/UMTS market is important to our future growth since mobile operators utilizing this technology provide services to approximately 80% of the worldwide mobile voice and data services subscribers.

          We received our first purchase order from one of the world's largest GSM operators in June 2006, and we plan to expand our current relationships, and to develop new relationships, with GSM/UMTS mobile operators. Many of these operators are located outside of the United States and developing these relationships requires significant time and various interoperability and verification testing. Therefore, these activities will require continued substantial investment in our sales and marketing personnel. We expect to begin recording revenues from shipments of the ST40 in the fourth quarter of 2007. Our revenue growth will depend on the acceptance of our ST40, the continued acceptance of our ST16 and applications and services related to our platforms, further penetration of the GSM/UMTS market, increased adoption of mobile multimedia services and continued migration to packet-based networks by mobile operators.

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          Since our inception in August 2000, we have raised an aggregate of approximately $100 million through a series of equity financings, a portion of which we invested in expanding our research and development organization, building our sales force and initiating our marketing and administration operations. We have incurred significant losses to date, and as of March 31, 2007 we had an accumulated deficit of $103.2 million. We became profitable in 2005 and were also profitable in 2006. Our profitability will be affected by additional expenses that we incur to expand sales, marketing, research and development and general and administrative capabilities in order to grow our business.

          We maintain our corporate headquarters in Tewksbury, Massachusetts, and also have sales and development offices in various locations worldwide. We conduct our research and development activities at two locations in India and two locations in the United States. As of March 31, 2007, we had 458 employees worldwide. Our revenues for 2006 were $94.4 million and $27.6 million for the three months ended March 31, 2007, our net income for 2006 was $3.6 million and $2.3 million for the three months ended March 31, 2007 and we had $63.7 million and $53.5 million of deferred revenue as of December 31, 2006 and March 31, 2007, respectively.

          Our revenues consist of both product revenues and services revenues. We derive product revenues from the sale of our hardware products and the licensing of our software. Services revenues are generated from:

          We recognize revenue in accordance with Statement of Position, or SOP 97-2, Software Revenue Recognition and SOP 98-9, Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions. Accordingly, revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the price is fixed or determinable and collection is probable.

          Mobile operators can purchase our products and license our software in various configurations, depending on their requirements for capacity, features and protocols. Typically, a mobile operator purchases a small amount of equipment for testing and trial purposes and, once testing is complete, purchases the necessary products to meet their initial capacity and feature requirements. As their capacity requirements increase, operators may purchase additional hardware or license additional software. The level of our sales is significantly influenced by the extent to which mobile operators make capital investments to enhance and expand their networks to provide multimedia services. Mobile operators' capital investments will be influenced by the demand for multimedia services by their customers.

          We offer our products and services through our direct sales force to mobile operators and indirectly through relationships with OEMs, system integrators and distributors. The OEMs, system integrators and distributors generally purchase our products after they have received a purchase order from their customers and do not maintain an inventory of our products in anticipation of sales to their customers.

          In 2004, we entered into OEM agreements with Nortel Networks relating to the CDMA market and the GSM/UMTS market. Sales to Nortel Networks, all of which were made under the CDMA agreement, accounted for more than 40% of our revenues in 2006. In December 2006, we terminated both OEM agreements in part because we were no longer strategically aligned with

37


Nortel Networks on future packet core products for mobile operators. Under the terms of the CDMA agreement, Nortel Networks has a right to continue to purchase our CDMA products for delivery through December 2008. Although the termination of the CDMA agreement could disrupt our relationships with CDMA mobile operators formerly serviced by Nortel Networks, we are currently seeking to establish direct sales relationships with some of the CDMA operators formerly serviced by Nortel Networks, including Sprint Nextel, and are currently exploring a new reseller relationship with Nortel Networks to continue to service other CDMA operators. While we can provide no assurance, we currently believe that a number of mobile operators previously serviced by Nortel Networks will establish direct relationships with us. As a result, we do not believe that the termination of the Nortel Networks OEM agreements will significantly impact our revenues.

          We believe our revenues will vary significantly from period-to-period as a result of the following:

          The variability of our revenues directly impacts our operating performance in any particular period since a significant portion of our operating costs, such as prototypes and related equipment and sales commissions, are either fixed in the short-term or may not vary proportionately with recorded revenues.

          Cost of revenues consists of costs of products sold and services provided. Cost of products consists primarily of payments to a third party manufacturer for purchased materials and services and internal costs, such as salaries and benefits related to personnel, provision for inventory obsolescence and related overhead. The use of an outsourced manufacturer enables us to conserve working capital, adjust to fluctuations in demand and provide for timely delivery to our customers. Cost of services consists primarily of salaries and benefits related to professional services and technical support personnel, product repair costs, depreciation and related overhead.

          Our gross profit has been, and will be, affected by many factors, including the demand for our products and services, the average selling price of our products, which in turn depends on the mix of product configurations sold, new product introductions, the region of the world in which our customers are located and the volume and costs of manufacturing our hardware products.

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          Operating expenses consist of research and development, sales and marketing and general and administrative expenses.

          Other income (expense) primarily consists of interest income earned on cash and short-term investments. We have historically invested our cash in money market funds and other short-term, high-grade investments.

          Other income (expense) also includes gains (losses) from foreign currency transactions of our foreign subsidiaries. The functional currency of our foreign operations is the U.S. dollar. Accordingly, all assets and liabilities, except certain long-term assets, of these international subsidiaries are remeasured into U.S. dollars using the exchange rates in effect at the balance sheet date. Revenues and expenses of these international subsidiaries are generally remeasured into U.S. dollars at the average rates in effect during the year.

          Accretion of redeemable convertible preferred stock includes accrued dividends on each series of our preferred stock.

Application of Critical Accounting Policies and Use of Estimates

          Our financial statements are prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements and related disclosures require us to make estimates, assumptions and judgments that affect the reported amounts of assets and liabilities and 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. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. We evaluate our estimates and assumptions on an ongoing basis. Our actual results may differ significantly from these estimates under different assumptions or conditions.

          We believe that of our significant accounting policies, which are described in note 2 to the financial statements included in this prospectus, the following accounting policies involve a greater

39



degree of judgment and complexity. Accordingly, we believe these are the most critical to fully understand and evaluate our financial condition and results of operations.

          Generally, our revenues are generated through fulfillment of contractual arrangements that contain multiple elements, including equipment with embedded software and services, such as installation, training, consulting and maintenance and support, known as M&S. We recognize revenue in accordance with Statement of Position, or SOP 97-2, Software Revenue Recognition and SOP 98-9, Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions. Accordingly, revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the price is fixed or determinable and collection is probable. Certain of these requirements, most notably the customer acceptance terms generally included in our contracts and our need to establish fair values of our products and services based on facts specific to our operations, are critical to the timing and extent of our revenue recognition. As a result of these factors, a significant majority of our contractual arrangements result in the deferral of revenue and the time period for deferral may be significant. In addition, in certain circumstances, pricing considerations must be assessed to determine whether the price is fixed or determinable.

          Product revenues consist of revenues from sales of our hardware and licensing of our software. Product sales generally include a perpetual license to our software. Product revenues are generally recognized at shipment or upon customer acceptance, assuming all other revenue recognition criteria are met. Substantially all of our products have been sold in conjunction with product support services, which consist of software updates and product support. Software updates provide customers with rights to unspecified software product upgrades and to maintenance releases and patches released during the term of the support period. Revenues for support services are recognized on a straight-line basis over the service contract term, which is generally 12 to 15 months.

          Pursuant to SOP 97-2 revenue is allocated to deliverables based on vendor specific objective evidence of fair value, known as VSOE, when VSOE exists. Generally, all revenues for an arrangement are deferred when VSOE does not exist for any undelivered element. However, revenue is recognized ratably over the contractual M&S period when M&S is the only undelivered element. If VSOE exists for the undelivered elements, but not the delivered elements, revenue is recognized under the residual method set forth in SOP 98-9, which provides that revenue is recognized based on the difference between the total arrangement fee and the VSOE of the undelivered elements. Revenue for the undelivered elements is then recorded as those elements are delivered. When we defer revenue in an arrangement, the related product costs are also deferred, subject to their realizability, and recognized over the same period as the related revenue.

          The determination of VSOE is highly judgmental and is a key factor in determining whether revenue may be recognized or must be deferred and the extent to which it may be recognized once the various elements of an arrangement are delivered. We assess VSOE based on previous sales of products and services, the type and size of customer, renewal rates in contracts and the geographic location of the customer. We monitor VSOE on an ongoing basis. As noted above, most of our arrangements include multiple elements, some of which are delivered in or over future periods. Therefore a change in our assessment of, or our inability to establish, VSOE for products or services may result in significant variation in our revenues and operating results. At March 31, 2007, we had deferred approximately $9.8 million of revenue and $1.2 million of related cost of revenue, as a result of additional product delivery obligations for which we had not established VSOE of fair value. This revenue will be recognized upon the delivery of the specific products or at the time we establish VSOE of fair value for these products.

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          In arrangements where cash consideration is paid to a customer, the payments are recorded in accordance with EITF 01-9, Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor's Products), which generally requires the consideration be recorded as a reduction of revenues.

          Prior to January 1, 2006, we accounted for our stock-based awards to employees using the intrinsic value method prescribed in Accounting Principles Board, or APB, Opinion 25, Accounting for Stock Issued to Employees, and related interpretations. 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. In addition, through December 31, 2005, we accounted for share-based compensation expense for non-employees using the fair value method prescribed by SFAS 123, applying the Black-Scholes option-pricing model, and recorded the fair value, for financial reporting purposes, of non-employee stock options as an expense over either the vesting term of the option or the service period.

          In December 2004, the Financial Accounting Standards Board, or FASB, issued SFAS 123R, Share-Based Payment, which requires companies to expense the fair value of employee stock options and other forms of share-based compensation. We adopted SFAS 123R effective January 1, 2006. SFAS 123R requires nonpublic companies that used the minimum value method in SFAS 123 for either recognition or pro forma disclosures to apply SFAS 123R using the prospective-transition method. As such, we will continue to apply APB Opinion 25 in future periods to equity awards outstanding prior to the date of our adoption of SFAS 123R. In accordance with SFAS 123R, we will recognize the compensation cost of stock-based awards on a graded-vesting basis over the vesting period of the award. Effective with the adoption of SFAS 123R, we have elected to use the Black-Scholes option pricing model to determine the weighted average fair value of stock options granted or modified.

          For the year ended December 31, 2006 and the three months ended March 31, 2007, we recorded expense of $1.7 million and $1.5 million, respectively, in connection with stock-based awards. As of March 31, 2007, we had $8.9 million of unrecognized expense related to non-vested options. This expense is expected to be recognized over a weighted average period of 1.1 years.

          As there was no public market for our common stock prior to this offering, we have determined the volatility for options granted after January 1, 2006 based on an analysis of reported data for a peer group of companies that issued options with substantially similar terms. The expected volatility of options granted has been determined using an average of the historical volatility measures of this peer group of companies. The expected volatility for options granted after January 1, 2006 was 68%. The expected life of options has been determined utilizing the "simplified" method as prescribed by the SEC's Staff Accounting Bulletin No. 107, Share-Based Payment. The expected life of options granted during each of the year ended December 31, 2006 and the three months ended March 31, 2007 was 6.25 years and the weighted average risk free interest rate was 4.81%. The risk-free interest rate is based on a U.S. treasury instrument whose term is consistent with the expected life of the stock options. We have not paid, and do not anticipate paying, cash dividends on our shares of common stock; therefore, the expected dividend yield was assumed to be zero. In addition, SFAS 123R requires companies to utilize an estimated forfeiture rate when calculating the expense for the period. As a result, we applied an estimated forfeiture rate of 3%, based on a review of our historical forfeitures, to determine the expense recorded in our consolidated statements of operations. If this rate changes in future periods, our stock compensation expense may increase or decrease significantly.

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          In accordance with APB Opinion 25, share-based compensation expense resulted from stock option grants at exercise prices that, for financial reporting purposes, were deemed to be below the estimated grant date fair value of the underlying common stock. During the years ended December 31, 2004 and 2005, we granted options to purchase 4,152,000 shares of our common stock to our employees and consultants. No compensation cost related to stock-based awards to employees was recorded for the years ended December 31, 2004 and 2005, as the exercise prices were deemed to equal or exceed the grant date fair value of common stock.

          During 2004 and 2005, we relied on our board of directors, the members of which have extensive experience in the industry in which we operate and all but one of whom are non-employee directors, to determine a reasonable estimate of the then fair value of our common stock. Given the absence of an active market for our common stock, our board of directors determined the estimated fair value of our common stock on the date of grant based on several factors, including:

          During 2004 and 2005, our board also considered our customer base and our prospects for future growth. The board noted that our bookings and revenues were generated almost exclusively from CDMA operators. However, because a majority of worldwide subscribers are served by GSM/UMTS operators, management and the board of directors believed it was crucial for us to penetrate the GSM/UMTS market before we could achieve a level of sustainable business growth that would enable any liquidity scenarios to be practical. At the time of each option grant during 2004 and 2005, the board considered the factors discussed above and at various points throughout this period valued our common stock between $0.30 and $1.65 per share.

          In February 2006, our board requested that an independent firm perform a contemporaneous valuation of our common stock. Our board engaged Gordon Associates Inc., an independent third-party valuation firm, to perform this valuation. In connection with this valuation, the valuation firm considered various liquidity alternatives, but determined that the probabilities and timing of the alternative liquidity scenarios could not be reliably estimated. The valuation firm determined that the fair value of the common stock as of February 22, 2006 was $1.49 per share. On April 18, 2006, our board of directors considered the results of the independent valuation, as well as other factors our board deemed relevant, including that we had not yet penetrated the GSM/UMTS market, and decided to continue to value our common stock at $1.65 per share.

          In June 2006, we received a purchase order from one of the world's largest GSM operators. This purchase order represented a significant event in our development as it provided an opportunity to enter into the GSM/UMTS market and provided credibility for our products with other GSM/UMTS operators, including our GSM customer's affiliates that operate networks in a significant number of countries in Europe.

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          In August 2006, our board of directors requested the valuation firm to update their February 2006 report. The valuation firm updated their valuation, which resulted in a determination that the value of our common stock as of August 30, 2006 was $1.64 per share. On September 29, 2006, our board of directors considered the results of the August 2006 independent valuation, as well as other factors the board deemed relevant, and decided to continue to value our common stock at $1.65 per share.

          In November 2006, our board of directors requested the valuation firm to perform another valuation, which resulted in a valuation of $5.13 per share of common stock as of November 27, 2006. The November 2006 valuation was prepared utilizing the probability weighted expected return method as prescribed by the AICPA Practice Aid, Valuation of Privately-Held-Company Equity Securities Issued as Compensation, referred to as the Practice Aid. This valuation took into consideration the following scenarios:

          On December 14, 2006, our board of directors considered the results of the November 2006 valuation and determined to value our common stock at $5.13 per share as of that date.

          In connection with the preparation of our financial statements for the year ended December 31, 2006, we examined the valuations of our common stock after June 2006, the point in time of our first significant GSM/UMTS purchase order. As noted above, the $5.13 per share value determined in the November 2006 valuation was utilized for financial reporting purposes to record share-based compensation for awards granted on December 14 and December 22, 2006. We retrospectively reviewed the August 2006 valuation for financial reporting purposes and prepared an analysis of that valuation that included the values of the alternative liquidation scenarios as determined in the November 2006 valuation. As a result of this analysis, we retrospectively determined that the fair value of our common stock for financial reporting purposes as of the June, September and October 2006 stock option grant dates was $1.92, $3.99, and $4.49 per share, respectively.

          In January 2007 and again in March 2007, our board of directors requested the valuation firm to update their November 2006 valuation. The valuation firm conducted these valuation updates utilizing the probability weighted expected return method as prescribed by the Practice Aid, and considered the same scenarios as utilized in the November 2006 valuation. The valuation firm's January 2007 update resulted in a determination that the value of our common stock as of January 26, 2007 was $5.87 per share. On February 8, 2007, our board of directors considered the results of the January 2007 independent valuation, as well as other factors the board deemed relevant, and determined to value our common stock at $5.87 per share as of that date. The valuation firm's March 2007 update resulted in a determination that the value of our common stock as of March 19, 2007 was $7.58 per share. On April 13, 2007, our board of directors considered the results of the March 2007 independent valuation, as well as other factors the board deemed relevant, and determined to value our common stock at $8.25 per share as of that date.

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          The following is a summary of stock option and restricted stock grants during 2006 and 2007:

Grants Made During 2006 and 2007
  Number of
Option and
Restricted
Shares Granted(a)

  Exercise or
Purchase
Price

  Fair Value of
Common Stock

 
February 2, 2006   48,665   $ 1.65(b ) $ 1.65  
April 18, 2006   971,970     1.65(c )   1.65  
June 15, 2006   225,997     1.65(c )   1.92 (e)
September 29, 2006   1,230,640     1.65(c )   3.99 (e)
October 25, 2006   23,999     1.65(c )   4.49 (e)
December 14, 2006   363,653     5.13(d )   5.13  
December 22, 2006   199,998     5.13(d )   5.13  
January 10, 2007   266,666     5.13(c )   5.13  
February 8, 2007   433,333     5.87(d )   5.87  
February 9, 2007   384,619     5.87(d )   5.87  
March 2, 2007   47,330     5.87(d )   5.87  
April 13, 2007   1,066,628     8.25(c )   8.25  

(a)
Excludes an aggregate of 3,252 shares of restricted stock granted to our employees at no cost during 2006 and 2007. These shares of restricted stock vested immediately upon grant. We recorded compensation expense for these stock grants based upon the fair value of our common stock on the date of grant as determined by our board of directors.

(b)
The exercise or purchase price for the award was equal to the fair value of our common stock as determined in a contemporaneous valuation by our board of directors.

(c)
The exercise or purchase price for the award was equal to the fair value of our common stock as determined in a contemporaneous valuation by our board of directors, which considered, among other factors, the then most recent common stock valuation performed by the valuation firm. The exercise price was at least equal to the fair market value as determined in the then most recent valuation.

(d)
The exercise or purchase price for the award was equal to the fair value of our common stock as determined by our board of directors, based upon a contemporaneous valuation of our common stock by the valuation firm.

(e)
Retrospectively reassessed for financial reporting purposes in connection with the preparation of our financial statements for the year ended December 31, 2006.

          As described above, the determination of the fair value of our common stock requires the assessment of many quantitative and qualitative factors. Examples of these factors include the following:

Our board of directors determined the fair value of our common stock taking into consideration these factors and the results of the various valuations prepared by our valuation firm, as indicated in the table above.

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          On May 15, 2007, we, in consultation with our managing underwriters, determined our estimated offering price range of $9.00 to $11.00 per share. The estimated offering price range was based on current market conditions and updated comparable company market data, and was contingent on our continuing business execution. From February 2, 2006 through April 13, 2007, we granted share-based awards as indicated in the table above. During this period, the value of our common stock increased primarily as a result of our improved operating results, our success developing relationships with GSM/UMTS operators and the increased probability of a potential initial public offering. Based on the increased probability of a potential public offering, the discount used by our valuation firm for the lack of an active market for our common stock was reduced from 30% in the February 2006 valuation to 10% in the March 2007 valuation. The difference between the fair value of our common stock on each grant date and $10.00, the mid-point of the estimated price range shown on the cover page of this prospectus, declined in each quarter since the beginning of 2006.

          The significant factors contributing to the difference between the fair value of our common stock as determined by our board of directors and the currently estimated initial public offering price were:

          We carry our inventory at the lower of historical cost or net realizable value assuming inventory items are consumed on a first-in, first-out basis. We recognize inventory losses based on obsolescence and levels in excess of forecasted demand. In these cases, inventory is written down to estimated realizable value based on historical usage and expected demand. Inherent in our estimates of market value in determining inventory valuation are estimates related to economic trends, future demand for our products and technical obsolescence of our products. If future demand or market conditions are less favorable than our projections, additional inventory write-downs could be required and would be reflected in the cost of revenues in the period the revision is made. To date, we have not been required to revise any of our assumptions or estimates used to determine our inventory valuations.

          When products have been delivered, but the product revenues associated with the arrangement have been deferred as a result of not meeting the revenue recognition criteria required by SOP 97-2, we defer the related inventory costs for the delivered items.

          We are subject to income taxes in both the United States and foreign jurisdictions and we use estimates in determining our provisions for income taxes. We account for income taxes in accordance with SFAS 109, Accounting for Income Taxes, which is the asset and liability method for accounting and reporting for income taxes. Under SFAS 109, deferred tax assets and liabilities are recognized based on temporary differences between the financial reporting and income tax bases of assets and liabilities using statutory rates.

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          As of December 31, 2006, we had U.S. federal net operating loss carryforwards for income tax purposes of $63.1 million that expire beginning in 2022 and state net operating loss carryforwards of $65.5 million that expire beginning in 2007. We also had U.S. federal tax credits of $3.0 million that expire beginning in 2020 and state research and development credits of $652,000 that expire beginning in 2018. The Internal Revenue Code contains provisions that limit the net operating losses and tax credit carryforwards available to be used in any given year in the event of certain circumstances, including significant changes in ownership interests, as defined.

          During the year ended December 31, 2006, we recorded income tax expense of $413,000 which consisted primarily of provisions associated with various state and foreign jurisdictions. Income tax expense related to our international subsidiaries generally results from taxable income generated by the subsidiary pursuant to intercompany service agreements. We believe the compensation associated with these service agreements is reasonable in light of the level and nature of services performed by our subsidiaries. However, if a foreign tax jurisdiction or the Internal Revenue Service were to challenge these arrangements, we could be subject to additional income tax expense either in the United States or the foreign jurisdiction.

          Due to the uncertainty surrounding the realization of our deferred tax assets, based principally on operating losses, we have provided a full valuation allowance against our various tax attributes. We will assess the level of valuation allowance required in future periods based on the available positive and negative evidence at that point in time. Should more positive than negative evidence regarding the realizability of tax attributes exist at a future point in time, the valuation allowance may be reduced or eliminated altogether. Reduction of the valuation allowance, in whole or in part, would result in a non-cash reduction in income tax expense during the period of reduction.

          Research and development expense includes costs incurred to develop intellectual property. Research and development costs are charged to operations as incurred. The costs to develop new software and substantial enhancements to existing software are expensed as incurred until technological feasibility has been established, at which time any additional costs would be capitalized. We have determined technological feasibility is established at the time a working model of software is completed. The time period during which costs could be capitalized, from the point of reaching technological feasibility until the time of general product release is short. Consequently, the amounts that could be capitalized are not material to our financial position or results of operations and therefore have been charged to expense as incurred.

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Results of Operations

 
  Three Months Ended March 31,
   
   
 
 
  Period-to-Period
Change

 
 
  2006
  2007
 
 
  Amount
  % of
Revenues

  Amount
  % of
Revenues

  Amount
  Percentage
 
 
  (dollars in thousands)

 
Revenues:                                
  Product   $ 11,722   81 % $ 24,452   88 % $ 12,730   109 %
  Services     2,712   19     3,190   12     478   18  
   
 
 
 
 
     
    Total revenues   $ 14,434   100 % $ 27,642   100 % $ 13,208   92 %
   
 
 
 
 
     
Cost of revenues:                                
  Product   $ 3,893   27 % $ 4,438   16 % $ 545   14 %
  Services     341   2     1,387   5     1,046   307  
   
 
 
 
 
     
    Total cost of revenues   $ 4,234   29 % $ 5,825   21 % $ 1,591   38 %
   
 
 
 
 
     
Operating expenses:                                
  Research and development   $ 3,642   25 % $ 10,066   36 % $ 6,424   176 %
  Sales and marketing     5,160   36     7,069   26     1,909   37  
  General and administrative     1,516   11     2,844   10     1,328   88  
   
     
     
     
    Total operating expenses   $ 10,318   71 % $ 19,979   72 % $ 9,661   94 %
   
     
     
     

          The following table sets forth our revenues by type and geographic location of our customers.

 
  Three Months Ended March 31,
   
   
 
 
  Period-to-Period
Change

 
 
  2006
  2007
 
 
  Amount
  % of
Revenues

  Amount
  % of
Revenues

  Amount
  Percentage
 
 
  (dollars in thousands)

 
Revenues by Customer Type:                                
  Direct   $ 11,600   80 % $ 17,983   65 % $ 6,383   55 %
  Indirect     2,834   20     9,659   35     6,825   241  
   
 
 
 
 
     
    Total revenues   $ 14,434   100 % $ 27,642   100 % $ 13,208   92 %
   
 
 
 
 
     
Revenues by Geography:                                
  United States and Canada   $ 10,891   75 % $ 20,205   73 % $ 9,314   86 %
  Japan     1,338   9     696   3     (642 ) (48 )
  Korea     162   1     5,734   21     5,572   3,440  
  Rest of world     2,043   14     1,007   3     (1,036 ) (51 )
   
 
 
 
 
     
    Total revenues   $ 14,434   100 % $ 27,642   100 % $ 13,208   92 %
   
 
 
 
 
     

          Revenues increased $13.2 million in the quarter ended March 31, 2007 as compared to the same quarter in 2006, primarily due to increased product sales to existing customers. Product revenues, which include hardware and software sales, increased $12.7 million in the first quarter of 2007 as compared to the same quarter in 2006 due primarily to increased sales to major mobile operators in the United States and Canada. The increase in revenues from Korea was due primarily to the recognition of approximately $5.5 million that was deferred at December 31, 2006. We

47



delivered the final software functionality for this arrangement during the quarter ended March 31, 2007.

 
  Three Months Ended March 31,
   
   
 
 
  Period-to-Period
Change

 
 
  2006
  2007
 
 
  Amount
  % of Related
Revenues

  Amount
  % of Related
Revenues

  Amount
  Percentage
 
 
  (dollars in thousands)

 
Cost of Revenues:                                
  Product   $ 3,893   33 % $ 4,438   18 % $ 545   14 %
  Services     341   13     1,387   43     1,046   307  
   
     
     
     
    Total cost of revenues   $ 4,234   29 % $ 5,825   21 % $ 1,591   38 %
   
     
     
     
Gross Profit:                                
  Product   $ 7,829   67 % $ 20,014   82 % $ 12,185   156 %
  Services     2,371   87     1,803   57     (568 ) (24 )
   
     
     
     
    Total gross profit   $ 10,200   71 % $ 21,817   79 % $ 11,617   114 %
   
     
     
     

          Product gross margin increased 15 percentage points in the first quarter of 2007 as compared to the same period in 2006 due primarily to the quarter including a higher proportion of software revenue. We anticipate our gross margin will decrease in subsequent 2007 periods due primarily to our anticipated mix of product shipments being consistent with historical amounts.

          During the first quarter of 2007, the $1.0 million increase in cost of services was primarily due to higher salaries, incentives and benefits, depreciation expense and overhead costs associated with additional customer support and training personnel that were added during 2006 and in the first quarter of 2007. We anticipate cost of services will increase in future periods as we continue to increase the number of customer support personnel we employ. In addition to the increased number of employees, we plan to continue to expand our customer support testing facilities in the remainder of 2007 which will increase cost of services. Many of these costs are fixed in nature, therefore we anticipate our services gross profit will increase as our services revenues increase in future periods.

          Gross profit on services decreased 24% during the first quarter of 2007 as a result of the increase in support costs as described above. We believe our overall gross profit for the remainder of 2007 will decrease from the 79% in the first quarter of 2007 and be largely consistent with our 2006 results due to the factors discussed above.

 
  Three Months Ended March 31,
   
   
 
 
  2006
  2007
  Period-to-Period
Change

 
 
   
  % of
Revenues

   
  % of
Revenues

 
 
  Amount
  Amount
  Amount
  Percentage
 
 
  (dollars in thousands)

 
Research and development   $ 3,642   25 % $ 10,066   36 %   6,424   176 %
Sales and marketing     5,160   36     7,069   26     1,909   37  
General and administrative     1,516   11     2,844   10     1,328   88  
   
     
     
     
  Total operating expenses   $ 10,318   71 % $ 19,979   72 % $ 9,661   94 %
   
     
     
     

48


          Research and development.    Research and development expenses consisted primarily of the following significant items:

 
  Three Months Ended March 31,
   
   
 
 
  2006
  2007
  Period-to-Period
Change

 
 
   
  % of
Revenues

   
  % of
Revenues

 
 
  Amount
  Amount
  Amount
  Percentage
 
 
  (dollars in thousands)

 
Payroll and related expenses   $ 3,150   22 % $ 4,578   17 % $ 1,428   45 %
Prototypes and related equipment     464   3     2,570   9     2,106   454  
Consulting     556   4     322   1     (234 ) (42 )
Depreciation     374   3     596   2     222   59  
Share-based compensation     16       480   2     464   2,900  
Other     (918 ) (6 )   1,520   5     2,438   266  
   
     
     
     
  Total research and development   $ 3,642   25 % $ 10,066   36 % $ 6,424   176 %
   
     
     
     

          Research and development expenses increased $6.4 million or 176% in the first quarter of 2007 from the same quarter in 2006, and the percentage of these costs to revenues also increased. Following is a discussion of each significant item listed above:

          We intend to continue to invest significantly in our research and development efforts, which we believe are essential to maintaining our competitive position. Accordingly, we anticipate payroll and related expenses, prototype and related equipment and depreciation expense to increase during the remainder of 2007 as we continue to add quality assurance personnel, test enhancements to our hardware and software products and increase our test lab space. Although we anticipate these expenses to increase in absolute amounts in 2007 as compared to 2006, we believe these expenses as a percentage of revenue will remain consistent with our full year 2006 results.

49



          Sales and marketing.    Sales and marketing expenses consisted primarily of the following significant items:

 
  Three Months Ended March 31,
   
   
 
 
  2006
  2007
  Period-to-Period
Change

 
 
   
  % of
Revenues

   
  % of
Revenues

 
 
  Amount
  Amount
  Amount
  Percentage
 
 
  (dollars in thousands)

 
Salaries and related expenses   $ 2,531   18 % $ 3,159   11 % $ 628   25 %
Commissions     729   5     906   3     177   24  
Travel     875   6     952   3     77   9  
Consulting     256   2     546   2     290   113  
Share-based compensation     11       365   1     354   3,218  
Other     758   5     1,141   4     383   51  
   
     
     
     
  Total sales and marketing   $ 5,160   36 % $ 7,069   26 % $ 1,909   37 %
   
     
     
     

          Sales and marketing expenses increased $1.9 million, or 37%, as compared to the first quarter of 2006, and were lower as a percentage of revenues. Following is a discussion of each significant item listed above:

          We anticipate continuing to increase the number of sales and marketing personnel we employ in future periods to expand our geographic presence, to address specific customer opportunities and to increase our revenues. We expect commissions to be relatively consistent for the full year 2007 as compared to our 2006 results and to decrease as a percentage of revenues as we leverage our sales organization. However, commissions may vary significantly from our expectations if our customer orders differ significantly from the quotas established for our sales personnel. In addition, we may incur additional expenses such as demonstration and interoperability testing associated with our ST40 platform in existing and new markets. Despite the expected increases in sales and marketing expenses, we expect these expenses to decrease as a percentage of total revenues for the full year 2007 compared to our 2006 results.

50



          General and administrative.    General and administrative expenses consisted primarily of the following significant items:

 
  Three Months Ended March 31,
   
   
 
 
  2006
  2007
  Period-to-Period
Change

 
 
   
  % of
Revenues

   
  % of
Revenues

 
 
  Amount
  Amount
  Amount
  Percentage
 
 
  (dollars in thousands)

 
Payroll and related expenses   $ 631   4 % $ 961   3 % $ 330   52 %
Professional fees     503   3     734   3     231   46  
Consulting     102   1     383   1     281   275  
Share-based compensation           575   2     575    
Other     280   2     191   1     (89 ) (32 )
   
     
     
     
  Total general and administrative   $ 1,516   11 % $ 2,844   10 % $ 1,328   88 %
   
     
     
     

          General and administrative expenses increased $1.3 million, or 88%, in the first quarter of 2007 as compared to the same period in 2006, and decreased as a percentage of revenues. Following is a discussion of each significant item listed above:

          We expect general and administrative expense to increase in future periods as we invest in infrastructure to support continued growth and incur additional costs related to operating as a publicly-traded company, including increased audit and legal fees, costs of compliance with securities and other regulations, investor relations and higher insurance premiums. Despite this anticipated increase in expenses in absolute amounts, for the full year 2007 we anticipate these expenses as a percentage of revenue to remain consistent with our 2006 results.

          Interest income.    Interest income consists of income generated from the investment of our cash balances and short-term investments. The $292,000 increase was due to higher average balances during the first quarter of 2007 and higher rates of return on these balances.

          Income tax expense.    For the quarter ended March 31, 2007, we recorded income tax expense of $243,000 versus $50,000 in the prior year. The increase in 2007 was due primarily to us being subject to federal alternative minimum tax in 2007 and not in 2006. We anticipate that we will be subject to state income taxes and federal alternative minimum taxes in future years. We have significant net operating loss carryforwards and other deferred tax assets, but have recorded a valuation allowance against them due to the uncertainty surrounding the timing and extent of realization of these tax attributes.

          Net income.    Net income increased approximately $2.1 million for the quarter ended March 31, 2007 to $2.3 million. This increase resulted from the items discussed above.

51



 
  Year Ended December 31,
   
   
 
 
  Period-to-Period
Change

 
 
  2005
  2006
 
 
  Amount
  % of
Revenues

  Amount
  % of
Revenues

  Amount
  Percentage
 
 
  (dollars in thousands)

 
Revenues:                                
  Product   $ 51,819   87 % $ 81,061   86 % $ 29,242   56 %
  Services     7,841   13     13,289   14     5,448   70  
   
 
 
 
 
     
    Total revenues   $ 59,660   100 % $ 94,350   100 % $ 34,690   58  
   
 
 
 
 
     
Cost of revenues:                                
  Product   $ 12,285   21 % $ 25,640   27 % $ 13,355   109 %
  Services     1,358   2     2,086   2     728   54  
   
 
 
 
 
     
    Total cost of revenues   $ 13,643   23 % $ 27,726   29 % $ 14,083   103  
   
 
 
 
 
     
Operating expenses:                                
  Research and development   $ 18,107   30 % $ 25,980   28 % $ 7,873   43 %
  Sales and marketing     19,785   33     30,311   32     10,526   53  
  General and administrative     7,352   12     8,515   9     1,163   16  
   
     
     
     
    Total operating expenses   $ 45,244   76 % $ 64,806   69 % $ 19,562   43 %
   
     
     
     

          The following table sets forth our revenues by type and geographic location of our customers.

 
  Year Ended December 31,
   
   
 
 
  Period-to-Period
Change

 
 
  2005
  2006
 
 
  Amount
  % of
Revenues

  Amount
  % of
Revenues

  Amount
  Percentage
 
 
  (dollars in thousands)

 
Revenues by Customer Type:                                
  Direct   $ 27,446   46 % $ 46,964   50 % $ 19,518   71 %
  Indirect     32,214   54     47,386   50     15,172   47  
   
 
 
 
 
     
    Total revenues   $ 59,660   100 % $ 94,350   100 % $ 34,690   58  
   
 
 
 
 
     
Revenues by Geography:                                
  United States and Canada   $ 28,691   48 % $ 81,687   87 % $ 52,996   185 %
  Japan     18,718   31     4,227   4     (14,491 ) (77 )
  Korea     11,731   20     661   1     (11,070 ) (94 )
  Rest of world     520   1     7,775   8     7,255   1,395  
   
 
 
 
 
     
    Total revenues   $ 59,660   100 % $ 94,350   100 % $ 34,690   58 %
   
 
 
 
 
     

          Revenues increased $34.7 million in 2006, primarily due to increased product sales to existing customers and recognition of $39.2 million of revenue that was deferred at December 31, 2005 as compared to the recognition in 2005 of $33.0 million that was deferred at December 31, 2004.

          Product revenues, which include hardware and software sales, increased $29.2 million from 2005 due primarily to increased sales to major mobile operators in the United States and Canada. The decrease in revenues in Japan and Korea was due primarily to the incremental deferral of approximately $8.4 million related to Japan and $5.5 million related to Korea, as compared to the

52



deferral at December 31, 2005. We anticipate these deferred balances will be recognized during 2007. In addition, a portion of the decrease in revenues in Korea was due to 2005 being the final period in which revenues were recognized on a subscription basis on a contract that expired on December 31, 2005. In 2006, $14.0 million of our indirect revenue that had been deferred at December 31, 2005 was recognized based upon us establishing VSOE for maintenance and support services for a type of customer. At that point in time, deferred revenue was adjusted to the fair value of the undelivered services in accordance with SOP 97-2.

          Services revenues increased $5.4 million due primarily to increased maintenance and support services being provided on a larger installed base during 2006.

 
  Year Ended December 31,
   
   
 
 
  Period-to-Period
Change

 
 
  2005
  2006
 
 
  Amount
  % of Related
Revenues

  Amount
  % of Related
Revenues

  Amount
  Percentage
 
 
  (dollars in thousands)

 
Cost of Revenues:                                
  Product   $ 12,285   24 % $ 25,640   32 % $ 13,355   109 %
  Services     1,358   17     2,086   16     728   54  
   
     
     
     
    Total cost of revenues   $ 13,643   23 % $ 27,726   29 % $ 14,083   103 %
   
     
     
     
Gross Profit:                                
  Product   $ 39,534   76 % $ 55,421   68 % $ 15,887   40 %
  Services     6,483   83     11,203   84     4,720   73  
   
     
     
     
    Total gross profit   $ 46,017   77 % $ 66,624   71 % $ 20,607   45 %
   
     
     
     

          The $14.1 million increase in cost of revenues was attributable to the increase in hardware and software products sold during 2006 or delivered in previous periods but recognized in revenues during 2006, and higher cost of services.

          Product gross margin percentage decreased 8 percentage points due primarily to the increase in the cost of products sold related to us establishing VSOE for maintenance and support for a type of customer. As described above, we recorded additional revenues in 2006 as a result of the establishment of VSOE; however, the cost of products associated with this revenue was higher because the arrangement obligated us to provide certain products free of charge. We recognized $7.3 million of costs associated with the $14.0 million of revenue that was recognized upon the establishment of VSOE in 2006. This cost in conjunction with lower average selling price for this OEM arrangement resulted in lower gross margin percentage.

          We anticipate our direct sales relationships to contribute a higher percentage of our future revenues, which should result in a higher gross product profit percentage. However, this increase in percentage may be somewhat offset by higher customer support costs as described below.

          During 2006, the $728,000 increase in cost of services was primarily due to higher salaries, incentives and benefits, depreciation expense and overhead costs associated with additional customer support and training personnel that were added during 2006. We anticipate cost of services to increase in future periods as we continue to increase the number of customer support personnel we employ. In addition to the increased number of employees, we plan to expand our customer support testing facilities in 2007 which will increase cost of services. Many of these costs will be fixed in nature and could therefore result in lower services gross profit in the future.

53


          Gross profit on services increased 73% as a result of a substantial increase in maintenance, support and service revenues associated with the growth in our installed product base without a corresponding proportionate increase in costs. However, we anticipate adding additional employees and customer support testing facilities during 2007 which may reduce the services gross margin percentage in the future.

 
  Year Ended December 31,
   
   
 
 
  2005
  2006
  Period-to-Period
Change

 
 
   
  % of
Revenues

   
  % of
Revenues

 
 
  Amount
  Amount
  Amount
  Percentage
 
 
  (dollars in thousands)

 
Research and development   $ 18,107   30 % $ 25,980   28 % $ 7,873   43 %
Sales and marketing     19,785   33     30,311   32     10,526   53  
General and administrative     7,352   12     8,515   9     1,163   16  
   
     
     
     
  Total operating expenses   $ 45,244   76 % $ 64,806   69 % $ 19,562   43 %
   
     
     
     

          Research and development.    Research and development expenses consisted primarily of the following significant items:

 
  Year Ended December 31,
   
   
 
 
  2005
  2006
  Period-to-Period
Change

 
 
   
  % of
Revenues

   
  % of
Revenues

 
 
  Amount
  Amount
  Amount
  Percentage
 
 
  (dollars in thousands)

 
Payroll and related expenses   $ 9,938   17 % $ 13,702   15 % $ 3,764   38 %
Prototypes and related equipment     3,215   5     4,415   5     1,200   37  
Consulting     1,485   2     2,281   2     796   54  
Depreciation     1,249   2     1,867   2     618   49  
Share-based compensation     230       708   1     478   208  
Other     1,990   3     3,007   3     1,017   51  
   
     
     
     
  Total research and development   $ 18,107   30 % $ 25,980   28 % $ 7,873   43 %
   
     
     
     

          Research and development expenses increased $7.9 million or 43% in 2006 from 2005, however the percentage of these costs to revenues decreased as our revenues increased 58%. Following is a discussion of each significant item listed above:

54


          Sales and marketing.    Sales and marketing expenses consisted primarily of the following significant items:

 
  Year Ended December 31,
   
   
 
 
  2005
  2006
  Period-to-Period
Change

 
 
   
  % of
Revenues

   
  % of
Revenues

 
 
  Amount
  Amount
  Amount
  Percentage
 
 
  (dollars in thousands)

 
Salaries and related expenses   $ 8,251   14 % $ 10,861   12 % $ 2,610   32 %
Commissions     3,350   6     10,221   11     6,871   205  
Travel     3,548   6     3,398   4     (150 ) (4 )
Consulting     1,185   2     1,712   2     527   44  
Share-based compensation     28       404       376   1,343  
Other     3,423   6     3,715   4     292   9  
   
     
     
     
  Total sales and marketing   $ 19,785   33 % $ 30,311   32 % $ 10,526   53 %
   
     
     
     

          Sales and marketing expenses increased $10.5 million, or 53%, as compared to 2005, and were slightly lower as a percentage of revenues. Following is a discussion of each significant item listed above:

55


          General and administrative.    General and administrative expenses consisted primarily of the following significant items:

 
  Year Ended December 31,
   
   
 
 
  2005
  2006
  Period-to-Period
Change

 
 
   
  % of
Revenues

   
  % of
Revenues

 
 
  Amount
  Amount
  Amount
  Percentage
 
 
  (dollars in thousands)

 
Payroll and related expenses   $ 2,106   4 % $ 3,120   3 % $ 1,014   48 %
Professional fees     3,585   6     3,104   3     (481 ) (13 )
Consulting     482   1     736   1     254   53  
Share-based compensation           504   1     504    
Other     1,179   2     1,051   1     (128 ) (11 )
   
     
     
     
  Total general and administrative   $ 7,352   12 % $ 8,515   9 % $ 1,163   16 %
   
     
     
     

          General and administrative expenses increased $1.2 million, or 16%, in 2006 as compared to 2005, and decreased as a percentage of revenues. Following is a discussion of each significant item listed above:

          Interest income.    Interest income consists of income generated from the investment of our cash balances and short-term investments. The $1.5 million increase was due to higher average balances during 2006 as we generated significant cash from operations and to higher rates of return on these balances.

          Income tax expense.    For the year ended December 31, 2006, we recorded income tax expense of $413,000 versus $513,000 in the prior year. The decrease in 2006 was due primarily to us being subject to federal alternative minimum tax in 2005 and not in 2006. We anticipate that we will be subject to state income taxes and federal alternative minimum taxes in future years. We have significant net operating loss carryforwards and other deferred tax assets, but have recorded a valuation allowance against them due to the uncertainty surrounding the timing and extent of realization of these tax attributes.

          Net income.    Net income increased approximately $2.7 million for the year ended December 31, 2006 to $3.6 million. This increase resulted from the items discussed above, including the increase in interest income of $1.5 million.

56



 
  Year Ended December 31,
   
   
 
 
  2004
  2005
  Period-to-Period
Change

 
 
   
  % of
Revenues

   
  % of
Revenues

 
 
  Amount
  Amount
  Amount
  Percentage
 
 
  (dollars in thousands)

 
Revenues:                                
  Product   $ 29,453   86 % $ 51,819   87 % $ 22,366   76 %
  Services     4,942   14     7,841   13     2,899   59  
   
 
 
 
 
     
    Total revenues   $ 34,395   100 % $ 59,660   100 % $ 25,265   73 %
   
 
 
 
 
     

Cost of revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
  Product   $ 12,633   37 % $ 12,285   21 % $ (348 ) (3 )%
  Services     812   2     1,358   2     546   67  
   
 
 
 
 
     
    Total cost of revenues   $ 13,445   39 % $ 13,643   23 % $ 198   1 %
   
 
 
 
 
     

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
  Research and development   $ 13,303   39 % $ 18,107   30 % $ 4,804   36 %
  Sales and marketing     18,445   54     19,785   33     1,340   7  
  General and administrative     3,185   9     7,352   12     4,167   131  
   
     
     
     
    Total operating expenses   $ 34,933   102 % $ 45,244   76 % $ 10,311   30 %
   
     
     
     

          The following table sets forth our revenues by type and geographic location of our customers.

 
  Year Ended December 31,
   
   
 
 
  2004
  2005
  Period-to-Period
Change

 
 
   
  % of
Revenues

   
  % of
Revenues

 
 
  Amount
  Amount
  Amount
  Percentage
 
 
  (dollars in thousands)

 
Revenues by Customer Type:                                
  Direct   $ 18,856   55 % $ 27,446   46 % $ 8,590   46 %
  Indirect     15,539   45     32,214   54     16,675   107  
   
 
 
 
 
     
    Total revenues   $ 34,395   100 % $ 59,660   100 % $ 25,265   73 %
   
 
 
 
 
     
Revenues by Geography:                                
  United States and Canada   $ 17,102   50 % $ 28,691   48 % $ 11,589   68 %
  Japan     7,485   22     18,718   31     11,233   150  
  Korea     7,704   22     11,731   20     4,027   52  
  Rest of world     2,104   6     520   1     (1,584 ) (75 )
   
 
 
 
 
     
    Total revenues   $ 34,395   100 % $ 59,660   100 % $ 25,265   73 %
   
 
 
 
 
     

          Revenues increased $25.3 million in 2005, primarily due to increased product sales to existing customers and $33.0 million of revenue recognized that was deferred at December 31, 2004 as compared to the recognition in 2004 of $16.1 million that was deferred at December 31, 2003.

          Product revenues, which include hardware and software sales, increased $22.4 million from 2004 due primarily to increased sales to major mobile operators and the recognition of deferred

57



revenue mentioned above. Revenues in Japan increased in 2005 primarily due to the recognition of $6.3 million more revenue from deferred revenue in 2005 than 2004 and a lower amount of unbilled sales in 2005 than in 2004. The revenues increase related to Korea was due primarily to the inclusion in 2005 of a full year of revenue recognized on a subscription basis for a particular customer compared to only eight months of recognition in 2004.

          Services revenues increased $2.9 million due primarily to increased maintenance and support services being provided on a larger installed base during 2005.

 
  Year Ended December 31,
   
   
 
 
  2004
  2005
  Period-to-Period
Change

 
 
   
  % of
Related
Revenues

   
  % of
Related
Revenues

 
 
  Amount
  Amount
  Amount
  Percentage
 
 
  (dollars in thousands)

 
Cost of Revenues:                                
  Product   $ 12,633   43 % $ 12,285   24 % $ (348 ) (3 )%
  Services     812   16     1,358   17     546   67  
   
     
     
     
    Total cost of revenues   $ 13,445   39 % $ 13,643   23 % $ 198   1 %
   
     
     
     

Gross Profit:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
  Product   $ 16,820   57 % $ 39,534   76 % $ 22,714   135 %
  Services     4,130   84     6,483   83     2,353   57  
   
     
     
     
    Total gross profit   $ 20,950   61 % $ 46,017   77 % $ 25,067   120 %
   
     
     
     

          Cost of revenues was relatively unchanged in 2005 as compared to 2004 due primarily to 2004 including,


          Product gross margin increased 19% due primarily to the items discussed above and our 2005 sales having higher average selling prices than 2004 sales primarily related to customers outside the United States and Canada.

          During 2005, the $546,000 increase in cost of services was primarily due to higher salaries, incentives and benefits and overhead costs associated with additional support and training personnel that were added during 2005.

          Gross profit on services increased 57% in 2005 primarily as a result of higher maintenance, support and service revenues associated with the growth in our installed product base without a corresponding increase in costs.

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  Year Ended December 31,
   
   
 
 
  2004
  2005
  Period-to-Period
Change

 
 
   
  % of
Revenues

   
  % of
Revenues

 
 
  Amount
  Amount
  Amount
  Percentage
 
 
  (dollars in thousands)

 
Research and development   $ 13,303   39 % $ 18,107   30 % $ 4,804   36 %
Sales and marketing     18,445   54     19,785   33     1,340   7  
General and administrative     3,185   9     7,352   12     4,167   131  
   
     
     
     
  Total operating expenses   $ 34,933   102 % $ 45,244   76 % $ 10,311   30 %
   
     
     
     

          Research and development.    Research and development expenses consisted primarily of the following significant items:

 
  Year Ended December 31,
   
   
 
 
  2004
  2005
  Period-to-Period
Change

 
 
   
  % of
Revenues

   
  % of
Revenues

 
 
  Amount
  Amount
  Amount
  Percentage
 
 
  (dollars in thousands)

 
Payroll and related expenses   $ 7,913   23 % $ 9,938   17 % $ 2,025   26 %
Prototypes and related equipment     633   2     3,215   5     2,582   408  
Consulting     879   3     1,485   2     606   69  
Depreciation     1,339   4     1,249   2     (90 ) (7 )
Share-based compensation     200   1     230       30   15  
Other     2,339   7     1,990   3     (349 ) (15 )
   
     
     
     
  Total research and development   $ 13,303   39 % $ 18,107   30 % $ 4,804   36 %
   
     
     
     

          Research and development expenses increased $4.8 million or 36% from 2004, however the percentage of these costs to revenues decreased as our revenues increased 73%. Following is a discussion of significant changes in the items listed above:

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          Sales and marketing.    Sales and marketing expenses consisted primarily of the following significant items:

 
  Year Ended December 31,
   
   
 
 
  2004
  2005
  Period-to-Period
Change

 
 
   
  % of
Revenues

   
  % of
Revenues

 
 
  Amount
  Amount
  Amount
  Percentage
 
 
  (dollars in thousands)

 
Salaries and related expenses   $ 5,928   17 % $ 8,251   14 % $ 2,323   39 %
Commissions     6,821   20     3,350   6     (3,471 ) (51 )
Travel     1,966   6     3,548   6     1,582   80  
Consulting     1,382   4     1,185   2     (197 ) (14 )
Share-based compensation           28       28    
Other     2,348   7     3,423   6     1,075   46  
   
     
     
     
  Total sales and marketing   $ 18,445   54 % $ 19,785   33 % $ 1,340   7 %
   
     
     
     

          Sales and marketing expenses increased $1.3 million or 7% as compared to 2004; however, the percentage of these costs to revenues decreased as our revenues increased 73%. Following is a discussion of the significant changes in the items listed above:

          General and administrative.    General and administrative expenses consisted primarily of the following significant items:

 
  Year Ended December 31,
   
   
 
 
  2004
  2005
  Period-to-Period
Change

 
 
   
  % of
Revenues

   
  % of
Revenues

 
 
  Amount
  Amount
  Amount
  Percentage
 
 
  (dollars in thousands)

 
Payroll and related expenses   $ 1,359   4 % $ 2,106   4 % $ 747   55 %
Professional fees     1,305   4     3,585   6     2,280   175  
Consulting     272   1     482   1     210   77  
Other     249   1     1,179   2     930   373  
   
     
     
     
  Total general and administrative   $ 3,185   9 % $ 7,352   12 % $ 4,167   131 %
   
     
     
     

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          General and administrative expenses increased $4.2 million or 131% as compared to 2004, and increased as a percentage of revenues. Following is a discussion of each significant item listed above:

          Interest income.    Interest income consists of income generated from the investment of our cash balances and short-term investments. The $662,000 increase in 2005 was due to higher average cash and investment balances due primarily to the issuance of our Series E convertible preferred stock during 2005 that generated net proceeds of approximately $17.9 million.

          Income tax expense.    For the year ended December 31, 2005, we recorded income tax expense of $513,000 as compared to $160,000 in 2004. The increase in 2005 was due primarily to us being subject to federal alternative minimum tax in 2005 and higher state income taxes. In 2004, income tax expense consisted primarily of taxes related to our international subsidiaries. We have significant net operating loss carryforwards and other deferred tax assets, but have recorded a valuation allowance against them due to the uncertainty surrounding the timing and extent of realization of these tax attributes.

          Net income (loss).    Net income totaled $904,000 for the year ended December 31, 2005 as compared to a net loss of $14.0 million for the year ended December 31, 2004. The increase in net income was due primarily to the increase in revenues, which was partially offset by higher operating expenses as discussed above.

Selected Quarterly Data

          The following table sets forth our unaudited quarterly consolidated statement of operations data for each of the five quarters ended March 31, 2007. In our opinion, the information presented has been prepared on the same basis as the audited consolidated financial statements included in this prospectus, and reflects all necessary adjustments, consisting only of normal recurring

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adjustments, necessary for a fair presentation of this data. The results of historical periods are not necessarily indicative of the results of operations for a full year or any future period.

 
  For the Three Months Ended
 
 
  March 31,
2006

  June 30,
2006

  September 30,
2006

  December 31,
2006

  March 31,
2007

 
 
  (dollars in thousands)

 
Revenues:                                
  Product   $ 11,722   $ 17,744   $ 31,642   $ 19,952   $ 24,452  
  Services     2,712     2,645     3,596     4,337     3,190  
   
 
 
 
 
 
      14,434     20,389     35,238     24,289     27,642  

Cost of revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
  Product     3,893     3,401     13,240     5,106     4,438  
  Services     341     363     429     953     1,387  
   
 
 
 
 
 
      4,234     3,764     13,669     6,059     5,825  
   
 
 
 
 
 
Gross profit     10,200     16,625     21,569     18,230     21,817  

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
  Research and development     3,642     6,064     7,421     8,853     10,066  
  Sales and marketing     5,160     7,584     8,983     8,584     7,069  
  General and administrative     1,516     1,983     2,317     2,699     2,844  
   
 
 
 
 
 
    Total operating expenses     10,318     15,631     18,721     20,136     19,979  
Income (loss) from operations     (118 )   994     2,848     (1,906 )   1,838  
Other income (expense), net     420     428     645     744     710  
   
 
 
 
 
 
Income (loss) before income tax expense     302     1,422     3,493     (1,162 )   2,548  
Income tax expense     (50 )   (92 )   (243 )   (27 )   (243 )
   
 
 
 
 
 
Net income (loss)   $ 252   $ 1,330   $ 3,250   $ (1,189 ) $ 2,305  
   
 
 
 
 
 

          Consistent with our historical experience, revenues fluctuated on a quarterly basis in 2006 and the quarter ended March 31, 2007 due to timing of customer orders and revenue recognition in relation to the shipment of products. Revenues for the quarter ended September 30, 2006 included $15.7 million of revenues associated with us establishing VSOE for maintenance and support for a type of customer, which did not recur in the quarters ended December 31, 2006 and March 31, 2007. This establishment of VSOE also resulted in the recognition of significant cost of products sold of approximately $7.6 million. These costs, in addition to this customer having lower average sales prices, resulted in reduced gross margin.

          Research and development expenses increased in each quarter presented due primarily to the hiring of additional research and development personnel, which in turn resulted in higher prototype and related equipment expense. In addition, we recognized a $2.0 million payment from a customer for professional services, which was recorded as a reduction of research and development expense in the quarter ended March 31, 2006.

          Sales and marketing expenses increased due to the hiring of additional sales personnel and higher commissions in the quarter ended September 30, 2006. In the quarter ended September 30, 2006, customer orders were higher than any other quarter presented, which resulted in incurred

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sales commissions attributable to certain of our sales personnel being paid at higher rates due to them exceeding their sales quotas.

          Our net loss of $1.2 million for the quarter ended December 31, 2006 was largely due to the recognition of $1.2 million of share-based compensation in that period.

          Our operating results may fluctuate due to a variety of factors, many of which are outside of our control. As a result, comparing our operating results on a period-to-period basis may not be meaningful. Most notably we believe our revenues will vary significantly from period to period as a result of the following:

          The variability in our revenues directly impacts our operating performance in any particular period since a significant portion of our operating costs, such as prototype and related equipment, share-based compensation and sales commissions, are either fixed in the short-term or may not vary proportionately with recorded revenues. Commissions are recorded at the point in time we receive a customer order and revenue is recorded at the point in time all of the criteria for revenue recognition have been met. Revenue recognition often occurs in a subsequent period. The cost for prototype and related equipment may vary based on the number of testing personnel we hire and the number of products being developed.

Liquidity and Capital Resources

          We funded our operations from 2000 through 2004 primarily with approximately $100.0 million of net proceeds from issuances of convertible preferred stock. Since 2005, we have funded our operations principally with cash provided by operating activities, which was driven mainly by our revenue growth.

          Cash, cash equivalents and short-term investments.    Our cash, cash equivalents and short term investments at March 31, 2007 of $50.2 million were held for working capital purposes and were invested primarily in money market funds. We do not enter into investments for trading or speculative purposes. Restricted cash, which totaled $1.0 million at December 31, 2006 and $1.1 million at March 31, 2007, and was not included in cash and cash equivalents, was held as collateral for letters of credit related to vendor and lease agreements.

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          Our net cash flows from operating, investing and financing activities for the periods indicated in the table below were as follows:

 
  Year Ended December 31,
  Three Months
Ended
March 31,

 
 
  2004
  2005
  2006
  2006
  2007
 
 
  (dollars in thousands)

   
   
 
Net cash provided by (used in) operating activities   $ (4,095 ) $ 2,015   $ 31,056   $ 5,311   $ (7,934 )
Net cash provided by (used in) investing activities   $ (2,368 ) $ (20,488 ) $ (28,130 ) $ (505 ) $ 8,100  
Net cash provided by (used in) financing activities   $ 25,230   $ 17,780   $ 987   $ (8 ) $ 989  

          Operating activities.    Cash from operating activities consists of significant components of the statements of operations adjusted for changes in various working capital items including deferred revenues, accounts receivable, inventories, accounts payable, prepaid expenses and various accrued expenses.

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          Investing activities.    Cash from investing activities consisted primarily of capital expenditures and purchases and sales of short-term investments associated with our investment balances. The $8.1 million of cash provided by investing activities during the first quarter of 2007 consisted primarily of maturities for short-term investments partially offset by $2.9 million of capital expenditures. The $7.6 million increase in cash used in investing activities in 2006 was due primarily to higher capital expenditures of $6.2 million, related primarily to office expansions and equipment, and $1.2 million of higher net purchases of short-term investments as compared to 2005. Cash used in investing activities increased $18.1 million in 2005 as compared to 2004, $17.4 million of which was due to higher net purchases of short-term investments and $1.6 million of which was due to higher capital expenditures.

          Financing activities.    Cash from financing activities consisted primarily of cash received from the issuance of convertible preferred stock and sales and exercises of our equity instruments. The increase in cash provided by financing activities of $1.0 million in the first quarter of 2007 was due to the exercises of stock options and sales of restricted stock. The decrease in cash provided by financing activities of $16.8 million in 2006 was due primarily to $17.9 million less proceeds from the issuance of convertible preferred stock partially offset by higher proceeds from the sales and exercises of our restricted stock and stock options of $965,000. Cash provided by financing activities decreased $7.5 million in 2005 due primarily to lower proceeds from the issuance of our convertible preferred stock of $7.0 million. At December 31, 2006 we had no long-term debt outstanding and our restricted cash was our only asset pledged as collateral.

          We believe our existing cash and cash equivalents, short-term investments and cash flows from operating activities will be sufficient to finance our planned growth, enhance our products and fund anticipated capital expenditures at least through 2009.

          We may use the net proceeds from this offering for working capital and other general corporate purposes, to finance accelerated growth, develop new product lines and fund acquisitions and strategic investments. These future working capital requirements will depend on many factors, including the rate of our revenues growth, our introduction of new products and enhancements and our expansion of sales and marketing and product development activities. To the extent our existing resources and the proceeds of this offering are insufficient to fund these activities we may need to raise additional funds through bank credit arrangements or public or private equity or debt financings. We also may need to raise additional funds in the event we determine in the future to effect one or more acquisitions of businesses, technologies and products that complement our existing operations. In the event additional funding is required, we may not be

65



able to obtain bank credit arrangements or affect an equity or debt financing on terms acceptable to us or at all.

          Capital expenditures.    We have made capital expenditures primarily for testing and evaluation systems and equipment to support product development, as well as for leasehold improvements and other general purposes to support our growth. Our capital expenditures totaled $1.7 million in 2004, $3.4 million in 2005, $9.6 million in 2006 and $2.9 million in the quarter ended March 31, 2007. We expect capital expenditures to be approximately $11-13 million for the full year of 2007, primarily related to purchases of test equipment, equipment to support product development, leasehold improvements and other general purposes to support our growth.

          Contractual obligations and requirements.    As of March 31, 2007, our commitments under operating leases and purchase obligations were as set forth below. For purposes of the table below, purchase obligations are defined as agreements to purchase goods or services that are enforceable and legally binding and that specify all significant terms, including, fixed or minimum quantities to be purchased, fixed, minimum or variable pricing provisions, and the approximate timing of transactions.

 
  Total
  Less than
1 Year

  1-3
Years

  4-5
Years

  More than
5 Years

 
  (dollars in thousands)

Operating leases   $ 6,812   $ 1,597   $ 3,554   $ 1,661   $
Purchase obligations     8,101     7,801     300        
   
 
 
 
 
  Total   $ 14,913   $ 9,398   $ 3,854   $ 1,661   $
   
 
 
 
 

          We do not engage in any off balance sheet financing activities. We do not have any interest in entities referred to as variable interest entities, which includes special purpose entities and other structured finance entities.

Quantitative and Qualitative Disclosures About Market Risk

          Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and rates. Our market risk exposure is primarily a result of fluctuations in foreign exchange rates and interest rates. We do not hold or issue financial instruments for trading purposes.

          To date, substantially all of our international customer agreements have been denominated in U.S. dollars. Accordingly, we have limited exposure to foreign currency exchange rates and do not enter into foreign currency hedging transactions. The functional currency of our foreign operations in Europe, Asia and South America is the U.S. dollar. Accordingly, all assets and liabilities of these foreign subsidiaries are remeasured into U.S. dollars using the exchange rates in effect at the balance sheet date. Revenues and expenses of these foreign subsidiaries are remeasured into U.S. dollars at the average rates in effect during the year. Any differences resulting from the remeasurement of assets, liabilities and operations of these subsidiaries are recorded within other income (expense) in the consolidated statements of operations. If the foreign currency exchange

66


rates fluctuated by 10% as of March 31, 2007, our foreign exchange gain or loss would have fluctuated by approximately $130,000.

          At March 31, 2007, we had unrestricted cash and cash equivalents and short-term investments totaling $50.2 million. These amounts were invested primarily in money market funds and high quality corporate and government securities. The unrestricted cash and cash equivalents were held for working capital purposes. We do not enter into investments for trading or speculative purposes. Due to the short-term nature of these investments, we believe that we do not have any material exposure to changes in the fair value of our investment portfolio as a result of changes in interest rates. Declines in interest rates, however, would reduce future investment income.

Recent Accounting Pronouncements

          In July 2006, the FASB issued FASB Interpretation 48, Accounting for Uncertainty in Income Taxes, an interpretation of SFAS 109, Accounting for Income Taxes, which prescribes a recognition threshold and measurement process for recording in the financial statements uncertain tax positions taken or expected to be taken in a tax return. In addition, FIN 48 provides guidance on the derecognition, classification, interest and penalties, accounting in interim periods and disclosure requirements for uncertain tax positions. The accounting provisions of FIN 48 were effective for us beginning on January 1, 2007. The adoption of FIN 48 did not have a material impact on our results of operations, financial position or cash flows.

          In September 2006, the FASB issued SFAS 157, Fair Value Measurement, which provides guidance for using fair value to measure assets and liabilities. In addition, SFAS 157 also provides guidance for expanded information about the extent to which companies measure assets and liabilities at fair value, the information used to measure fair value and the effect of fair value measurements on earnings. SFAS 157 applies whenever other standards require (or permit) assets or liabilities to be measured at fair value, but does not expand the use of fair value to any new circumstances. The accounting provisions of SFAS 157 will be effective for us beginning January 1, 2008. We are in the process of determining the effect the adoption of SFAS 157 will have on our consolidated financial statements.

          In February 2007, the FASB issued SFAS 159, The Fair Value Option for Financial Assets and Financial Liabilities, Including an Amendment of FASB Statement No. 115. SFAS 159 allows entities to measure many financial instruments and certain other assets and liabilities at fair value on an instrument-by-instrument basis (the fair value option). The fair value option represents step in the evolution of financial reporting because it considerably expands the ability of entities to select the measurement attribute for certain assets and liabilities. We will be required to adopt the provisions of SFAS 159 January 1, 2008, however earlier adoption is allowed. We will adopt this standard on January 1, 2008. We are in the process of determining the effect the adoption of SFAS 159 will have on our consolidated financial statements.

Change in Accountants

          Ernst & Young LLP previously served as our independent registered public accounting firm. On April 20, 2005, our board of directors dismissed Ernst & Young LLP as our registered public accounting firm. As of April 20, 2005, Ernst & Young LLP had not begun its audit of our consolidated financial statements as of and for the fiscal year ended December 31, 2004.

          Ernst & Young LLP's audit reports on our consolidated financial statements as of and for the years ended December 31, 2002 and 2003 did not contain any adverse opinion or disclaimer of opinion, nor were they qualified or modified as to uncertainty, audit scope or accounting principle

67



except with respect to their audit report on our 2002 financial statements, which contained an explanatory paragraph to highlight a going concern uncertainty. In connection with its audits of our financial statements as of December 31, 2002 and 2003 and for the years then ended and during the interim period from January 1, 2004 through April 20, 2005, there were no disagreements with Ernst & Young LLP on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of Ernst & Young LLP, would have caused Ernst & Young LLP to make reference to the subject matter of the disagreement in connection with its audit reports related to our fiscal 2002 and 2003 consolidated financial statements. During our two fiscal years ended December 31, 2002 and 2003 and during the interim period from January 1, 2004 until April 20, 2005, there were no reportable events as defined in Item 304(a)(1)(v) of Regulation S-K.

          Subsequent to our dismissal of Ernst & Young LLP, management restated its financial statements as of and for the years ended December 31, 2002 and 2003 principally related to the shifting of the recognition of approximately $3.5 million of revenue and the related cost of revenue from 2003 to later periods. We have not consulted with Ernst & Young LLP with regard to the basis for those restatements. As described below, our 2003 financial statements as presented in this prospectus have been audited by PricewaterhouseCoopers LLP and the 2002 financial statements as presented in this prospectus are unaudited.

          Also on April 20, 2005, our board of directors appointed PricewaterhouseCoopers LLP as our new independent registered public accounting firm for the fiscal year ended December 31, 2005 and engaged PricewaterhouseCoopers LLP to conduct an audit of our consolidated financial statements for the year ended December 31, 2004. In connection with this audit, PricewaterhouseCoopers LLP also audited our restated 2003 financial statements.

          We did not consult with PricewaterhouseCoopers LLP on any financial or accounting reporting matters before its appointment. PricewaterhouseCoopers LLP has reported on our consolidated financial statements for each of the fiscal years ended December 31, 2003, 2004, 2005 and 2006 included in this prospectus.

          We delivered a copy of this disclosure to Ernst & Young LLP on March 5, 2007 and requested that Ernst & Young LLP furnish us with a letter addressed to the SEC stating whether or not it agrees with the above statements regarding Ernst & Young LLP. Attached to the registration statement of which this prospectus is a part, as Exhibit 16.1, is a copy of the letter of Ernst & Young LLP to the SEC dated March 16, 2007.

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BUSINESS

Overview

          Starent Networks is a leading provider of infrastructure hardware and software products and services that enable mobile operators to deliver multimedia services to their subscribers. We have created hardware and software products that provide core network functions and services, including access from a wide range of radio networks to the operator's packet core network. Our products and services also provide management of subscriber sessions moving between networks and application of billing and other session policies. Our products and services provide high performance and system intelligence by combining significant computing power, memory and traffic handling capabilities with a flexible, high availability operating system and other proprietary software. Our products integrate multiple network functions and services needed for the delivery of advanced multimedia services, such as video, Internet access, voice-over-IP, e-mail, mobile TV, photo sharing and gaming.

          Consumers and professionals are increasingly using mobile phones and other multimedia handheld devices to stay connected to each other, to access the Internet, to utilize business applications and for entertainment. At the same time, mobile operators are experiencing declining profits from voice services and increasing competitive pressures. To address these changes, mobile operators are deploying next-generation wireless networks, such as third generation, or 3G, networks, that are capable of delivering high quality, mobile multimedia services to subscribers. In deploying these new networks, mobile operators are seeking packet core network products and services that can deliver higher performance and functionality than has been available from products repurposed from wireline applications.

          We have developed our multimedia core network platforms, the ST16 and the ST40, and our proprietary software specifically to address the needs of packet-based mobile networks. Our products are designed to provide mobile operators with new revenue opportunities while also reducing their costs. Our products possess a high degree of system intelligence that allows a mobile operator to understand the details of each subscriber session, enabling individual subscriber management and network traffic flow control. Our products also offer high performance capabilities, such as high capacity, significant data processing rates and high transaction rates, which increase the efficiency of the network and enhance the mobile subscriber's experience. To increase reliability, our platforms employ hardware redundancy and high-availability software techniques. By integrating several network functions into a single element, we allow mobile operators to simplify their networks. We designed our products to be access independent in that they can function across a range of 2.5G, 3G and 4G mobile and wireless radio access networks.

          We sell our hardware and software products to leading mobile operators around the world both directly and through OEMs, system integrators and distributors. We were founded in 2000 and our products were first used commercially by a mobile operator in the first quarter of 2003. Since 2003, our products have been deployed by over 60 mobile operators in 25 countries. We were profitable in fiscal years 2005 and 2006. In 2006, our revenues were $94.4 million and our net income was $3.6 million, including interest income of $2.3 million. For the quarter ended March 31, 2007 our revenues and net income were $27.6 million and $2.3 million, respectively. As of March 31, 2007, we had an accumulated deficit of $103.2 million.

Industry Background

          Mobile operators today are experiencing some of the most dramatic changes to their business models since the advent of mobile communications. These changes are the result of increased competition among mobile operators, the decline in average revenue per subscriber from voice communications and the rapid increase in mobile subscriber demand for a wide range of multimedia services. To address each of these trends, mobile operators are dramatically increasing

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the data services provided through their networks. For example, Verizon Wireless reported that data services grew from 9.8% of subscriber revenue in the fourth quarter of 2005 to 15.8% in the fourth quarter of 2006. This trend is expected to continue. Strategy Analytics, an independent research firm, forecasts that data services will account for 24% of subscriber revenue by 2011. According to Strategy Analytics, global mobile data services revenue is expected to grow 15% annually over the next five years from $106 billion in 2006 to $200 billion in 2011.

          Several factors are accelerating the growth of data-rich multimedia traffic on mobile wireless networks. The number of mobile subscribers worldwide continues to grow as established markets experience increases in subscriber penetration and developing countries adopt mobile communications more rapidly. According to Wireless Intelligence, an independent research firm, the number of worldwide mobile connections is expected to grow 50% from 2.7 billion in 2006 to 4 billion in 2010. Another factor is our increasingly mobile and interconnected society in which information is accessible and communications are available all the time regardless of location. Moreover, as individuals and enterprises become accustomed to increased access to multimedia services on the Internet, including video, music downloads, multimedia messaging and continuous information and news, there is an increasing desire to have mobile access to these services. Also contributing to the growth in traffic is the proliferation of mobile devices designed for multimedia services, such as smart phones, personal digital assistants, laptop computers and other handheld devices.

The Evolution of Mobile Voice and Data Networks

          Mobile operators have been aggressively upgrading their networks in response to the demands created by the growth in voice and multimedia services. IDC, an independent research firm, estimates that capital expenditures in the global wireless infrastructure market in 2006 were more than $46.5 billion. In particular, mobile operators have made significant investments in upgrading from 2G to 3G radio access technologies that can provide greater bandwidth needed to increase voice capacity and deliver high bandwidth data services.

          The two principal radio access interfaces in use today are Code Division Multiple Access, or CDMA, which is used primarily in the United States and Asia, and Global System for Mobile Communications/Universal Mobile Telecommunications System, or GSM/UMTS, which is used in most markets around the world. CDMA mobile operators are currently upgrading to CDMA2000 1X, 1xEV-DO Rev. 0 and 1xEV-DO Rev. A, while GSM/UMTS operators are moving to High Speed Packet Access, or HSPA. Additionally, many operators are exploring more advanced fourth generation, or 4G, access technologies, such as Mobile WiMax and Long Term Evolution/System Architecture Evolution, or LTE/SAE.

          In addition to upgrading the radio access portion of their networks, mobile operators are deploying packet-based technology to supplement or replace circuit-based technology. Traditional circuit networks, which were developed for voice communications, establish a dedicated circuit for each call. However, circuit networks are relatively inefficient and do not allow for high-bandwidth multimedia services. Packet networks split traffic into multiple pieces of data, or packets, that are routed over an Internet Protocol, or IP, network, eliminating the need to establish a dedicated circuit for each call or session. The use of a packet core network increases network efficiency and lowers operating costs, while also enabling an operator to deliver multimedia services. As more multimedia services are deployed, more traffic will flow over the packet network. Over time, we expect mobile operators will convert entirely to packet networks not only for data services but also for all voice communications.

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          The following diagram illustrates the flow of traffic in both circuit-based and packet-based mobile networks:

GRAPHIC

          As mobile operators implement more multimedia services on their packet networks, they are looking to further standardize the delivery of these services. New core network architecture standards are being developed, such as IP Multimedia Subsystem, or IMS, and Multimedia Domain, or MMD. These standards will also be implemented by wireline operators. The implementation of these new delivery architecture standards by both mobile and wireline operators will provide an opportunity for fixed-mobile convergence, which is the ability of a subscriber to have a uniform service experience as they move between a mobile network, such as a 3G network, and a wireline or a fixed wireless network, such as WiFi. With the convergence of mobile and wireline networks, telecommunications operators will be able to provide services to users irrespective of their location, access technology and communications device.

The Need for Intelligent and Robust Network Products and Services

          As mobile networks transition to next-generation access technologies and become increasingly packet-based, many mobile operators want their networks to be "intelligent." An intelligent network provides mobile operators with the ability to inspect data packets from individual transactions in great detail. This deep packet inspection allows the mobile operator to shape each subscriber session using quality of service, bandwidth allocation and traffic flow control. This ability to actively manage network traffic flows allows mobile operators to deliver a consistent experience as subscribers roam through a mobile network or move across different types of networks. In order to offer reliable and intelligent mobile networks that provide a high quality subscriber experience and are able to handle increasing amounts of network traffic, operators require infrastructure products and services that:

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          Historically, mobile operators deploying packet networks have been required to retrofit network infrastructure hardware and software originally designed for wireline networks. These products have included repurposed network switches, routers and off-the-shelf enterprise servers, none of which are able to sufficiently satisfy the needs of mobile operators to deliver efficient and reliable multimedia services.

          While routers and network switches are capable of forwarding packets of information, they lack the integrated processing power, memory and software needed to examine individual packets and apply defined business policies and subscriber services to them. To overcome these shortcomings, mobile operators typically connect the repurposed switches and routers with numerous enterprise servers in order to provide services such as deep packet inspection, virtual private networks and firewalls. These multi-element configurations require network traffic to make multiple hops through different networks and equipment for the additional services. This can cause network traffic delays and limit subscriber and network visibility. These delays result in slower transmission speeds, a lower quality experience for the subscriber and potentially lower service use. These delays also have a significant negative impact on real-time services, such as voice and streaming video.

          These multi-element configurations can also increase network complexity, resulting in a product that is difficult and expensive to scale and often costly to operate. This complexity also makes the deployment of new network functions and addition of new subscriber services time-consuming and expensive because it often requires a new configuration. Additionally, the need for redundancy to improve service reliability further increases both the complexity and the cost of these multi-element configurations. Even with additional redundancy, the complexity of these systems creates multiple potential points of failure, and engineering a multi-element product that can handle the large volumes of traffic on a typical mobile operator's network can be difficult.

Our Solutions

          We have introduced new, "purpose-built" network infrastructure products comprised of both high-performance hardware and software that address the specific challenges faced by mobile operators in offering multimedia services. Our products fulfill a number of network functions that enable carriers to deliver multimedia services across a range of network architectures. Unlike repurposed multi-element configurations, our integrated products and services were designed specifically to provide the high capacity, data processing rates, computer processing capability and software required to meet the needs of mobile operators in offering packet-based multimedia services.

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          Our hardware and software products and services provide six key, integrated capabilities that create enhanced revenue opportunities and facilitate reduced costs for mobile operators:

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Our Strategy

          Our goal is to strengthen our leadership in the mobile network infrastructure market by enabling mobile operators to enhance the subscribers' experience, playing a key role in the migration to an all-packet core network and providing products and services that offer new and increased revenue opportunities for mobile operators. Principal elements of our strategy include the following:

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Our Products

          Our products consist of the ST16 and ST40 hardware platforms, proprietary software that allows the ST16 and ST40 to be configured for specific network functions, software that enables operators to provide in-line services and the Starent Web EMS, a web-based element management system that allows a mobile operator to monitor and operate the ST16 and ST40 through a graphical user interface.

ST16 and ST40 Multimedia Core Platforms

          The ST16 has been deployed since 2003 and we recently announced the ST40, which we expect to be generally available in the third quarter of 2007. The ST16 and ST40 are robust hardware platforms that combine high capacity, availability and performance with subscriber and network intelligence. The ST16 and ST40 are radio access-independent and can be deployed in multiple mobile network environments, including CDMA2000 1X, 1xEV-DO Rev. 0 and Rev. A, GPRS, UMTS networks and, we anticipate in the latter half of 2007, WiFi and Mobile WiMAX networks.

          The ST16 and ST40 each consists of a chassis, application or processing cards and line cards. The application or processing cards provide system management and process all network functions and services. The line cards provide the physical connection to the network.

          The ST16 platform is well suited to meet the needs of most multimedia networks. The ST40 platform offers increased performance capabilities and capacity required by mobile operators for high demand, high capacity, multimedia networks.

Platform

  Call Completions
Per Second*

  Total Subscriber Data
Transmission Speed*

  Session Capacity
(single chassis)*

ST16   Up to 6,000   4.2 Gbps   Up to 1,500,000
ST40   Up to 15,000   10 Gbps   Up to 3,000,000

          The ST16 and ST40 are capable of providing multiple network functions and in-line services.

Network Functions

          The ST16 and ST40 can be configured with software packages to provide each of, or a combination of, the following network functions:

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          Each of the ST16 and the ST40 is able to support one or more of these functions — as required by the mobile operator — in a single piece of equipment by enabling appropriate software features. As a result, the ST16 and the ST40 provide converged, universal services to multiple access technologies, which can be more cost effective and easier to manage than the deployment of many single-purpose access gateways.

"In-line" Services

          The ST16's and ST40's processing power and abundant memory are designed to enable mobile operators to integrate multiple in-line service capabilities into the core network. In-line services that we currently offer or plan to offer in the future include enhanced charging and billing, intelligent traffic control, peer-to-peer detection and control, stateful firewall and content filtering. Mobile operators can deploy in-line services along with required core network functions such as a PDSN, GGSN, Home Agent or ASN Gateway. Deploying these service functions in-line with the core network can provide more efficient network traffic flows and a more secure and satisfying subscriber experience. Additionally, in-line services allow a mobile operator more flexibility and greater simplicity in designing their networks because they have fewer network elements, such as servers, load balancers, firewalls and routers, to deploy and support. This can lead to a higher degree of network optimization, lower operating costs and a higher level of service assurance.

Starent Web EMS

          The Starent Web Element Management System, or EMS, is a centralized service and network element management product that controls the ST16 and ST40. Starent Web EMS is a multi-service element manager, which provides fault, configuration, accounting, performance and security functions through a graphical user interface. Starent Web EMS enables mobile operators to monitor, manage and control the performance of the ST16 and ST40, as well as integrate and interoperate with other components and network management systems. The Starent Web EMS also provides a variety of performance and operation records based on mobile operator defined parameters.

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Technology

          We have spent over six years developing and seek to constantly improve our technology and products. This development includes our custom hardware platforms, our operating system, each network function we support, in-line service capabilities, our element management system and many customer-required features. Our technology integrates system intelligence, service flexibility, high availability and high-performance within products that can distribute all service tasks across the entire platform. In addition, as we have deployed our products with many of the world's largest mobile operators, we have been tasked to address operator specific requirements. These requirements, such as geographic redundancy and custom accounting and protocol development, have required significant development.

Platform Architecture

          Each of the ST16 and ST40 uses a distributed architecture that allows it to allocate tasks or system actions across the entire platform. This distributed architecture provides for simplicity, ability to handle increasing amounts of network traffic and improved reliability, manageability and performance over alternative bladed architectures. A bladed architecture, where each processing card, or blade, has a distinct functionality, requires the addition of new blades for new services and each service would require a unique blade for redundancy. We believe the distributed architecture of our products enables more efficient hardware usage with enhanced performance characteristics. Additionally, the application of billing and other session policies control and packet forwarding paths are separated on different processing resources, which improves the ability to handle increasing amounts of network traffic and traffic flow efficiencies while diminishing latency, or delay, within the session, and ensuring faster session setup and handoff. As a result, mobile operators can deploy more efficient mobile networks that can handle a greater number of concurrent sessions with less hardware.

System Intelligence

          Our products and services provide mobile operators with the ability to inspect data packets from individual transactions in great detail. This deep packet inspection allows the ST16 and the ST40 to intelligently shape each subscriber session using quality of service, bandwidth allocation and traffic flow control, which in turn allows mobile operators to actively manage network traffic flows to improve the subscriber's experience.

          The ST16 and ST40 also offer service steering, which allows mobile operators to efficiently steer or route each session through appropriate services based on key policies for that particular session or subscriber.

          The ST16's and ST40's system intelligence provides mobile operators with the following key capabilities:


Service Assurance

          The ST16 and ST40 employ hardware redundancy as well as high-availability software techniques, such as session recovery, fault containment, and state replication, to maximize network

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uptime, maintain the subscriber session and retain billing information. In addition to the high-availability software techniques, the following service availability features are included with the ST16 and ST40:


Multi-access Technologies

          The use of multiple radio access technologies by mobile operators should be invisible to the subscriber. This seamless mobility between different access technologies enables mobile services to be maintained as the subscriber moves from one access technology to another. For example, as a subscriber using their mobile device on a 3G network enters an airport, they can be seamlessly connected to a higher-bandwidth WiFi network, if available. The architecture of our platforms is designed to support multiple radio access networks, and is capable of doing so in a single platform.

Starent Operating System

          Our operating system software is based on a Linux software kernel, which provides a robust, proven software environment offering design flexibility. We have implemented significant customization and other elements to the Linux software kernel to design the operating system for high availability, service flexibility and high-performance.

          Our operating system has the following key features:

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Customer Support and Services

          We provide wide-ranging and highly interactive support, which we believe is a critical component of our overall product and service offering and value to our customers. Our support and services program covers pre-sales consultation, network testing and trialing, network design, installation, operation, post-sales maintenance and training.

          Our support organization provides 24-hour, year-round operational support, including telephone support. This support team consists of resources throughout the world providing our customers easy access to our support technicians and engineers.

          Our system engineering organization provides our customers and mobile operators with pre-sales consultation, network testing and trialing, network design and installation assistance, third party product integration, as well as support with configuration and operation. This group focuses on interoperability testing with other network components and large or complex support requirements and acts as an escalation point for the support organization.

          We provide our customers with a variety of training courses on the deployment, operation and maintenance of our products. Training is performed in our Technical Education Center located in Tewksbury, Massachusetts or at the customer's location. These courses generally range from two to five days and cover a variety of topics from product overview and installation through configuration and maintenance.

          As of December 31, 2006, our support and services organization consisted of 31 employees located in all major geographical markets, including North America, Asia, Europe and Central and South America.

Sales and Marketing

          We market and sell our products to mobile operators through our direct sales organization and indirectly through our OEMs, system integrators and distributors. In 2006, 50% of our revenues were from direct sales and 50% were from sales through OEMs, system integrators and distributors and in 2005 46% of our revenues were from direct sales and 54% were from sales through OEMs, system integrators and distributors.

          As of March 31, 2007, our sales and marketing organization consisted of 80 employees located in our major geographical markets, including North America, Asia, Europe and Central and South America.

Direct Sales

          Our direct sales organization focuses on selling to leading mobile operators throughout the world. We maintain sales offices in a number of markets throughout the world, including sales offices in the United States and a sales office in each of Brazil, Canada, China, India, Japan, Korea and the United Kingdom.

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OEM, System Integrator and Distributor Relationships

          We have developed relationships with a number of OEMs, system integrators and distributors, including Alcatel-Lucent, Samsung Electronics and ITOCHU Techno-Solutions Corporation, also known as CTC. In some cases, these relationships have allowed us to reach a broader mobile operator market than was possible through our direct sales efforts. We believe that OEMs benefit from these relationships by leveraging our research and development expertise, reducing the time-to-market for new products and realizing incremental revenues from the sale of complementary hardware, software and services resulting from the incorporation of our technology into their product offerings. The system integrators and distributors with whom we have relationships specialize in building integrated products for mobile operators by putting together components from different vendors. Typically, when an OEM, system integrator or distributor services a large mobile operator, we also maintain a direct relationship with the operator. Maintaining a direct relationship with mobile operator customers from our indirect sales channel facilitates offering our customer support and services program.

          While our indirect sales channel continues to be an important part of our overall business, direct relationships with certain mobile operators may offer better opportunities for increasing sales and maintaining a high-level of customer support. Accordingly, we terminated our OEM relationship with Nortel Networks for products in the GSM/UMTS market effective December 2006 because we were no longer strategically aligned with Nortel Networks on future packet core products for mobile operators and because there had been no sales of our products through that indirect channel. We also terminated our OEM relationship with Nortel Networks for products in the CDMA market effective March 2007 because we were no longer strategically aligned with Nortel Networks on future packet core products for mobile operators and to allow specific major mobile operators to purchase directly from us. Sales to Nortel Networks, all of which were made pursuant to the CDMA OEM relationship, accounted for more than 40% of our revenues in 2006. Nortel Networks serviced a significant number of mobile operators in the CDMA market in 2006, the largest of which, Sprint Nextel, accounted for over 50% of our sales to Nortel Networks and the largest 10 of which accounted for over 80% of our sales to Nortel Networks. In place of our OEM relationship with Nortel Networks, we are seeking to establish direct sales relationships with some of the CDMA operators formerly serviced by Nortel Networks, including Sprint Nextel, and are exploring a new reseller relationship with Nortel Networks to continue to service other mobile operator customers indirectly. See "Risk Factors—Risks Related to Our Business and Industry—We recently terminated our OEM relationships with Nortel Networks. If we are unable to establish strong relationships with the mobile operators formerly serviced by Nortel Networks under our CDMA agreement or if we are unable to resolve a dispute with Nortel Networks relating to the termination of our GSM/UMTS agreement, our business will be harmed," for more information.

Marketing and Product Management

          Our marketing and product management organizations focus on defining our product requirements, educating our mobile operator customers and our OEMs, system integrators and distributors, media and analysts on our technology, building brand awareness and supporting the efforts of the sales organization. We market our products through industry events, public relations efforts, collateral materials and on our Internet site. We participate in industry events, including management presentations on the topics of 3G mobile wireless network technologies and the efficient delivery of multimedia services. We believe the combination of these efforts creates awareness of us and our products and technologies.

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Customers

          Our primary customers are mobile operators located throughout the world that are deploying or seeking to deploy packet-based multimedia services over next generation networks. We also sell our products to OEMs and system integrators.

          Over 60 mobile operators in 25 countries, including leading mobile operators using the CDMA and the GSM/UMTS networks, have deployed our products. A representative sample of our deployments to date include networks operated by the following mobile operators:


North America
    Alltel Communications, Inc. (USA)
    Rural Cellular Corporation (USA)
    Sprint Nextel (USA)
    TELUS Corporation (Canada)
    U.S. Cellular (USA)
    Verizon Wireless (USA)
    Virgin Mobile USA, LLC

 

Latin America
    Centennial de Puerto Rico
    Telecomunicaciones Movilnet, C.A. (Venezuela)
    Telefonica Peru
    Telefonica Guatemala
    Telecommunications Services of Trinidad and
    Tobago
    Puerto Rico Telephone Company, Inc.
    VIVO (Telerj Celular S.A.) (Brazil)

Asia
    China Unicom
    Hanoi Telecom Corporation (Vietnam)
    KDDI Corporation (Japan)
    KT Freetel Co., Ltd. (South Korea)
    PT Bakrie Telecom Tbk (Indonesia)
    SK Telecom (South Korea)
    Worldcall Telecom Limited (Pakistan)

 

Europe, Middle East and Africa
    Movicel (Angola)
    Telefonica O2 Czech Republic
    Pelephone (Israel)
    Yeniseytelecom (Russia)
    Multi-Links Telecommunications Limited (Nigeria)
    Vodafone Limited (United Kingdom)
    Zapp (Telemobil SA) (Romania)

          In each of years ended December 31, 2004, 2005 and 2006 and the quarter ended March 31, 2007, we derived more than 90% of our revenues from our top five customers. In 2004, Verizon Wireless represented more than 40% of our revenues and Samsung and CTC each represented more than 20%. In 2005, Verizon Wireless represented 40% of our revenues and CTC and Samsung each represented more than 20%. In 2006, we derived more than 40% of our revenue from Nortel Networks (of which more than half was related to Sprint Nextel) and more than 30% of our revenues from Verizon Wireless. In the quarter ended March 31, 2007, we derived approximately 60% of our revenues from Verizon Wireless and approximately 20% of our revenues from Samsung. We terminated our OEM relationships with Nortel Networks in December 2006.

          Information with respect to our revenues based on customers' geographical locations is set forth below:

 
  Percent of Total
Revenues For

 
 
  Year Ended
December 31,

   
 
 
  Three Months Ended
March 31, 2007

 
 
  2004
  2005
  2006
 
 
   
   
   
  (unaudited)

 
United States and Canada   50 % 48 % 87 % 73 %
Japan   22   31   4   3  
Korea   22   20   1   21  
Rest of world   6   1   8   3  
   
 
 
 
 
  Total   100 % 100 % 100 % 100 %
   
 
 
 
 

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          Information with respect to our long-lived assets by geographic location is set forth below:

 
  At December 31,
   
 
  At March 31, 2007
 
  2005
  2006
 
  (in thousands)

  (unaudited)

United States   $ 3,000   $ 8,396   $ 9,384
India     1,639     2,231     2,968
Rest of world     297     212     216
   
 
 
  Total   $ 4,936   $ 10,839   $ 12,568
   
 
 

          In December 2003, we entered into a general purchase agreement with Cellco Partnership, also known as Verizon Wireless, pursuant to which we supply our products to Verizon Wireless and its affiliates. Verizon Wireless is not under any obligation to purchase products from us under the agreement. The agreement provides that the prices, terms, conditions, warranties and other benefits that we offer to Verizon Wireless be no less favorable than those that we offer to any other customer in the United States that has equal or greater volume purchases and/or purchase commitments to us.

          Under the terms of the agreement, we generally provide Verizon Wireless with licenses to the software embedded in our hardware products solely for use in connection with the product in which such software is embedded. In addition, we grant Verizon Wireless a separate, enterprise-wide, perpetual license to use, copy and modify our Starent Web EMS software. In exchange for up-front license fees, we also grant Verizon Wireless non-exclusive, non-transferable, perpetual, worldwide licenses to several software features in our products for use in connection with an unlimited number of our products. For all software licensed to Verizon Wireless, we agree to place the source code and related documentation for such software into escrow with a third party escrow agent to be released if we are acquired by a competitor of Verizon Wireless, we fail to provide maintenance and support services as specified in the agreement, or we become insolvent or bankrupt.

          The agreement specifies that we provide Verizon Wireless with 24-hour, year-round technical support in exchange for annual maintenance and support fees. These annual maintenance and support fees are determined as a percentage of the price of all products that Verizon Wireless has purchased from us. Verizon Wireless is entitled to service credits, in amounts not to exceed the support fees paid in each quarter, if we fail to meet the support performance standards set forth in the agreement. We also make software development services available to Verizon Wireless from time to time for the development of customizations specific to Verizon Wireless systems in exchange for time and materials based fees. Unless otherwise agreed on a case-by-case basis, Verizon Wireless owns any software customizations we supply under the agreement.

          Pursuant to the agreement, we agree to indemnify, defend and hold harmless Verizon Wireless and its affiliates from any claims of infringement or misappropriation of intellectual property rights arising from or in connection with the products and services provided by us or any claims arising from our products or the actions of our employees.

          The agreement renews annually unless either Verizon Wireless or we provide notice of termination at least sixty days prior to the end of the then-current term. Verizon Wireless may terminate the agreement at any time with or without cause.

Research and Development

          Our technology requires continued investment to maintain our leadership position. Accordingly, we believe that a strong research and development program is critical to our business. Our research and development organization focuses on designing, developing and enhancing our products as well as the technology underlying our products, investigating new technologies,

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performing testing and quality assurance activities and integrating our products with third-party products, if necessary.

          As of March 31, 2007, we had 74 research and development personnel in the United States and 195 research and development personnel in India. Our research and development organization has extensive industry experience that provides us with the core competencies required to deliver products suitable for global mobile operator networks. Our employees' expertise includes:

          We have made substantial investments in product and technology development since we were founded in 2000. Research and development expenses totaled $13.3 million in 2004, $18.1 million in 2005, $26.0 million in 2006 and $10.1 million in the quarter ended March 31, 2007.

Manufacturing

          We outsource the manufacturing of our ST16 and ST40 products to Plexus Corp., a global provider of subcontracting services. Plexus fulfills our manufacturing requirements in Boise, Idaho, and has other locations across the United States at which our requirements also may be fulfilled. Once products are manufactured, they are sent to our headquarters in Tewksbury, Massachusetts, where we perform final assembly and quality control testing to ensure reliability. We believe that outsourcing our manufacturing enables us to conserve working capital, better adjust to fluctuations in demand and provide for timely delivery to our customers.

          Although there are multiple sources for most of the component parts of our products, some components are sourced from single or, in some cases, limited sources. For example, Plexus purchases through electronics distributors various types of central processors, network processors, switch fabrics, oscillators and memory devices from various component manufacturers, including Broadcom Corporation, Intel Corporation, Viking Interworks, a division of Sanmina-SCI, and Vitesse Semiconductor Corporation, which are presently Plexus' sole sources for these particular components. We typically do not have a written agreement with any of these component manufacturers to guarantee the supply of the key components used in our products, and we do not require Plexus to have a written agreement with these component manufacturers. We regularly monitor the supply of the component parts and the availability of alternative sources. We provide forecasts to Plexus so that it can source the key components in advance of their anticipated use, with the objective of maintaining an adequate supply of these key components for use in the manufacture of our products. In addition, we maintain a small inventory of key components that we believe are most critical to the manufacturing process.

Competition

          The market for mobile 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. With the growth and adoption of mobile multimedia services, we expect competition to continue and intensify for all our products and in all our target markets.

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          We believe there are a number of important factors to compete effectively in our market, including:


          Our primary competitors consist of major network infrastructure providers, including Cisco Systems, Inc. and UTStarcom, Inc. in the CDMA2000 market and LM Ericsson Telephone Co., Nokia Corporation and Cisco Systems in the GSM/UMTS market. As next-generation technologies such as Mobile WiMax, IMS and MMD develop, we expect to compete in those new markets with some of these existing competitors as well as with new competitors. In our sales to OEM customers, we face the competitive risk that OEMs might seek to develop in-house alternative products to those currently provided by us. Additionally, OEMs might elect to source technology from our competitors.

          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. Our competitors may have more extensive customer bases and broader customer relationships than we do, including relationships with our potential customers. In addition, these competitors may have longer operating histories and greater name recognition than we do. Our competitors may be in a stronger position to respond quickly to new technologies and may be able to market and sell their products more effectively. Moreover, if one or more of our competitors were to merge or partner with another of our competitors, the change in the competitive landscape could adversely affect our customer relationships and competitive position or otherwise affect our ability to compete effectively.

Intellectual Property

          Our success depends in part upon our ability to obtain and maintain proprietary protection for our products, technology and know-how, to operate without infringing the proprietary rights of others and to prevent others from infringing our proprietary rights. Our policy is to seek to protect our proprietary position by, among other methods, filing United States and foreign patent applications related to our proprietary technology, inventions and improvements that are important to the development of our business. We also rely on trade secrets, know-how, continuing technological innovation and in-licensing opportunities to develop and maintain our proprietary position.

          As of March 31, 2007, we owned a total of 2 United States patents and 33 United States patent applications, as well as foreign counterparts to 27 of these patent applications and patents.

          The expiration date for each of our issued United States patents is 2023. The patent positions of companies like ours are generally uncertain and involve complex legal and factual questions. Our ability to maintain and solidify our proprietary position for our technology will depend on our success in obtaining effective patent claims and enforcing those claims once granted. We do not know whether any of our patent applications or those patent applications that we license will result in the issuance of any patents. Our issued patents and those that may issue in the future, or those licensed to us, may be challenged, invalidated or circumvented, which could limit our ability to stop competitors from marketing related products or shorten the term of patent protection that we may have for our products. In addition, the rights granted under any issued patents may not provide us

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with competitive advantages against competitors with similar technology. Furthermore, our competitors may independently develop similar technologies or duplicate any technology developed by us. Because of the extensive time required for development, testing and regulatory review of a potential product, it is possible that, before any of our products under development can be commercialized, any related patent may expire or remain in force for only a short period following commercialization, thereby reducing any advantage of the patent.

          We rely, in some circumstances, on trade secrets to protect our technology. Trade secrets, however, are difficult to protect. We seek to protect our proprietary technology and processes, in part, by confidentiality agreements with our employees, consultants, scientific advisors and other contractors. These agreements may be breached, and we may not have adequate remedies for any breach. In addition, our trade secrets may otherwise become known or be independently discovered by competitors. To the extent that our employees, consultants or contractors use intellectual property owned by others in their work for us, disputes may arise as to the rights in related or resulting know-how and inventions.

          We use trademarks on some of our products and believe that having distinctive marks may be an important factor in marketing our products. We have registered our Starent® and ST16® marks in the United States. Our other trademarks include the Starent Networks logo ST40™ and VIM™. We have also registered some of our marks in a number of foreign countries. Although we have a foreign trademark registration program for selected marks, we may not be able to register or use such marks in each foreign country in which we seek registration.

Employees

          As of March 31, 2007, we had 458 full-time employees, with 269 in research and development, 17 in operations, 80 in sales and marketing, 36 in support, and 56 in general and administration. Of our employees, 191 are located in the United States and 267 are abroad. We consider our current relationship with our employees to be good. None of our employees are represented by labor unions or have collective bargaining agreements.

Facilities

          Our corporate headquarters are located in Tewksbury, Massachusetts, where we occupy an approximately 55,000 square foot facility under a lease expiring in February 2011. We use these facilities for administration, research and development, as well as for quality control, testing and shipping of our products. We also own a building in Pune, India and lease a facility in Bangalore, India that we use for research and development activities.

          We also lease sales and development offices in Buzzards Bay, Massachusetts; Chicago, Illinois; Overland Park, Kansas; Reston, Virginia; Redmond, Washington; Sao Paulo, Brazil; Toronto, Canada; Beijing, China; Tokyo, Japan; Seoul, South Korea and London, United Kingdom. We believe that our current facilities are sufficient for our current needs. We intend to add new facilities or expand existing facilities as we add employees or expand our markets, and we believe that suitable additional or substitute space will be available as needed to accommodate any such expansion of our operations.

Legal Proceedings

          UTStarcom, Inc. has filed three lawsuits against us alleging patent infringement and related claims beginning in March 2004 and most recently on May 8, 2007—the District Court's ruling in our favor on the first of these lawsuits was upheld on appeal, the second suit has been stayed by the agreement of the parties and we believe we have meritorious defenses to the third pending case.

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          In March 2004, UTStarcom filed a complaint against us in the United States District Court for the Northern District of California alleging infringement of two patents assigned to UTStarcom. In August 2004, UTStarcom filed an amended complaint for infringement, asserting only one of those patents, U.S. Patent No. 6,628,671, entitled "Instant Activation of Point-to-Point Protocol (PPP) Connection Using Existing PPP State," which we refer to as the '671 patent. In September 2004, we answered the amended complaint, denied the infringement allegations contained in the complaint and filed counterclaims against UTStarcom seeking a declaratory judgment that we did not infringe the '671 patent and that the '671 patent was invalid and unenforceable. In August 2005 the District Court issued a claim construction order, construing five terms of the patent. Based on the District Court's claim construction, in September 2005 we filed a motion for summary judgment of noninfringement. UTStarcom also filed a motion for summary judgment on September 20, 2005 that we were estopped from contesting the validity of the '671 patent. The District Court issued an order granting our motion for summary judgment in December 2005. In this order, the District Court ruled that we did not infringe UTStarcom's patent on multiple grounds. UTStarcom appealed this order to the United States Court of Appeals for the Federal Circuit. In April 2007, the United States Court of Appeals for the Federal Circuit affirmed the District Court's summary judgment ruling in our favor.

          In February 2005, UTStarcom filed an additional complaint against us in the United States District Court for the Northern District of California seeking unspecified damages and injunctive relief. The complaint alleges infringement by us of UTStarcom's U.S. Patent No. 6,829,473, entitled "Roaming and Hand-Off Support for Prepaid Billing for Wireless Data Networks," which we refer to as the '473 patent. In May 2005, we answered the complaint, denied the infringement allegations contained in the complaint, and filed counterclaims against UTStarcom seeking a declaratory judgment that we did not infringe the '473 patent and that the '473 patent was invalid and unenforceable. In July 2005, we filed an amended answer and counterclaims to the '473 patent complaint. A claim construction hearing had been scheduled on February 14, 2007; however, in December 2006, UTStarcom filed a reissue patent application with the United States Patent and Trademark Office relating to the '473 patent. In January 2007, by agreement of the parties, the District Court stayed the case pending the outcome of UTStarcom's reissue application relating to the patent. We believe that we have meritorious defenses against any resulting reissued patent, and we are prepared to vigorously defend the '473 patent case through trial.

          In May 2007, UTStarcom filed a new complaint against us and a number of our employees and former employees in the United States District Court for the Northern District of Illinois alleging violations of the Illinois trade secrets act, infringement of five patents assigned to UTStarcom, intentional interference with UTStarcom's business relations and declarations of ownership relating to one of our patents and three of our patent applications. The complaint contains allegations, among others, that a number of former employees of a business unit UTStarcom acquired, who subsequently worked for us, took UTStarcom's trade secrets with them and improperly used those trade secrets to develop, manufacture and market our 3G wireless products, and that such products incorporate various UTStarcom confidential technical information, including UTStarcom's proprietary virtual private network and EV-DO features. UTStarcom further alleges that we have disclosed UTStarcom's trade secrets in one of our patents and three of our patent applications, and that these patent applications legally belong to UTStarcom based on the inventors' previous work at the business unit acquired by UTStarcom. The complaint seeks unspecified monetary damages, injunctive relief, declarations of ownership relating to the specified patent and three patent applications owned by us, costs and attorneys fees. We believe we have meritorious defenses to each of UTStarcom's claims in this lawsuit and we are prepared to vigorously defend the lawsuit.

          In addition, we are subject to other legal proceedings, claims and litigation arising in the ordinary course of business. Defending lawsuits requires significant management attention and financial resources and the outcome of any litigation, including the matters described above, is inherently uncertain. We do not, however, currently expect that the ultimate costs to resolve pending matters will have a material adverse effect on our consolidated financial position, results of operations or cash flows.

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MANAGEMENT

Executive Officers and Directors

          Our executive officers and directors and their ages and positions as of March 31, 2007 are set forth below:

Name

  Age
  Position(s)
Ashraf M. Dahod   56   President and Chief Executive Officer; Chairman
John P. Delea, Jr.    45   Vice President of Finance and Administration
Pierre G. Kahhale   50   Vice President of Worldwide Field Operations
Vijay Kathuria   46   Vice President and General Manager, India
Robert J. Kelly   50   Vice President of Manufacturing Operations
Thierry Maupilé   48   Vice President of Global Marketing and Business Development
Paul J. Milbury   58   Vice President of Operations and Chief Financial Officer
Kevin F. Newman   46   Vice President and General Counsel
Anthony P. Schoener   46   Vice President of Engineering
Gennady H. Sirota   42   Vice President of Product Management
Edward T. Anderson   57   Director
Timothy A. Barrows   50   Director
Sean M. Dalton   36   Director
Matthew J. Desch   49   Director
James A. Dolce, Jr.   44   Director
Kenneth A. Goldman   57   Director

          Ashraf M. Dahod is a co-founder of Starent Networks and has served as a director and our President and Chief Executive Officer since August 2000. Prior to founding our company, in 1996, Mr. Dahod co-founded NetCore Systems, Inc., a producer of large-scale, high performance switching products, which was acquired by Tellabs, Inc. in 1999. In 1988, Mr. Dahod co-founded Sigma Network Systems, Inc., a provider of multi-layer, multi-protocol switching systems, and continued to serve in a senior management position with Sigma Network Systems after it was acquired by Standard Microsystems Corporation in 1992. In 1981, Mr. Dahod founded Applitek Corporation, which developed the first cable modem. Applitek was later renamed LANCity and was acquired by Bay Networks, Inc., which was subsequently acquired by Nortel Networks.

          John P. Delea, Jr. has served as our Vice President of Finance and Administration since July 2002 and, until February 2007, as our Chief Financial Officer. From July 2000 to June 2002, Mr. Delea served as Chief Financial Officer of Quantum Bridge Communications, Inc., a networking equipment provider. From October 1996 to June 2000, Mr. Delea served as Chief Financial Officer of NetGenesis Corp., a web analytics provider. Mr. Delea is a Certified Public Accountant.

          Pierre G. Kahhale has served as our Vice President of Worldwide Field Operations since August 2002. From March 2000 to November 2001, Mr. Kahhale served as Chief Executive Officer of Latus Lightworks, Inc., an optical networks company. From May 1981 to March 2000, Mr. Kahhale held several senior North American and European sales and account management positions with Nortel Networks, a network communications provider. When Mr. Kahhale left Nortel Networks in March 2000, he was serving as its Vice President for Wireless Networks in the Americas.

          Vijay Kathuria has served as our Vice President and General Manager, India since February 2004. From June 1991 to January 2004, Mr. Kathuria served as Vice President and General Manager of NuLink, Incorporated, an engineering services provider that he co-founded and which we acquired in February 2004.

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          Robert J. Kelly has served as our Vice President of Manufacturing Operations since February 2007 and served as our Vice President of Operations from June 2004 to February 2007. From October 2001 to May 2003, Mr. Kelly served as Senior Director of Operations at Motorola, Inc., a wireless and broadband communications company. From April 1999 to October 2001, Mr. Kelly served as Vice President of Operations at RiverDelta Networks Inc., an internet infrastructure developer. From June 1997 to April 1999, Mr. Kelly served as Vice President of Manufacturing at Packet Engines, Inc., a supplier of Gigabit Ethernet products. From January 1994 to June 1997, he served as Vice President of Operations at FORE Systems, Inc., an enterprise switching provider.

          Thierry Maupilé has served as our Vice President of Global Marketing and Business Development since January 2007. From July 2002 to January 2007, Mr. Maupilé served as Vice President, Business Development of IPWireless Inc., a mobile broadband technology company. From September 1999 to July 2002, Mr. Maupilé served as Vice President (GTSI) of Strategy & Business Development, Global Telecom Solutions Sector, EMEA Region of Motorola, Inc.

          Paul J. Milbury has served as our Vice President of Operations and Chief Financial Officer since February 2007. From December 2000 to March 2007, Mr. Milbury served as Vice President and Chief Financial Officer of Avid Technology, Inc., a digital media creation, management, and distribution solutions company. From April 2000 to December 2000, Mr. Milbury served as Chief Financial Officer of iBelong.com, Inc., a company that developed and managed customized Internet portals. Prior to that, Mr. Milbury spent 19 years at Digital Equipment Corporation (now part of Hewlett-Packard Computer Corporation), where in 1995 he became Vice President and Treasurer.

          Kevin F. Newman has served as our Vice President and General Counsel since October 2005. From July 2003 to September 2005, Mr. Newman served as an independent legal consultant for public companies. From April 2000 to June 2003, he served as Vice President and General Counsel of ePresence, Inc., a technology services company. From February 1996 to March 2000, Mr. Newman served as Assistant General Counsel — Mergers and Acquisitions of Wang Global, a worldwide provider of network services.

          Anthony P. Schoener is a co-founder of Starent Networks and has served as our Vice President of Engineering since August 2000. From January 1998 to June 2000, Mr. Schoener served as Director of Software Development at 3Com Corporation, a provider of voice and data networking solutions. From June 1996 to December 1997, Mr. Schoener served as Vice President of Engineering for NetGenesis Corp. From January 1990 to March 1996, he served as Director of Software Development at Bay Networks Inc., a provider of network access solutions.

          Gennady H. Sirota has served as our Vice President of Product Management since November 2000. From November 1999 to November 2000, Mr. Sirota served as Director of Wireless Product Management, Carrier Systems Group at 3Com Corporation. From January 1987 to November 1999, he served Motorola, Inc., a wireless and broadband communications company, in senior product management and engineering positions. When Mr. Sirota left Motorola in November 1999, he was serving in their product line management organization.

          Edward T. Anderson has served as one of our directors since August 2000. Mr. Anderson has been the Managing Partner of North Bridge Venture Partners, a venture capital firm, since May 1994. Prior to joining North Bridge Venture Partners, Mr. Anderson was a general partner of ABS Ventures, the venture capital affiliate of Alex Brown & Sons. Mr. Anderson is also a member of the board of directors of Sonus Networks, Inc., a voice over IP infrastructure solutions provider.

          Timothy A. Barrows has served as one of our directors since July 2004. Mr. Barrows has been a Managing Member at Matrix Partners, a venture capital firm, since September 1985.

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Mr. Barrows is also a member of the board of directors of Sycamore Networks, Inc., a networking solutions provider.

          Sean M. Dalton has served as one of our directors since July 2001. Mr. Dalton has been a Managing General Partner of Highland Capital Partners, a venture capital firm, since December 2005. Mr. Dalton joined Highland Capital Partners in May 1998 as a Senior Associate and became a General Partner in January 2000. Prior to 1998, Mr. Dalton was a Product Manager — Internet Services at GTE, a local telephone service provider, where he developed remote access and other network services for internet service providers and large business customers.

          Matthew J. Desch has served as one of our directors since June 2006. Mr. Desch is the Chief Executive Officer of Iridium Satellite LLC, where he has served since September 2006. From July 2002 to October 2005, he served as the Chief Executive Officer of Telcordia Technologies, a telecommunications software and services provider. From July 1987 to March 2000, Mr. Desch held several management positions with Nortel Networks, a network communications provider. When Mr. Desch left Nortel Networks in March 2000, he was serving as its Executive Vice President and President, Global Service Providers. Mr. Desch also serves as chairman of the board directors of Airspan Networks, Inc., a wireless voice and data systems provider.

          James A. Dolce, Jr. has served as one of our directors since November 2006. Mr. Dolce is the Chief Executive Officer of VeriVue, Inc., a private telecommunications company, where he has served since November 2006. From July 2002 to April 2006, he served as the Executive Vice President of Field Operations for Juniper Networks, Inc., a networking and security solutions provider. From January 2000 to July 2002, Mr. Dolce served as President and Chief Executive Officer of Unisphere Networks, a provider of data and voice platforms for service providers.

          Kenneth A. Goldman has served as one of our directors since February 2006. Mr. Goldman has been the Executive Vice President and Chief Financial Officer of Dexterra, Inc., a provider of mobile enterprise software, since November 2006. From August 2000 to March 2006, Mr. Goldman served as Senior Vice President, Finance and Administration and Chief Financial Officer of Siebel Systems, Inc., a supplier of customer software solutions and services. From December 1999 to December 2003, Mr. Goldman was a member of the Financial Accounting Standards Advisory Council. From July 1996 to July 2000, Mr. Goldman served as Senior Vice President of Finance and Chief Financial Officer of Excite@Home, Inc., an Internet service provider. Mr. Goldman is a member of the board of directors of Leadis Technology Inc., a semiconductor company, and Juniper Networks and is a member of the board of trustees of Cornell University.

Board Composition

          Our board of directors currently consists of seven members, all of whom were elected as directors pursuant to the board composition provisions of an investor rights agreement that we have entered into with holders of our convertible preferred stock, our chief executive officer and our vice president of engineering. The board composition provisions of the investor rights agreement will terminate upon the closing of this offering and there will be no further contractual obligations regarding the election of our directors. Our directors hold office until their successors have been elected and qualified or until the earlier of their resignation or removal. There are no family relationships among any of our directors or executive officers.

          In accordance with the terms of our restated certificate of incorporation and amended and restated by laws that will become effective upon the closing of this offering, our board of directors will be divided into three classes, each of which shall consist, as nearly as possible, of one-third of the total number of directors constituting our entire board of directors and each of whose members will serve for staggered three year terms. As a result, only one class of our board of directors will

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be elected each year from and after the closing of this offering. Upon the closing of this offering, the members of the classes will be divided as follows:

          Our restated certificate of incorporation and amended and restated by laws that will become effective upon the closing of this offering provide that our directors may be removed only for cause by the affirmative vote of the holders of at least 662/3% of the votes that all our stockholders would be entitled to cast in an annual election of directors. Upon the expiration of the term of a class of directors, directors in that class will be eligible to be elected for a new three-year term at the annual meeting of stockholders in the year in which their term expires.

Director Independence

          Under Rule 4350 of the Nasdaq Marketplace Rules, a majority of a listed company's board of directors must be comprised of independent directors within one year of listing. In addition, Nasdaq Marketplace Rules require that, subject to specified exceptions, each member of a listed company's audit, compensation and nominating and governance committees be independent and that audit committee members also satisfy independence criteria set forth in Rule 10A-3 under the Securities Exchange Act of 1934, as amended. Under Rule 4200(a)(15) of the Nasdaq Marketplace Rules, a director will only qualify as an "independent director" if, in the opinion of that company's board of directors, that person does not have a relationship that would interfere with the exercise of independent judgment in carrying out the responsibilities of a director. In order to be considered to be independent for purposes of Rule 10A-3, a member of an audit committee of a listed company may not, other than in his or her capacity as a member of the audit committee, the board of directors, or any other board committee: (1) accept, directly or indirectly, any consulting, advisory, or other compensatory fee from the listed company or any of its subsidiaries; or (2) be an affiliated person of the listed company or any of its subsidiaries.

          In March 2007, our board of directors undertook a review of the composition of our board of directors and its committees and the independence of each director. Based upon information requested from and provided by each director concerning their background, employment and affiliations, including family relationships, our board of directors has determined that none of Messrs. Anderson, Barrows, Dalton, Desch, Dolce or Goldman, representing six of our seven directors, has a relationship that would interfere with the exercise of independent judgment in carrying out the responsibilities of a director and that each of these directors is "independent" as that term is defined under Rule 4200(a)(15) of the Nasdaq Marketplace Rules. Our board of directors also determined that Messrs. Anderson, Dalton and Goldman, who comprise our audit committee, Messrs. Barrows, Desch and Dolce, who comprise our compensation committee, and Messrs. Barrows, Dolce and Goldman, who comprise our nominating and governance committee, satisfy the independence standards for those committees established by applicable SEC rules and the Nasdaq Marketplace Rules. In making this determination, the board of directors considered the relationships that each non-employee director has with our company and all other facts and circumstances the board of directors deemed relevant in determining their independence, including the beneficial ownership of our capital stock by each non-employee director.

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Board Committees

          Our board of directors has established an audit committee, a compensation committee and a nominating and governance committee. Each committee operates under a charter that has been approved by our board of directors.

Audit Committee

          The members of our audit committee are Messrs. Anderson, Dalton and Goldman. Our board of directors has determined that each of the members of our audit committee satisfies the requirements for financial literacy under the current requirements of the Nasdaq Global Market rules and regulations. Mr. Goldman is the chairman of the audit committee and is also an "audit committee financial expert," as defined by SEC rules and satisfies the financial sophistication requirements of the Nasdaq Global Market. Our audit committee assists our board of directors in its oversight of our accounting and financial reporting process and the audits of our financial statements.

          The audit committee's responsibilities include:

          All audit services to be provided to us and all non-audit services, other than de minimus non-audit services, to be provided to us by our registered public accounting firm must be approved in advance by our audit committee.

Compensation Committee

          The members of our compensation committee are Messrs. Barrows, Desch and Dolce. Mr. Dolce is the chairman of the compensation committee. Our compensation committee assists our board of directors in the discharge of its responsibilities relating to the compensation of our executive officers. The compensation committee's responsibilities include:

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Nominating and Governance Committee

          The members of our nominating and governance committee are Messrs. Barrows, Dolce and Goldman. Mr. Barrows is the chairman of the nominating and governance committee. The nominating and governance committee's responsibilities include:

Compensation Committee Interlocks and Insider Participation

          None of our executive officers serves as a member of the board of directors or compensation committee, or other committee serving an equivalent function, of any entity that has one or more executive officers who serve as members of our board of directors or our compensation committee. None of the members of our compensation committee is an officer or employee of our company, nor have they ever been an officer or employee of our company.

Code of Business Conduct and Ethics

          We will adopt a code of business conduct and ethics that applies to all of our employees, officers and directors, including those officers responsible for financial reporting. The code of business conduct and ethics will be available on our website at www.starentnetworks.com. We expect that any amendments to the code, or any waivers of its requirements, will be disclosed on our website.

Director Compensation

          Each of our non-employee directors who is not affiliated with holders of our convertible preferred stock is currently entitled to annual cash compensation of $10,000, payable quarterly. In addition, non-employee directors are reimbursed for reasonable travel and other expenses incurred in connection with attending our board and committee meetings.

          We have granted stock awards and options to purchase shares of our common stock to our non-employee directors. The following table sets forth information regarding compensation earned by our non-employee directors during the fiscal year ended December 31, 2006.

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Our chief executive officer did not receive any compensation in connection with his service as a director in 2006.

Name

  Fees
Earned or
Paid in
Cash
($)

  Stock
Awards
($)(4)

  Option
Awards
($)

  All Other
Compensation
($)

  Total
($)(7)

Edward T. Anderson     (5)    
Timothy A. Barrows     (5)    
Sean M. Dalton       6,378 (6)   6,378
Matthew J. Desch   5,833 (1)   22,943 (6)     28,776
James A. Dolce, Jr.    1,667 (2) (5)     1,667
Kenneth A. Goldman   9,167 (3)   34,892 (6)   44,059

(1)
Mr. Desch became a director in June 2006.

(2)
Mr. Dolce became a director in November 2006.

(3)
Mr. Goldman became a director in February 2006.

(4)
Valuation based on the dollar amount of option grants recognized for financial statement reporting purposes pursuant to SFAS 123R with respect to fiscal 2006, except that such amounts do not reflect an estimate of forfeitures related to service-based vesting conditions. The assumptions used by us with respect to the valuation of option grants are set forth in Note 3 — "Share-Based Compensation" to our financial statements included elsewhere in this prospectus.

(5)
The director received 66,666 shares of restricted stock granted on December 22, 2006 at a purchase price of $5.13 per share, which our board of directors determined was the fair market value of our common stock on the date of grant. No compensation expenses were recognized for financial statement reporting purposes pursuant to SFAS 123R for these grants because the shares were granted at a purchase price equal to the fair market value of our common stock on the date of grant as determined by our board of directors. The shares of restricted stock vest over a four-year period, with 25% of the shares vesting on December 22, 2007. Thereafter, an additional 6.25% of the shares will vest every three months, subject to continued service on our board of directors.

(6)
Represents an option to purchase 66,666 shares of common stock. Mr. Dalton's stock option was granted on December 14, 2006 at an exercise price of $5.13 per share; Mr. Desch's stock option was granted on June 15, 2006 at an exercise price of $1.65 per share; and Mr. Goldman's stock option was granted on April 18, 2006 at an exercise price of $1.65 per share. In each case, the exercise price of the stock option was the price that our board of directors determined was the fair market value of our common stock on the date of grant. Each stock option vests over a four-year period, with 25% of the shares underlying the option vesting on the first anniversary of the date of grant, or for Mr. Goldman's stock option on February 2, 2007, and an additional 6.25% of the shares underlying the option vesting each three months thereafter, subject to continuous service on our board of directors.

(7)
The aggregate number of stock awards and the aggregate number of option awards outstanding for each non-employee director at December 31, 2006, were as follows:

Name

  Aggregate
Stock Awards

  Aggregate
Option Awards

Edward T. Anderson   (A)
Timothy A. Barrows   66,666  
Sean M. Dalton     66,666
Matthew J. Desch     66,666
James A. Dolce, Jr.   66,666  
Kenneth A. Goldman     66,666

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          In May 2007, our board of directors approved a compensation program, which will become effective upon the closing of this offering, pursuant to which we will pay each non-employee director an annual retainer of $20,000 for service as a director. Each non-employee director other than committee chairpersons will receive an additional annual fee of $6,000 for service on the audit committee, $5,000 for service on the compensation committee and $2,500 for service on the nominating and governance committee. The chair of the audit committee will receive an additional annual retainer of $14,000, the chair of the compensation committee will receive an additional annual retainer of $8,000 and the chair of the nominating and governance committee will receive an additional annual retainer of $5,000. We will reimburse each non-employee member of our board of directors for out-of-pocket expenses incurred in connection with attending our board and committee meetings.

          In addition, each non-employee director will receive an option to purchase 70,000 shares of our common stock upon his or her initial appointment to our board of directors. These options will vest over a four-year period, with 25% of the shares underlying the option vesting on the first anniversary of the date of grant and an additional 6.25% of the shares underlying the option vesting each three months thereafter, subject to the non-employee director's continued service as a director. The exercise price of these options will equal the fair market value of our common stock on the date of grant.

          Each non-employee director will also receive an annual option grant to purchase 20,000 shares of our common stock at each annual meeting after which he or she continues to serve as a director, provided each such non-employee director has served on our board of directors for at least six months. However, in 2007, in lieu of an annual option grant at our 2007 annual meeting, our non-employee directors will receive the following pro rata option grants at the first board meeting following the closing of this offering based on the grant date of each director's initial equity grant: Mr. Anderson—7,068, Mr. Barrows—7,068, Mr. Dalton—7,068, Mr. Desch—17,480, Mr. Dolce—7,068 and Mr. Goldman—20,000. All of these options will vest over a five-year period, with 20% of the shares underlying the option vesting on the first anniversary of the date of grant and an additional 5% of the shares underlying the option vesting each three months thereafter, subject to the non-employee director's continued service as a director. The exercise price of these options will equal the fair market value of our common stock on the date of grant.

Executive Compensation

Compensation Discussion and Analysis

          Our current executive compensation policies and objectives were developed and implemented by our board of directors while we were a private company. Therefore, our compensation program, and the process by which it was developed, was less formal than that which we plan to employ as a public company.

          We have recently formed a formal compensation committee of our board of directors to oversee our executive compensation program. The compensation committee consists of three independent directors. That committee has been delegated authority from our board of directors and its activities will be governed by a compensation committee charter. One of the roles of the compensation committee under its charter is to review and approve annually all compensation decisions relating to our executive officers.

          Prior to the formation of the formal compensation committee, our board of directors received and considered recommendations relating to executive compensation decisions from our chief executive officer. These recommendations initially were considered, along with other information, on behalf of our board of directors by three of our independent directors. Those independent directors

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acted in an informal compensation committee role, advising our board of directors with respect to executive compensation decisions.

          Given the limited formal procedures we have employed as a private company, we expect that our approach to executive compensation as a public company, as developed and implemented by our compensation committee, will vary significantly from our historical practice. We expect that the compensation committee will utilize external analyses and other benchmarking to inform its executive compensation decisions and processes.

          We have not previously retained a compensation consultant to review our policies and procedures relating to executive compensation and we have not formally benchmarked our compensation to that of other companies. However, in anticipation of becoming a public company, our board of directors has approved the engagement of a compensation consulting firm to provide advice and resources to our compensation committee.

          The primary objectives of our executive compensation program are to:

          To achieve these objectives, we expect our compensation committee to evaluate our executive compensation program with the objective of setting compensation at levels the committee believes to be competitive with those of other companies in our industry. In addition, we intend our executive compensation program to tie a substantial portion of each executive's overall compensation to key strategic, financial and operational goals set by our board of directors, such as annual bookings targets. Historically, our board of directors has considered our financial goals on a company basis and to a lesser extent attainment of individual objectives in determining executive compensation. Finally, we will continue to provide a portion of our executive compensation in the form of equity awards that vest over time, which we believe will help to retain our executives and to align their interests with those of our stockholders by allowing the executives to participate in the longer term success of our company as reflected in stock price appreciation.

          At this time, the primary elements of our executive compensation program are:

          We do not have any formal or informal policy or target for allocating compensation between long-term and short-term compensation, between cash and non-cash compensation or among the different forms of non-cash compensation. Instead, we have determined subjectively on a case-by-case basis the appropriate level and mix of the various compensation components.

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          Base salaries.    Base salaries are used to recognize the experience, skills, knowledge and responsibilities required of all our employees, including our executives. Base salaries for our executives typically have been set in our offer letter to the executive at the outset of employment. However, from time to time in the discretion of our board of directors consistent with our executive compensation program objectives, base salaries for our executives, together with other components of compensation, are evaluated for adjustment based on an assessment of an executive's performance and compensation trends in our industry.

          During the third quarter of 2006, our board of directors conducted a periodic evaluation of executive compensation. As a part of that evaluation, our board of directors decided to increase annual base salaries for our executives effective in the third quarter of 2006, with Mr. Dahod's salary increasing from $190,000 to $220,000 and the salary of each of the other named executive officers increasing from $165,000 to $185,000. The decision to increase those salaries was based principally upon an informal comparison to the base salaries by executive position at other companies in our industry and related industries. While taking into account that base salary is only one component of our executive compensation, our board of directors concluded that for purposes of retention base salaries for our executive officers should be increased to be more competitive with other companies in our industry and related industries.

          Cash bonuses.    In addition to base salaries, our executives are eligible to receive cash bonuses based on our financial performance measured on a quarterly and an annual basis and individual objectives. There is no written plan for payment of these cash bonuses; however, our offer letter to each executive at the outset of employment sets forth eligibility to receive cash bonuses. These cash bonuses are intended to compensate for an executive's contribution to the achievement of our strategic, operational and financial goals. The corporate financial performance measures, which have typically been developed by our board of directors, are given the greatest weight in this bonus analysis.

          The target bonus percent for each executive is generally between 30% and 50% of that executive's base salary. However if corporate financial performance measures are exceeded, executives may receive between 41% and 69% of their base salary. The 30% to 50% target bonus is allocated 7.5% to 12.5% to quarterly financial measures, 15% to 25% to annual financial measures and 7.5% to 12.5% to individual objectives. Cash bonuses typically are paid quarterly and annually based on achievement of financial measures and individual objectives. The actual cash bonus paid to an executive with respect to a particular year is limited, in the aggregate, to 150% of the portion of the bonus amount determined based on financial measures. Each quarterly bonus payment with respect to financial measures is initially limited to the amount earned at the target bonus level even if we exceed financial measures in that quarter. Any amount payable for our exceeding the quarterly financial measures is deferred and only paid if we meet or exceed the annual financial measures. The annual payment based on financial measures is determined after year-end. If we meet our annual financial measures, any quarterly bonus amounts previously deferred are paid to our executives in addition to the annual bonus amount.

          Cash bonuses awarded with respect to 2006 and set forth in the Summary Compensation Table below were calculated based 75% on our bookings and income before taxes (with each of these financial measures being given equal weight) and 25% on individual objectives. Actual bookings for 2006 were 130% of the performance target. Actual income before taxes for 2006 also exceeded the performance target. Accordingly, the bonus amounts determined for our named executive officers with respect to 2006 were in excess of the 40% target but less than the 55% maximum.

          Our vice president, worldwide operations, Mr. Kahhale, is not compensated on the same general basis as the other named executive officers with respect to cash bonuses. Instead, in

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addition to his base salary, Mr. Kahhale is entitled to receive commissions based 70% on our worldwide sales order bookings and 30% on related payments for orders. Mr. Kahhale's eligibility for commissions, which are paid on a quarterly basis, is determined based on a target for his annual cash compensation and a target for our annual sales order bookings. In each quarter, we calculate commissions earned with a formula that applies these two targets against the actual dollar amounts of orders booked in the quarter and of payments for orders received in the quarter. Because Mr. Kahhale is principally responsible for overseeing the activities of our worldwide sales organization, we believe that providing Mr. Kahhale with commissions that are based on the performance of our sales organization, as measured by sales orders booked and related cash receipts, achieves our compensation objectives more effectively than would cash bonuses established for our other named executive officers.

          In 2007, we expect that our approach to cash bonuses for our named executive officers will remain based 75% on financial measures and 25% on individual objectives. For 2007 our board of directors has developed corporate financial targets and individual objectives that it believes are at a level where the named executive officers can reasonably expect to achieve their target bonus.

          Equity incentive awards.    Our equity award program is the primary vehicle for offering long-term incentives to our executives. Our equity awards to executives have typically been made in the form of stock options or restricted stock. Although we do not have any equity ownership guidelines for our executives, we believe that equity grants provide our executives with a direct link to our long-term performance, create an ownership culture and align the interests of our executives and our stockholders. In addition, the vesting feature of our equity grants should further our objective of executive retention because this feature provides an incentive to our executives to remain in our employ during the vesting period.

          In determining the size of equity grants to our executives, our board of directors has considered comparative share ownership of executives in our compensation peer group, our company-level performance, the applicable executive's performance, the amount of equity previously awarded to the executive, the vesting of such awards and the recommendations of management.

          We typically make an initial equity award of stock options or restricted stock to new executives in connection with the start of their employment. Grants of equity awards, including those to executives, are all approved by our board of directors and generally are granted based on the fair market value of our common stock. Typically, the equity awards we grant to our executives vest 25% at the end of the first year and in equal quarterly installments over the succeeding three years. This vesting schedule is consistent with the vesting of stock options granted to other employees.

          Typically in the first quarter of each year, at the discretion of our board of directors and consistent with our executive compensation program objectives, our board of directors approves new equity awards to reestablish or bolster incentives to retain employees, including executives. Our board of directors has historically considered new equity award grants for those employees whose outstanding grants were approximately 75% vested or more. Employees within that group are considered for refresh grants on a case-by-case basis, including factors such as the number of shares underlying outstanding grants, performance and market trends. Any award grants made on this basis are made with vesting beginning on January 1 of the year in which the grant is made. In 2007, our board of directors intends to move consideration of refresh grants to those employees that are approximately 50% vested or more.

          In determining the equity awards for each of the executives set forth on the table Grants of Plan-Based Awards in 2006 below, our board of directors took into account the refresh analysis, company-level performance, the applicable executive's performance and informal benchmarking by executive position against companies in our industry and related industries.

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          Beginning in 2006, the Company engaged an independent business valuation firm to prepare valuation reports to assist our board of directors in determining the fair market value of our common stock for purposes of equity grants. Valuation reports were prepared by that firm as of February, August and November 2006 and the valuation opinions set forth in those reports were considered by our board of directors in the determination of the value of our common stock.

          We do not have a program, plan or practice of selecting grant dates for equity compensation to our executive officers in coordination with the release of material non-public information. Equity award grants are made from time to time in the discretion of our board of directors consistent with our executive compensation program objectives.

          Benefits and other compensation.    We maintain broad-based benefits that are provided to all employees, including medical and dental insurance, life and disability insurance and a 401(k) plan. Other benefits we offer to all full-time employees include programs for job-related educational assistance, annual reimbursement for the purchase of personal digital assistants utilizing our technology of up to $1,000 and up to $50 per month for related services, a paid health club membership and up to $300 in annual premiums for group term life insurance. Other than our patent bonus and employee referral programs to which our corporate officers are not eligible, executives are eligible to participate in all of our employee benefit plans, in each case on the same basis as other full-time employees.

          Section 162(m) of the Internal Revenue Code of 1986, as amended, generally disallows a tax deduction for compensation in excess of $1.0 million paid to our chief executive officer and our four other most highly paid executive officers. Qualifying performance-based compensation is not subject to the deduction limitation if specified requirements are met. We generally intend to structure the performance-based portion of our executive compensation, when feasible, to comply with exemptions in Section 162(m) so that the compensation remains tax deductible to us. However, our board of directors may, in its judgment, authorize compensation payments that do not comply with the exemptions in Section 162(m) when it believes that such payments are appropriate to attract and retain executive talent.

Summary Compensation Table

          The following table sets forth information regarding compensation earned by our chief executive officer, our vice president, finance and administration and each of our three other most highly compensated executive officers during our fiscal year ended December 31, 2006. We refer to these executive officers as our "named executive officers" elsewhere in this prospectus. Paul Milbury joined our company as chief financial officer on February 5, 2007. The terms of

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Mr. Milbury's employment arrangement with us are described below under "— Employment Agreements."

Name and Principal Position

  Salary ($)
  Bonus ($)
  Option
Awards ($)

  All Other
Compensation
($)

  Total ($)
Ashraf M. Dahod
Chief Executive Officer
  $ 198,077   $ 103,076   $ 221,124 (2) $   $ 522,277
John P. Delea, Jr.
Vice President, Finance and Administration
    171,154     87,252     102,265 (2)       360,671
Pierre G. Kahhale
Vice President, Worldwide Field Operations
    171,154     854,077 (1)   102,265 (2)       1,127,496
Anthony P. Schoener
Vice President, Engineering
    171,154     87,252     39,485 (2)       297,891
Gennady H. Sirota
Vice President, Product Management
    171,154     87,252     23,692 (2)       282,098

(1)
Mr. Kahhale receives commissions rather than cash bonuses.

(2)
Valuation of these options is based on the dollar amount of share-based compensation recognized for financial statement reporting purposes pursuant to SFAS 123R with respect to fiscal 2006, except that such amounts do not reflect an estimate of forfeitures related to service-based vesting conditions. The assumptions used by us with respect to the valuation of option grants are set forth in Note 3 — "Share-Based Compensation" to our financial statements included elsewhere in this prospectus. The individual awards reflected in this summary compensation table are further summarized below in the table "Grants of Plan-Based Awards in 2006."

Grants of Plan-Based Awards in 2006

          The following table sets forth information regarding grants of awards made to our named executive officers during the fiscal year ended December 31, 2006.

Name

  Grant Date
  All Other Option Awards:
Number of Securities
Underlying Options (#)

  Exercise or Base
Price of Option
Awards ($/share)

  Value on Grant Date
($)

 
Ashraf M. Dahod   9/29/2006   466,666   $ 1.65 (1) $ 1,498,000 (2)
John P. Delea, Jr.    4/18/2006   180,000     1.65 (1)   197,343 (2)
Pierre G. Kahhale   4/18/2006   180,000     1.65 (1)   197,343 (2)
Anthony P. Schoener   9/29/2006   83,333     1.65 (1)   267,500 (2)
Gennady H. Sirota   9/29/2006   50,000     1.65 (1)   160,500 (2)

(1)
Based on the valuation of our common stock as of the date of grant.

(2)
Valuation of these options is based on the aggregate dollar amount of share-based compensation recognized for financial statement reporting purposes pursuant to SFAS 123R over the entire term of these options, except that such amounts do not reflect an estimate of

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Outstanding Option Awards at Fiscal Year End

          The following table sets forth information regarding outstanding option awards held by our named executive officers at December 31, 2006.

 
  Option Awards
 
Name

  Number of
Securities
Underlying
Unexercised
Options
Exercisable (#)

  Number of
Securities
Underlying
Unexercised
Options
Unexercisable (#)

  Option
Exercise
Price ($)

  Option Expiration
Date

 
Ashraf M. Dahod  
204,164
  466,666
262,500
(1)
(2)
$
1.65
1.82

(5)
9/29/2016
7/26/2010

(6)

John P. Delea, Jr.

 


18,750
16,666

 

180,000
11,250

(3)
(4)

 

1.65
0.30
0.30

 

4/18/2016
1/23/2013
7/22/2012

 

Pierre G. Kahhale

 


18,750
333,333

 

180,000
11,250

(3)
(4)

 

1.65
0.30
0.30

 

4/18/2016
1/23/2013
8/22/2012

 

Anthony P. Schoener

 


78,750
18,750

 

83,333
101,250
11,250

(1)
(2)
(4)

 

1.65
1.65
0.30

 

9/29/2016
7/26/2015
1/23/2013

 

Gennady H. Sirota

 


78,750
18,750

 

50,000
101,250
11,250

(1)
(2)
(4)

 

1.65
1.65
0.30

 

9/29/2016
7/26/2015
1/23/2013

 

(1)
25% of the shares underlying this option vest on September 29, 2007 and the remainder vest quarterly in 12 equal installments beginning on December 29, 2007.

(2)
25% of the shares underlying this option vest on January 1, 2006 and the remainder vest quarterly in 12 equal installments beginning on April 1, 2006.

(3)
25% of the shares underlying this option vest on April 18, 2007 and the remainder vest quarterly in 12 equal installments beginning on July 18, 2007.

(4)
The shares underlying this option vest over five and one-half years, with 25% of the shares vesting during 2006 and 12.5% of the shares vesting on each of January 23, 2007, July 23, 2007 and July 23, 2008.

(5)
Option exercise price fixed at 110% of fair market value at the time of the grant consistent with Internal Revenue Code Section 422(c)(5).

(6)
Exercise period limited to five years consistent with Internal Revenue Code Section 422(c)(5).

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Option Exercises and Stock Vested

          The following table sets forth information regarding options exercised by our named executive officers during the fiscal year ended December 31, 2006.

 
  Option Awards
 
Name

  Number of Shares
Acquired on Exercise (#)

  Value Realized on
Exercise ($)

 
Ashraf M. Dahod     $  
John P. Delea, Jr.    200,000 (1)   270,000 (2)
Pierre G. Kahhale        
Anthony P. Schoener        
Gennady H. Sirota        

(1)
Options were exercised as of June 14, 2006.

(2)
The aggregate dollar value realized on exercise represents the difference between the aggregate market price of shares of our common stock underlying that option on the date of exercise, which we have assumed to be $1.65, and the aggregate exercise price of the option.

Potential Payments Upon Termination or Change in Control

          Other than acceleration of vesting of equity-based awards as provided in each of our stock incentive plans, we do not have a formal policy or any agreements providing severance or change-of-control benefits to our executives. Each of our employees who is party to an incentive stock option agreement with us is entitled to accelerated vesting with respect to the applicable option immediately prior to the effective date of an acquisition as defined in the stock option agreements. Each option subject to such acceleration typically vests as to an additional 25% of the original number of shares subject to such option and the final vesting date set forth in the applicable agreement is accelerated by 12 months. An "acquisition" under the stock option agreement means any:

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          As of December 31, 2006, the following named executive officers would be entitled to additional accelerated vesting of their outstanding stock options described in the table below:

Name

  Value of Additional Vested Option Awards
Following a Change in Control (1)

 
Ashraf M. Dahod   $ 2,333,320 (2)
John P. Delea, Jr.    $ 487,500 (3)
Pierre G. Kahhale   $ 487,500 (3)
Anthony P. Schoener   $ 695,830 (3)
Gennady H. Sirota   $ 612,500 (3)

(1)
Valuation of these options is based on a price per share of our common stock of $10.00, which represents the midpoint of the range set forth on the cover of this prospectus.

(2)
An additional 25% of the original number of shares subject to options vest upon a change of control.

(3)
An additional 12.5% of the original number of shares subject to a portion of the option awards held by these executives vest upon a change of control. An additional 25% of the original number of shares subject to the remainder of the option awards held by these executive vest upon a change of control.

Employment Agreements

          We do not have formal employment agreements with any of our named executive officers. The initial compensation of each of our named executive officers was set forth in an offer letter that we executed with each of them at the time their employment with us commenced. Each offer letter provides that the executive officer's employment with us is on an at-will basis. Other than the change in control and severance benefits provided to Mr. Milbury as described below, none of our named executive officers is currently party to a change in control or severance agreement with us. As a condition to their employment, each named executive officer entered into a non-competition, non-solicitation agreement and a proprietary information and inventions assignment agreement. Under these agreements, each named executive officer has agreed (1) not to compete with us or to solicit our employees during their employment and for a period of 12 months after the termination of their employment and (2) to protect our confidential and proprietary information and to assign intellectual property developed during the course of their employment to us.

          We entered into an offer letter with Mr. Milbury on January 17, 2007 that sets forth the terms of his employment as our vice president of operations and chief financial officer. Mr. Milbury's initial base annual salary is $210,000 and he is entitled to receive a signing bonus of $85,000, which will be earned and paid on a bi-weekly basis during his first year of employment. In addition, our board of directors agreed to grant Mr. Milbury equity awards consisting of 243,819 shares of restricted common stock at a purchase price of $0.01 per share and options to purchase 189,514 shares of our common stock at an exercise price equal to the fair market value of our common stock on the grant date. The aggregate total of restricted stock and options will vest 25% at the end of the first year of employment and in equal quarterly installments over the succeeding three years. The entirety of the restricted stock award will vest prior to any vesting of the options.

          Under the terms of our offer letter with Mr. Milbury, in the event of a change of control of our company as a result of an acquisition, Mr. Milbury will be entitled to 12 months of accelerated vesting of his initial equity awards. In addition, if within one year of a change of control, Mr. Milbury is terminated without cause, experiences an adverse change in authority, duty or responsibility or if Mr. Milbury terminates his employment following a relocation of his principal place of business more

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than 50 miles from Tewksbury, Massachusetts, then he will be entitled to an additional 12 months of accelerated vesting of his initial equity awards and 12 months of post-termination salary continuation and reimbursement for the expense of continued health benefits under our group health plan under COBRA. In the event we terminate Mr. Milbury's employment without cause not in connection with a change of control, he will be entitled to accelerated vesting of his restricted stock such that an additional number of shares equal to the lesser of 108,333 or the number of shares for which Mr. Milbury has made an election under Section 83(b) of the Internal Revenue Code, will be immediately vested. In addition, Mr. Milbury would be entitled to 12 months of post-termination salary continuation and reimbursement for the expense of continued health benefits under our group health plan under COBRA.

Stock Option and Other Compensation Plans

2000 Stock Incentive Plan

          Our 2000 Stock Incentive Plan, as amended, which we refer to as the 2000 stock plan, was adopted by our board of directors and approved by our stockholders in August 2000. A maximum of 18,483,470 shares of common stock are authorized for issuance under the 2000 stock plan.

          The 2000 stock plan provides for the grant of incentive stock options, nonstatutory stock options, restricted stock and other stock-based awards. Our employees, officers, directors, consultants and advisors are eligible to receive awards under the 2000 stock plan; however, incentive stock options may only be granted to our employees. In accordance with the terms of the 2000 stock plan, our board of directors, or a committee or subcommittee appointed by our board of directors, administers the 2000 stock plan and, subject to any limitations in the 2000 stock plan, selects the recipients of awards and determines:

          Pursuant to the terms of the 2000 plan, in the event of a proposed liquidation or dissolution of our company, our board of directors will provide that all unexercised options will become exercisable in full at least 10 business days prior to the liquidation or dissolution and will terminate upon the liquidation or dissolution, except to the extent exercised before such date. Our board may specify the effect of a liquidation or dissolution on any restricted stock award or other award granted under the 2000 stock plan at the time of the grant of the award.

          In the event of our merger or consolidation with or into another entity as a result of which our common stock is converted into the right to receive cash, securities or other property, or any exchange of our shares for cash, securities or other property pursuant to a statutory share exchange transaction, our board of directors will provide that all of our outstanding options will be assumed or equivalent options will be substituted by the successor corporation. If the acquirer does not agree to assume, or substitute for, the options, then our board will provide that all unexercised options will become exercisable in full prior to completion of the reorganization event, and will terminate if not exercised prior to such time. If under the terms of the reorganization event holders of our common stock receive cash for their shares, our board may instead provide for a cash-out of

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the value of any outstanding options less the applicable exercise price. In addition, if a merger or other reorganization event occurs, our repurchase and other rights with respect to shares of restricted stock will inure to the benefit of our successor and will apply equally to the cash, securities or other property into which our common stock is then converted.

          As of March 31, 2007, there were options to purchase 7,548,235 shares of common stock outstanding under the 2000 stock plan at a weighted average exercise price of $2.01 per share, and 2,472,110 shares of common stock had been issued pursuant to the exercise of options granted under the stock plan. After the effective date of the 2007 stock incentive plan described below, we will grant no further stock options or other awards under the 2000 stock plan. However, any shares of common stock reserved for issuance under the 2000 stock plan that remain available for issuance and any shares of common stock subject to awards under the 2000 stock plan that expire, terminate, or are otherwise surrendered, canceled, forfeited or repurchased by us will be added to the number of shares available under the 2007 stock incentive plan up to a specified number of shares.

2007 Stock Incentive Plan

          Our 2007 stock incentive plan, which will become effective on the date that the registration statement for this offering is declared effective, was adopted by our board of directors on April 26, 2007 and approved by our stockholders on May     , 2007. The 2007 stock incentive plan provides for the grant of incentive stock options, non-statutory stock options, restricted stock awards and other stock-based awards. Upon effectiveness of the plan, the number of shares of common stock that will be reserved for issuance under the 2007 stock incentive plan will be the sum of 3,000,000 shares plus the number of shares of common stock then available for issuance under the 2000 stock plan and the number of shares of common stock subject to awards granted under the 2000 stock plan which expire, terminate or are otherwise surrendered, cancelled, forfeited or repurchased by us at their original issuance price pursuant to a contractual repurchase right, up to a maximum of 1,833,333 shares.

          In addition, our 2007 stock incentive plan contains an "evergreen" provision that allows for an annual increase in the number of shares available for issuance under our 2007 stock incentive plan on the first day of each fiscal year beginning in fiscal year 2009 and ending on the second day of fiscal year 2017. The annual increase in the number of shares shall be equal to the lowest of:

          Our employees, officers, directors, consultants and advisors are eligible to receive awards under our 2007 stock incentive plan; however, incentive stock options may only be granted to our employees. The maximum number of shares of common stock with respect to which awards may be granted to any participant under the plan is 1,333,333 per calendar year.

          In accordance with the terms of the 2007 stock incentive plan, our board of directors has authorized our compensation committee to administer the 2007 stock incentive plan. Pursuant to the terms of the 2007 stock incentive plan, our compensation committee will select the recipients of awards and determine:

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          If our board of directors delegates authority to an executive officer to grant awards under the 2007 stock incentive plan, the executive officer has the power to make awards to all of our employees, except executive officers. Our board of directors will fix the terms of the awards to be granted by such executive officer, including the exercise price of such awards, and the maximum number of shares subject to awards that such executive officer may make.

          Upon a merger or other reorganization event, our board of directors, may, in their sole discretion, take any one or more of the following actions pursuant to our 2007 stock incentive plan, as to some or all outstanding awards:

          Upon the occurrence of a reorganization event other than a liquidation or dissolution, the repurchase and other rights under each outstanding restricted stock award will continue for the benefit of the successor company and will, unless the board of directors may otherwise determine, apply to the cash, securities or other property into which our common stock is converted pursuant to the reorganization event. Upon the occurrence of a reorganization event involving a liquidation or dissolution, all conditions on each outstanding restricted stock award will automatically be deemed terminated or satisfied, unless otherwise provided in the agreement evidencing the restricted stock award.

          No award may be granted under the 2007 stock incentive plan after April 26, 2017. Our board of directors may amend, suspend or terminate the 2007 stock incentive plan at any time, except that stockholder approval will be required to comply with applicable law or stock market requirements.

401(k) Retirement Plan

          We maintain a 401(k) retirement plan that is intended to be a tax-qualified defined contribution plan under Section 401(k) of the Internal Revenue Code. In general, all of our U.S. employees are

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eligible to participate, subject to a 90-day waiting period. The 401(k) Plan includes a salary deferral arrangement pursuant to which participants may elect to reduce their current compensation by up to the statutorily prescribed limit, equal to $15,500 in 2007, and have the amount of the reduction contributed to the 401(k) Plan. We are permitted to match employees' 401(k) Plan contributions, however, we do not do so.

Limitations on Officers' and Directors' Liability and Indemnification Agreements

          As permitted by Delaware law, we have adopted provisions in our restated certificate of incorporation and amended and restated bylaws, both of which will become effective upon the effectiveness of the registration statement of which this prospectus is a part, that limit or eliminate the personal liability of our directors. Our restated certificate of incorporation and amended and restated bylaws limit the liability of directors to the maximum extent permitted by Delaware law. Delaware law provides that directors of a corporation will not be personally liable for monetary damages for breaches of their fiduciary duties as directors, except liability for:

          These limitations do not apply to liabilities arising under federal securities laws and do not affect the availability of equitable remedies, including injunctive relief or rescission. If Delaware law is amended to authorize the further elimination or limitation of liability of a director, then the liability of our directors will be eliminated or limited to the fullest extent permitted by Delaware law as so amended.

          As permitted by Delaware law, our restated certificate of incorporation and amended and restated bylaws also provide that:

          The indemnification provisions contained in our restated certificate of incorporation and amended and restated bylaws are not exclusive.

          In addition to the indemnification provided for in our restated certificate of incorporation and amended and restated bylaws, prior to completion of this offering we intend to enter into indemnification agreements with each of our directors and executive officers. Each indemnification agreement will provide that we will indemnify the director or executive officer to the fullest extent permitted by law for claims arising in his or her capacity as our director, officer, employee or agent, provided that he or she acted in good faith and in a manner that he or she reasonably believed to be in, or not opposed to, our best interests and, with respect to any criminal proceeding, had no reasonable cause to believe that his or her conduct was unlawful. In the event that we do not assume the defense of a claim against a director or executive officer, we are required to advance his or her expenses in connection with his or her defense, provided that he or she undertakes to

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repay all amounts advanced if it is ultimately determined that he or she is not entitled to be indemnified by us.

          We believe that these provisions and agreements are necessary to attract and retain qualified persons as directors and executive officers. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers or persons controlling our company pursuant to the foregoing provisions, the opinion of the SEC is that such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable.

          In addition, we maintain standard policies of insurance under which coverage is provided to our directors and officers against losses rising from claims made by reason of breach of duty or other wrongful act, and to us with respect to payments which may be made by us to such directors and officers pursuant to the above indemnification provisions or otherwise as a matter of law.

Rule 10b5-1 Sales Plans

          Our directors and executive officers may adopt written plans, known as Rule 10b5-1 plans, in which they will contract with a broker to buy or sell shares of our common stock on a periodic basis. Under a Rule 10b5-1 plan, a broker executes trades pursuant to parameters established by the director or officer when entering into the plan, without further direction from them. The director or officer may amend or terminate the plan in some circumstances. Our directors and executive officers may also buy or sell additional shares outside of a Rule 10b5-1 plan when they are not in possession of material, nonpublic information.

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CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

          Since January 1, 2004, we have engaged in the following transactions with our directors, executive officers and holders of more than 5% of our voting securities, and affiliates of our directors, executive officers and 5% stockholders. We believe that all of the transactions described below were made on terms no less favorable to us than could have been obtained from unaffiliated third parties.

Acquisition of NuLink, Inc.

          In February 2004, we acquired all of the capital stock of NuLink, Inc., an engineering consulting and research and development company founded by our president and chief executive officer, Mr. Dahod. NuLink was wholly-owned by Mr. Dahod and his spouse. We paid total consideration of approximately $2 million to acquire NuLink, including the issuance of 1,002,562 shares of our series D convertible preferred stock valued at approximately $1.7 million. Mr. Dahod and his spouse also received a cash distribution from NuLink in the aggregate amount of $180,000 immediately prior to our acquisition of NuLink.

Stock Issuances

Issuance of Series D Convertible Preferred Stock

          In February, March and April 2004, we issued an aggregate of 15,746,120 shares of our series D convertible preferred stock at a price per share of approximately $1.70 for an aggregate purchase price of approximately $26,768,000. The table below sets forth the number of series D shares sold to our directors, executive officers and 5% stockholders and their affiliates:

Name

  Number of Shares of Series D
Convertible Preferred Stock(3)

  Aggregate
Purchase Price ($)

Focus Ventures Entities   4,248,773   $ 7,204,457
Highland Capital Partners Entities(1)   3,093,628     5,245,729
Matrix Partners Entities(1)   3,365,890     5,707,374
North Bridge Venture Partners Entities(1)   3,365,888     5,707,374
Ashraf M. Dahod and affiliates(2)   1,002,562     1,700,000

(1)
Edward T. Anderson, one of our directors, is the managing partner of North Bridge Venture Partners; Timothy A. Barrows, one of our directors, is a managing member of Matrix Partners; and Sean M. Dalton, one of our directors, is a managing general partner of Highland Capital Partners. Ashraf M. Dahod is our president and chief executive officer and one of our directors.

(2)
Represents the 1,002,562 shares of series D convertible preferred stock issued to Mr. Dahod and his wife in connection with our acquisition of NuLink, Inc. in February 2004 as described above under "— Acquisition of NuLink, Inc."

(3)
All of our series D convertible preferred stock will be automatically converted into an aggregate of 10,497,407 shares of common stock upon consummation of this offering.

Issuance of Series E Convertible Preferred Stock

          In May, June, July and September 2005, we issued an aggregate of 6,136,876 shares of our series E convertible preferred stock at a price per share of approximately $2.93 for an aggregate

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purchase price of approximately $18,000,000. The table below sets forth the number of series E shares sold to our directors, executive officers and 5% stockholders and their affiliates:

Name

  Number of Shares of Series E
Convertible Preferred Stock(1)

  Aggregate
Purchase Price ($)

Focus Ventures Entities   436,852   $ 1,281,325
Highland Capital Partners Entities   1,355,121     3,974,689
Matrix Partners Entities   1,474,382     4,324,492
North Bridge Venture Partners Entities   1,474,382     4,324,492

(1)
All of our series E convertible preferred stock will be automatically converted into an aggregate of 4,091,245 shares of common stock upon consummation of this offering.

Investor Rights Agreement

          We have entered into an investor rights agreement with certain holders of our preferred stock, our chief executive officer and our vice president of engineering. Our board of directors currently consists of seven members, all of whom were elected as directors pursuant to the board composition provisions of the investor rights agreement. In addition, the investor rights agreement contains a right of first refusal provision that provides that we shall not make certain issuances of our securities unless we first offer such securities to certain holders of our preferred stock in accordance with the agreement. The board composition and right of first refusal provision of the investor rights agreement will terminate upon the closing of this offering.

          The investor rights agreement also provides that certain holders of our preferred stock, our chief executive officer and our vice president of engineering have the right to demand that we file a registration statement or request that their shares be covered by a registration statement that we are otherwise filing. For a more detailed description of these registration rights, see "Description of Capital Stock — Registration Rights."

Indemnification Agreements

          Our restated certificate of incorporation that will be in effect upon the closing of this offering provides that we will indemnify our directors and officers to the fullest extent permitted by Delaware law. In addition, we expect to enter into indemnification agreements with each of our directors and executive officers that may be broader in scope that the specific indemnification provisions contained in the Delaware General Corporation Law. For more information regarding these agreements, see "Management — Limitation of Liability and Indemnification."

Policies and Procedures for Related Party Transactions

          In March 2007, our board of directors adopted a written related person transaction policy to set forth the policies and procedures for the review and approval or ratification of related person transactions. This policy covers any transaction, arrangement or relationship, or any series of similar transactions, arrangements or relationships in which we were or are to be a participant, the amount involved exceeds $120,000, and a related person had or will have a direct or indirect material interest, including, without limitation, purchases of goods or services by or from the related person or entities in which the related person has a material interest, indebtedness, guarantees of indebtedness, and employment by us of a related person.

          Any related person transaction proposed to be entered into by us must be reported to our general counsel and will be reviewed and approved by the audit committee in accordance with the

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terms of the policy, prior to effectiveness or consummation of the transaction, whenever practicable. If our general counsel determines that advance approval of a related person transaction is not practicable under the circumstances, the audit committee will review and, in its discretion, may ratify the related person transaction at the next meeting of the audit committee, or at the next meeting following the date that the related person transaction comes to the attention of our general counsel. Our general counsel, however, may present a related person transaction arising in the time period between meetings of the audit committee to the chair of the audit committee, who will review and may approve the related person transaction, subject to ratification by the audit committee at the next meeting of the audit committee.

          In addition, any related person transaction previously approved by the audit committee or otherwise already existing that is ongoing in nature will be reviewed by the audit committee annually to ensure that such related person transaction has been conducted in accordance with the previous approval granted by the audit committee, if any, and that all required disclosures regarding the related person transaction are made.

          Transactions involving compensation of executive officers will be reviewed and approved by the compensation committee in the manner specified in the charter of the compensation committee.

          A related person transaction reviewed under this policy will be considered approved or ratified if it is authorized by the audit committee in accordance with the standards set forth in this policy after full disclosure of the related person's interests in the transaction. As appropriate for the circumstances, the audit committee will review and consider:

          The audit committee will review all relevant information available to it about the related person transaction. The audit committee may approve or ratify the related person transaction only if the audit committee determines that, under all of the circumstances, the transaction is in or is not inconsistent with our best interests. The audit committee may, in its sole discretion, impose conditions as it deems appropriate on us or the related person in connection with approval of the related person transaction.

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PRINCIPAL AND SELLING STOCKHOLDERS

          The following table sets forth information regarding the beneficial ownership of our common stock as of March 31, 2007, by:

          Beneficial ownership is determined in accordance with the rules of the SEC. These rules generally attribute beneficial ownership of securities to persons who possess sole or shared voting power or investment power with respect to those securities and include shares of common stock issuable upon the exercise of stock options that are immediately exercisable or exercisable within 60 days after March 31, 2007. Except as otherwise indicated, all of the shares reflected in the table are shares of common stock and all persons listed below have sole voting and investment power with respect to the shares beneficially owned by them, subject to applicable community property laws. The information is not necessarily indicative of beneficial ownership for any other purpose.

          Percentage ownership calculations for beneficial ownership prior to this offering are based on 53,417,462 shares outstanding as of March 31, 2007, assuming the conversion of all of the outstanding convertible preferred stock. Percentage ownership calculations for beneficial ownership after this offering also include the shares we are offering hereby. Except as otherwise indicated in the table below, addresses of named beneficial owners are in care of Starent Networks, Corp., 30 International Place, Tewksbury, Massachusetts 01876.

          In computing the number of shares of common stock beneficially owned by a person and the percentage ownership of that person, we deemed outstanding shares of common stock subject to options held by that person that are currently exercisable or exercisable within 60 days of March 31, 2007. We did not deem these shares outstanding, however, for the purpose of computing the percentage ownership of any other person. Beneficial ownership representing less than 1% is denoted with an asterisk (*).

 
  Shares Beneficially Owned
Prior to Offering

   
  Shares Beneficially Owned
After Offering

 
Name and Address of Beneficial Owner

  Shares
Offered

 
  Number
  Percentage
  Number
  Percentage
 
5% Stockholders                      
  Entities affiliated with Matrix Partners(1)   10,542,716   19.7 %   10,542,716   16.9 %
  Entities affiliated with North Bridge Venture Partners(2)   10,542,720   19.7     10,542,720   16.9  
  Entities affiliated with Focus Ventures(3)   3,123,747   5.8     3,123,747   5.0  
  Entities affiliated with Highland Capital Partners(4)   9,649,058   18.1     9,649,058   15.5  
                       

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Officers and Directors                      
  Ashraf M. Dahod(5)   7,534,015   14.0 % 333,333   7,200,682   11.5 %
  John P. Delea, Jr.(6)   295,416   *   29,333   266,083   *  
  Pierre G. Kahhale(7)   412,083   *   41,208   370,875   *  
  Vijay Kathuria(8)   571,039   1.1   33,333   537,706   *  
  Robert J. Kelly   100,000   *     100,000   *  
  Thierry Maupilé   66,666   *     66,666   *  
  Paul J. Milbury   243,819   *     243,819   *  
  Kevin F. Newman(9)   37,500   *     37,500   *  
  Anthony P. Schoener(10)   657,083   1.2   53,333   603,750   1.0  
  Gennady H. Sirota(11)   590,416   1.1   58,666   531,750   *  
  Edward T. Anderson(12)   10,609,386   19.9     10,609,386   17.0  
  Timothy A. Barrows(13)   10,609,382   19.9     10,609,382   17.0  
  Sean M. Dalton(14)   9,649,058   18.1     9,649,058   15.5  
  Matthew J. Desch     *       *  
  James A. Dolce, Jr.   66,666   *     66,666   *  
  Kenneth A. Goldman(15)   20,833   *     20,833   *  
  All executive officers and directors as a group (16 persons)   41,463,362   76.4   549,206   40,914,156   64.6  
Other Selling Stockholders                      
  Frank Bradbury(16)   116,123   *   10,000   106,123   *  
  John DePietro(17)   85,332   *   8,533   76,799   *  
  Hamed Eshraghian(18)   205,414   *   20,542   184,872   *  
  Rajat Ghai(19)   82,208   *   8,220   73,988   *  
  ITOCHU Corporation(20)   433,586   *   433,586     *  
  Parvez Khan(21)   205,415   *   20,000   185,415   *  
  Kuei-Fang Kung(22)   117,664   *   11,766   105,898   *  
  Nick Lopez(23)   98,249   *   9,825   88,424   *  
  Mathew Nieman(24)   202,707   *   20,000   182,707   *  
  Sanil Puthiyandyil(25)   103,914   *   6,666   97,248   *  
  Bhaskar Ray(26)   74,664   *   7,466   67,198   *  
  Samsung-SVIC #4 New Technology Business Investment L.P.(27)   1,885,159   3.5   377,032   1,508,127   2.4  
  Janakiraman Senthilnathan(28)   133,564   *   13,333   120,231   *  
  Paul Shieh(29)   298,999   *   26,666   272,333   *  
  Amit Tiwari(30)   122,082   *   12,000   110,082   *  

(1)
Consists of 6,272,920 shares held by Matrix Partners VI, L.P., 2,092,730 shares held by Matrix VI Parallel Partnership-A, L.P., 701,089 shares held by Matrix VI Parallel Partnership-B, L.P., 1,338,369 shares held by Weston & Co. VI LLC and 137,608 shares held by Weston & Co. VI LLC, as nominee. Timothy A. Barrows, a member of our board of directors, is a Managing Member of Matrix VI Management Co., L.L.C., the general partner of each of Matrix Partners VI, L.P., Matrix Partners VI Parallel Partnership-A, L.P. and Matrix Partners VI Parallel Partnership-B, L.P. (collectively, the "Matrix Partnerships"). Mr. Barrows is the managing member of Matrix VI Management Co., L.L.C. and has sole voting and dispositive power with respect to the shares held by the Matrix Partnerships. Mr. Barrows disclaims beneficial ownership of such shares except to the extent of his pecuniary interest, if any. Weston & Co. VI LLC ("Weston" and, together with the Matrix Partnerships, the "Matrix Entities") is nominee for certain beneficial owners, including Mr. Barrows. Mr. Barrows has sole voting and investment control with respect to 181,941 shares beneficially held by Weston for him personally. Mr. Barrows is authorized by the sole member of Weston to take any action with respect to the remaining shares held by Weston as directed by the underlying beneficial owners. Mr. Barrows disclaims beneficial ownership of such remaining shares. The

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(2)
Consists of 7,144,648 shares held of record by North Bridge Venture Partners IV-A, L.P., or NBVP IV-A, and 3,398,072 shares held of record by North Bridge Venture Partners IV-B, L.P., or NBVP IV-B. NBVM GP, LLC, or NVBM, the sole general partner of North Bridge Venture Management IV, L.P. which is the sole general partner of each of NBVP IV-A and NBVP IV-B, has sole voting and dispositive power over these shares. The managers of NVBM having voting and dispositive power over these shares are Edward T. Anderson and Richard A. D'Amore, each of whom disclaims beneficial ownership of such shares except to the extent of their pecuniary interest. Mr. Anderson also serves as a member of our board of directors. The address of NBVP IV-A, L.P. and NBVP IV-B is c/o North Bridge Venture Partners, 950 Winter Street, Suite 4600, Waltham, MA 02451.

(3)
Consists of 2,967,561 shares held of record by Focus Ventures II, L.P., 39,046 shares held of record by FV Investors II A, L.P. and 117,140 shares held of record by FV Investors II QP, L.P. (collectively, the "Focus Entities"). Focus Ventures Partners II, L.P. is the general partner of Focus Ventures II, L.P. James H. Boettcher, Kevin McQuillan, Steven Bird and George Bischof (collectively, the "General Partners") are the general partners of Focus Ventures Partners II, L.P. The General Partners have shared voting and investment control over all the shares held by the Focus Entities and therefore may be deemed to share beneficial ownership of the shares held by the Focus Entities by virtue of their status as controlling persons of Focus Ventures Partners II, L.P. Each of the General Partners disclaims beneficial ownership of the shares held by the Focus Entities, except to the extent of such General Partner's pecuniary interest therein, if any. The address of Focus Ventures II, L.P., FV Investors II A, L.P. and FV Investors II QP, L.P. is c/o Focus Ventures, 525 University Avenue, Suite 1400, Palo Alto, CA 94301.

(4)
Consists of 6,812,238 shares held of record by Highland Capital Partners V Limited Partnership ("Highland Capital V"), 1,756,128 shares held of record by Highland Capital Partners V-B Limited Partnership ("Highland Capital V-B"), 1,080,692 shares held of record by Highland Entrepreneurs' Fund V Limited Partnership ("Highland Entrepreneurs' Fund" and together with Highland Capital V and Highland Capital V-B, the "Highland Investing Entities"). Highland Management Partners V Limited Partnership ("HMP") is the general partner of Highland Capital V and Highland Capital V-B. HEF V Limited Partnership ("HEF") is the general partner of Highland Entrepreneurs' Fund. Highland Management Partners V, Inc. ("Highland Management") is the general partner of both HMP and HEF. Sean M. Dalton, a member of our board of directors, Robert F. Higgins, Paul A. Maeder and Daniel J. Nova are the managing directors of Highland Management (together, the "Managing Directors"). Highland Management, as the general partner of the general partners of the Highland Investing Entities, may be deemed to have beneficial ownership of the shares held by the Highland Investing Entities. The Managing Directors have shared voting and investment control over all the shares held by the Highland Investing Entities and therefore may be deemed to share beneficial ownership of the shares held by Highland Investing Entities by virtue of their status as controlling persons of Highland Management. Each of the Managing Directors, including Mr. Dalton, disclaims beneficial ownership of the shares held by the Highland Investing Entities, except to the extent of such Managing Director's pecuniary interest therein, if any. The address for the entities affiliated with Highland Capital Partners is 92 Hayden Avenue, Lexington, MA 02421.

(5)
Includes 262,499 shares issuable to Mr. Dahod upon exercise of stock options, 334,187 shares held by Shamim Dahod, Mr. Dahod's wife, 5,098,649 shares held by Nooril-Iman, LP, a Delaware limited partnership and 23,012 shares held by Nooril-Iman Management, LLC, a Delaware limited liability company. Mr. Dahod and Shamim Dahod are co-owners and co-managers of Nooril-Iman Management, LLC, the General Partner of Nooril-Iman, LP, and may be deemed to share voting and investment power with respect to the shares held by Nooril-Iman, LP and Nooril-Iman Management, LLC. Mr. Dahod disclaims beneficial ownership of the shares held by Nooril-Iman, LP and Nooril-Iman Management, LLC except to the extent of his pecuniary interest, if any. Shares offered consists of shares offered by Nooril-Iman, LP.

(6)
Includes 56,250 shares issuable to Mr. Delea upon exercise of stock options.

(7)
Includes 11,250 shares issuable to Mr. Kahhale upon exercise of stock options and an aggregate of 200,000 shares held in family trusts. Mr. Kahhale is the trustee of the trusts and may be deemed to have voting and investment power with respect to the shares held by the trusts. Mr. Kahhale disclaims beneficial ownership of the shares held by the trusts except to the extent of his pecuniary interest, if any.

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(8)
Includes 284,373 shares issuable to Mr. Kathuria upon exercise of stock options.

(9)
Consists of 12,500 shares issuable to Mr. Newman upon exercise of stock options and 25,000 shares held jointly by Kevin F. Newman and his wife.

(10)
Includes 123,750 shares issuable to Mr. Schoener upon exercise of stock options.

(11)
Includes 101,250 shares issuable to Mr. Sirota upon exercise of stock options and 22,500 shares held jointly by Gennady Sirota and his wife.

(12)
Includes shares described in Note (2) above. Mr. Anderson disclaims beneficial ownership of the shares held by the entities affiliated with North Bridge Venture Partners except to the extent of his pecuniary interest therein, if any.

(13)
Includes shares described in Note (1) above. Mr. Barrows disclaims beneficial ownership of the shares held by the entities affiliated with Matrix Partners except to the extent of his pecuniary interest therein, if any.

(14)
Consists of shares described in Note (4) above. Mr. Dalton disclaims beneficial ownership of the shares held by the entities affiliated with Highland Capital Partners except to the extent of his pecuniary interest therein, if any.

(15)
Consists of 20,833 shares issuable to Mr. Goldman upon exercise of stock options.

(16)
Includes 22,290 shares issuable to Mr. Bradbury upon exercise of stock options.

(17)
Includes 24,011 shares issuable to Mr. DePietro upon exercise of stock options.

(18)
Includes 38,748 shares issuable to Mr. Eshraghian upon exercise of stock options.

(19)
Includes 34,375 shares issuable to Mr. Ghai upon exercise of stock options.

(20)
Shigemitsu Takatori is the Chief Operating Officer, IT & Business Solutions Division of ITOCHU Corporation and has voting and investment power with respect to the shares held by ITOCHU Corporation.

(21)
Includes 22,082 shares issuable to Mr. Khan upon exercise of stock options.

(22)
Includes 17,498 shares issuable to Ms. Kung upon exercise of stock options.

(23)
Includes 31,249 shares issuable to Mr. Lopez upon exercise of stock options.

(24)
Includes 19,374 shares issuable to Mr. Nieman upon exercise of stock options.

(25)
Includes 37,081 shares issuable to Mr. Puthiyandyil upon exercise of stock options.

(26)
Includes 7,998 shares issuable to Mr. Ray upon exercise of stock options.

(27)
Samsung Venture Investment Corporation is the management company for Samsung-SVIC #4 New Technology Business Investment L.P. Sang-Ki Kim is the Chief Executive Officer of Samsung Venture Investment Corporation and has voting and investment power with respect to the shares held by Samsung-SVIC #4 New Technology Business Investment L.P.

(28)
Includes 49,998 shares issuable to Mr. Senthilnathan upon exercise of stock options.

(29)
Includes 84,999 shares issuable to Mr. Shieh upon exercise of stock options.

(30)
Includes 28,749 shares issuable to Mr. Tiwari upon exercise of stock options and 10,000 shares held jointly by Mr. Tiwari and his wife.

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DESCRIPTION OF CAPITAL STOCK

General

          Following the closing of this offering, our authorized capital stock will consist of 250,000,000 shares of common stock, par value $0.001 per share, and 5,000,000 shares of preferred stock, par value $0.001 per share, all of which preferred stock will be undesignated.

          The following description of our capital stock and provisions of our restated certificate of incorporation and amended and restated bylaws are summaries and are qualified by reference to the restated certificate of incorporation and the amended and restated bylaws that will be in effect upon completion of this offering. Copies of these documents have been filed with the Securities and Exchange Commission as exhibits to our registration statement, of which this prospectus forms a part. The descriptions of the common stock and preferred stock reflect changes to our capital structure that will occur upon the closing of this offering.

Common Stock

          As of March 31, 2007, there were 53,417,462 shares of our common stock outstanding, held of record by 323 stockholders, assuming the conversion of all outstanding shares of preferred stock.

          The holders of our common stock are generally entitled to one vote for each share held on all matters submitted to a vote of the stockholders and do not have any cumulative voting rights. Holders of our common stock are entitled to receive proportionally any dividends declared by our board of directors out of funds legally available therefor, subject to any preferential dividend or other rights of any then outstanding preferred stock.

          In the event of our liquidation or dissolution, holders of our common stock are entitled to share ratably in all assets remaining after payment of all debts and other liabilities, subject to the prior rights of any then outstanding preferred stock. Holders of our common stock have no preemptive, subscription, redemption or conversion rights. All outstanding shares of our common stock are validly issued, fully paid and nonassessable. The shares to be issued by us in this offering will be, when issued and paid for, validly issued, fully paid and nonassessable.

          The rights, preferences and privileges of holders of our common stock are subject to, and may be adversely affected by, the rights of holders of shares of any series of preferred stock that we may designate and issue in the future.

Preferred Stock

          Under the terms of our restated certificate of incorporation, our board of directors is authorized to issue shares of preferred stock in one or more series without stockholder approval. Our board of directors has the discretion to determine the rights, preferences, privileges and restrictions, including voting rights, dividend rights, conversion rights, redemption privileges and liquidation preferences, of each series of preferred stock, any or all of which may be greater than or senior to the rights of the common stock. The issuance of preferred stock could adversely affect the voting power of holders of common stock and reduce the likelihood that such holders will receive dividend payments or payments on liquidation. In certain circumstances, an issuance of preferred stock could have the effect of decreasing the market price of our common stock.

          Authorizing our board of directors to issue preferred stock and determine its rights and preferences has the effect of eliminating delays associated with a stockholder vote on specific issuances. The issuance of preferred stock, while providing flexibility in connection with possible acquisitions, future financings and other corporate purposes, could have the effect of making it

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more difficult for a third party to acquire, or could discourage a third party from seeking to acquire, a majority of our outstanding voting stock. Upon completion of this offering, there will be no shares of preferred stock outstanding, and we have no present plans to issue any shares of preferred stock.

Options

          As of March 31, 2007, options to purchase 7,548,235 shares of common stock at a weighted average exercise price of $2.01 per share were outstanding.

Registration Rights

          We have entered into a fourth amended and restated investor rights agreement with certain holders of our preferred stock, our chief executive officer and our vice president of engineering. After the completion of this offering and the sale by the selling stockholders of the shares offered by them hereby, holders of a total of 45,064,641 shares of our common stock will have the right to require us to register these shares under the Securities Act under specific circumstances. After registration pursuant to these rights, these shares will become freely tradable without restriction under the Securities Act. The following description of the terms of the fourth amended and restated investor rights agreement is intended as a summary only and is qualified in its entirety by reference to the fourth amended and restated investor rights agreement filed as an exhibit to the registration statement of which this prospectus forms a part.

          Demand Registration Rights.    At any time from and after May 19, 2007, the holders of at least 35% of our shares of common stock having registration rights may demand that we register under the Securities Act all or a portion of their shares having an aggregate offering price of at least $5,000,000 based on the then-current market price of our common stock; provided, however, that we are required to effect no more than two registrations. In addition, the holders will have the right to request that we register on Form S-3 all or a portion of the registrable shares held by them having an aggregate offering price of at least $1,000,000 based on the then-current market price of our common stock.

          Incidental Registration Rights.    If at any time we propose to register shares of our common stock under the Securities Act, other than on a registration statement on Form S-4 or S-8, the holders of registrable shares will be entitled to notice of the registration and, subject to certain exceptions, have the right to require us to register all or a portion of the registrable shares then held by them.

          In the event that any registration in which the holders of registrable shares participate pursuant to the fourth amended and restated investor rights agreement is an underwritten public offering, the number of registrable shares to be included may, in specified circumstances, be limited due to market conditions.

          Pursuant to the fourth amended and restated registration rights agreement, we are required to pay all registration expenses and indemnify each participating holder with respect to each registration of registrable shares that is effected.

Anti-Takeover Effects of Delaware Law and Our Certificate of Incorporation

          Delaware law, our amended certificate of incorporation and our amended and restated bylaws contain provisions that could have the effect of delaying, deferring or discouraging another party from acquiring control of us. These provisions, which are summarized below, are expected to discourage coercive takeover practices and inadequate takeover bids. These provisions are also

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designed to encourage persons seeking to acquire control of us to first negotiate with our board of directors.

Staggered Board; Removal of Directors

          Our restated certificate of incorporation and our amended and restated bylaws divide our board of directors into three classes with staggered three-year terms. In addition, a director may be removed only for cause and only by the affirmative vote of the holders of at least 662/3% of the voting power of our outstanding common stock. Any vacancy on our board of directors, including a vacancy resulting from an enlargement of our board of directors, may be filled only by vote of a majority of our directors then in office.

          The classification of our board of directors and the limitations on the removal of directors and filling of vacancies could make it more difficult for a third party to acquire, or discourage a third party from seeking to acquire, control of our company.

Stockholder Action by Written Consent; Special Meetings

          Our restated certificate of incorporation provides that any action required or permitted to be taken by our stockholders must be effected at a duly called annual or special meeting of such holders and may not be effected by any consent in writing by such holders. Our restated certificate of incorporation and our amended and restated bylaws also provide that, except as otherwise required by law, special meetings of our stockholders can only be called by our chairman of the board, our chief executive officer or president or our board of directors.

Advance Notice Requirements for Stockholder Proposals

          Our amended and restated bylaws establish an advance notice procedure for stockholder proposals to be brought before an annual meeting of stockholders, including proposed nominations of persons for election to the board of directors. Stockholders at an annual meeting may only consider proposals or nominations specified in the notice of meeting or brought before the meeting by or at the direction of the board of directors or by a stockholder of record on the record date for the meeting, who is entitled to vote at the meeting and who has delivered timely written notice in proper form to our secretary of the stockholder's intention to bring such business before the meeting. These provisions could have the effect of delaying until the next stockholder meeting stockholder actions that are favored by the holders of a majority of our outstanding voting securities.

Delaware Business Combination Statute

          We are subject to Section 203 of the Delaware General Corporation Law. Subject to certain exceptions, Section 203 prevents a publicly held Delaware corporation from engaging in a "business combination" with any "interested stockholder" for three years following the date that the person became an interested stockholder, unless the interested stockholder attained such status with the approval of our board of directors or unless the business combination is approved in a prescribed manner. A "business combination" includes, among other things, a merger or consolidation involving us and the "interested stockholder" and the sale of more than 10% of our assets. In general, an "interested stockholder" is any entity or person beneficially owning 15% or more of our outstanding voting stock and any entity or person affiliated with or controlling or controlled by such entity or person.

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Amendment of Certificate of Incorporation and Bylaws

          The Delaware General Corporation Law provides generally that the affirmative vote of a majority of the shares entitled to vote on any matter is required to amend a corporation's certificate of incorporation or bylaws, unless a corporation's certificate of incorporation or bylaws, as the case may be, requires a greater percentage. Our amended and restated bylaws may be amended or repealed by a majority vote of our board of directors or by the affirmative vote of the holders of at least 662/3% of the votes which all our stockholders would be entitled to cast in any election of directors. In addition, the affirmative vote of the holders of at least 662/3% of the votes which all our stockholders would be entitled to cast in any election of directors is required to amend or repeal or to adopt any provisions inconsistent with any of the provisions of our restated certificate of incorporation described above under "— Staggered Board; Removal of Directors" and "— Stockholder Action by Written Consent; Special Meetings."

Limitation of Liability and Indemnification of Officers and Directors

          Our restated certificate of incorporation limits the personal liability of directors for breach of fiduciary duty to the maximum extent permitted by the Delaware General Corporation Law. Our restated certificate of incorporation provides that no director will have personal liability to us or to our stockholders for monetary damages for breach of fiduciary duty or other duty as a director. However, these provisions do not eliminate or limit the liability of any of our directors:

          Any amendment to or repeal of these provisions will not eliminate or reduce the effect of these provisions in respect of any act or failure to act, or any cause of action, suit or claim that would accrue or arise prior to any amendment or repeal or adoption of an inconsistent provision. If the Delaware General Corporation Law is amended to provide for further limitations on the personal liability of directors of corporations, then the personal liability of our directors will be further limited to the greatest extent permitted by the Delaware General Corporation Law.

          In addition, our certificate of incorporation provides that we must indemnify our directors and officers and we must advance expenses, including attorneys' fees, to our directors and officers in connection with legal proceedings, subject to limited exceptions.

Authorized but Unissued Shares

          The authorized but unissued shares of common stock and preferred stock are available for future issuance without stockholder approval, subject to any limitations imposed by the listing standards of The Nasdaq Global Market. These additional shares may be used for a variety of corporate finance transactions, acquisitions and employee benefit plans. The existence of authorized but unissued and unreserved common stock and preferred stock could make it more difficult or discourage an attempt to obtain control of us by means of a proxy contest, tender offer, merger or otherwise.

Transfer Agent and Registrar

          The transfer agent and registrar for our common stock is Computershare Trust Company, N.A.

Nasdaq Global Market

          We have applied to have our common stock listed on the Nasdaq Global Market under the symbol "STAR."

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SHARES ELIGIBLE FOR FUTURE SALE

          Prior to this offering, there has been no public market for our common stock, and a liquid public trading market for our common stock may not develop or be sustained after this offering. Future sales of significant amounts of our common stock, including shares issued upon exercise of outstanding options or in the public market after this offering, or the anticipation of those sales, could adversely affect public market prices prevailing from time to time and could impair our ability to raise capital through sales of our equity securities. We have applied to have our common stock listed on the Nasdaq Global Market under the symbol "STAR."

          Upon completion of this offering, we will have outstanding 62,417,462 shares of common stock, assuming no exercise of the underwriters' over-allotment option and no exercise of outstanding options. Of these shares, the 10,534,841 shares of common stock to be sold in this offering will be freely tradable without restriction or further registration under the Securities Act, except for any shares purchased by our "affiliates," as that term is defined in Rule 144 under the Securities Act. All remaining shares of common stock held by existing stockholders will be restricted securities as that term is defined in Rule 144 under the Securities Act. Substantially all of these restricted securities will be subject to the lock-up agreements described below. After the expiration of the lock-up agreements, these restricted securities may be sold in the public market only if registered or if they qualify for an exemption from registration under Rule 144 or 701 under the Securities Act.

          In addition, of the 7,548,235 shares of our common stock that were subject to stock options outstanding as of March 31, 2007, options to purchase 2,472,110 shares of common stock were vested as of March 31, 2007 and will be eligible for sale 180 days following the effective date of this offering.

Rule 144

          In general and subject to the lock-up agreements described below, under Rule 144 of the Securities Act, beginning 90 days after the date of this prospectus, a person who has beneficially owned shares of our common stock for at least one year would be entitled to sell within any three-month period a number of shares that does not exceed:

          Sales under Rule 144 are also subject to manner of sale provisions and notice requirements and to the availability of current public information about us. Upon expiration of the 180-day lock-up period described below, 3,759,587 shares of our common stock will be eligible for sale under Rule 144, excluding shares eligible for resale under Rule 144(k) described below. We cannot estimate the number of shares of common stock that our existing stockholders will elect to sell under Rule 144.

Rule 144(k)

          Subject to the lock-up agreements described below, shares of our common stock eligible for sale under Rule 144(k) may be sold immediately upon the completion of this offering. In general, under Rule 144(k), a person may sell shares of common stock acquired from us immediately upon the completion of this offering, without regard to manner of sale, the availability of public information about us or volume, if:

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          Upon the expiration of the 180-day lock-up period described below, approximately 8,621,144 shares of common stock will be eligible for sale under Rule 144(k).

Rule 701

          In general, under Rule 701 of the Securities Act, any of our employees, consultants or advisors who purchased shares from us in connection with a qualified compensatory stock plan or other written agreement is eligible to resell those shares 90 days after the effective date of this offering in reliance on Rule 144, but without compliance with the various restrictions, including the holding period, contained in Rule 144. Subject to the 180-day lock-up period described below, approximately 39,909,952 shares of our common stock will be eligible for sale in accordance with Rule 701.

Lock-up Agreements

          Our officers and directors and other stockholders representing 48,716,402 shares of our common stock have agreed with the underwriters, subject to certain exceptions, not to dispose of or hedge any of their common stock or securities convertible into or exchangeable for shares of common stock for a period through the date 180 days after the date of this prospectus, as modified as described below, except with the prior written consent of Goldman, Sachs & Co. and Lehman Brothers Inc., on behalf of the underwriters.

          The 180-day restricted period will be automatically extended or reduced under the following circumstances: (1) during the last 17 days of the 180-day restricted period, if we issue an earnings release or announce material news or a material event, the restrictions described in the preceding paragraph will continue to apply until the expiration of the 18-day period beginning on the issuance of the earnings release or the announcement of the material news or material event; or (2) prior to the expiration of the 180-day restricted period, if we announce that we will release earnings results or other material news during the 15-day period following the last day of the 180-day period, the restrictions described in the preceding paragraph will continue to apply until the expiration of the 18-day period beginning on the issuance of the earnings release or other material news.

          Goldman, Sachs & Co. and Lehman Brothers Inc. currently do not anticipate shortening or waiving any of the lock-up agreements and do not have any pre-established conditions for such modifications or waivers. Goldman, Sachs & Co. and Lehman Brothers Inc. may, however, with the approval of our board of directors, release for sale in the public market all or any portion of the shares subject to the lock-up agreement. In addition, there will