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Article by DailyStocks_admin    (11-03-08 04:07 AM)

Filed with the SEC from Oct 16 to Oct 22:

NMS Communications (NMSS)
Investor Lloyd Miller III wants to enhance the tech firm's governance, oversight and shareholder value.
Miller is considering the economics of a proposed sale of NMS's communications-platforms business. He questions the payment of more than $5.1 million in transaction costs in connection with the proposed $28 million sale, and argues that the costs are "disproportionate to the value realized by shareholders in the transaction." He also wants Robert Schechter to step down as chairman after the sale closes. Miller owns 3,058,945 shares (6.7%).
BUSINESS OVERVIEW

Overview

We are a leading provider of applications and platforms for value-added services in wireless and wireline communications. We are comprised of two main operating divisions: NMS Communications (formerly Communications Platforms) and LiveWire Mobile (formerly Mobile Applications). A third operating division, Network Infrastructure ("NI"), was sold to Verso Technologies, Inc., a Minnesota Corporation ("Verso"), on December 21, 2007. The NI division focused on solutions for the RAN portion of mobile operators' infrastructure. In accordance with Statement of Financial Standards ("SFAS") No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"), the operating results of the NI division have been reclassified as a discontinued operation in the consolidated statement of operations and related disclosures included in the notes to the consolidated financial statements and in "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this annual report on Form 10-K for all periods presented. Our description of the business focuses on continuing operations.

In January 2008, we formed a wholly-owned subsidiary, LiveWire Mobile, Inc. ("LiveWire Mobile"), a Delaware Corporation. In conjunction with creating LiveWire Mobile, we intend to contribute or license the personnel, assets, liabilities and intellectual property rights of our LiveWire Mobile division. On March 17, 2008, LiveWire Mobile acquired Groove Mobile, Inc. ("Groove Mobile") for cash consideration of $14.5 million. Groove Mobile, whose operations are based in Bedford, Massachusetts, is a provider of mobile music solutions. The Company believes the acquisition will enable LiveWire Mobile to expand its ability to offer a portfolio of managed services, including ringback tones, ringtones and full track music and video downloads delivered though an integrated storefront.

NMS Communications Division

Our NMS Communications division is a leading provider of embedded technology and platforms that enable the rapid creation and deployment of a broad range of value-added services for mobile and converged networks, ranging from voice mail and interactive voice response solutions, to video portals and mobile TV, and multi-media messaging systems. Our customers include major network equipment providers, application developers and systems integrators. For over 20 years, our customers have been deploying systems based on our products in wireless and wireline networks and enterprises around the world. Our key value proposition is helping our partners get to market quickly with innovative mobile voice, video and data services.

We sell our products worldwide through our direct sales force as well as through channel partners. Our customers and channel partners include leading telecommunications operators, network equipment providers and application providers such as, Ericsson AB, Nokia-Siemens Networks, Avaya, Inc., Alcatel-Lucent, Comverse Technology, Inc., Huawei Technologies Co., Ltd., OnMobile Global Limited, and Intervoice, Inc., as well as smaller regional value-added resellers.

LiveWire Mobile Division

Our LiveWire Mobile division is a leading global provider of personalization services for mobile network operators. These services allow subscribers to use music, audio and video content to personalize their mobile service by creating unique ringback tones. LiveWire Mobile achieves this by infusing powerful personalization capabilities into traditional mobile communications that are easy to use for subscribers and lucrative for network operators.

We sell these solutions for purchase primarily through channel partners and more recently, as a managed service. Mobile network operators add LiveWire Mobile offerings to drive subscriptions, content consumption and advertising revenue, thereby growing average revenue per user ("ARPU"), reducing turnover and growing their revenue.

LiveWire Mobile sells its products worldwide through our direct sales force as well as through channel partners. Our customers and channel partners include Vodafone, "3" (Hutchison Telecom), Virgin Mobile USA, Inc., Cricket Communications, Inc., Ericsson AB, and Nokia-Siemens Networks. LiveWire Mobile's ringback service is deployed in approximately 30 operators around the world with seven million active subscribers.

Industry Overview

Telecommunications is a large, complex and rapidly evolving market that includes wireless and traditional wireline communications services, and the related applications, equipment and infrastructure needed to deliver voice, video and data over circuit, packet and broadband networks. Various forces are enabling growth, including:

•
increased use of Internet Protocol ("IP") networks;

•
growth in the technologies that enable IP-communications in both wireless and wireline networks;

•
strong consumer adoption of wireless services, especially in emerging markets;

•
increasing number of wireless networks that support high-speed data services (2.5G-3G);

•
competition among service providers to deliver new types of services involving multimedia content and data services;

•
the need for service providers to compensate for the decline in ARPU with value added services; and

•
the increasingly rapid change of communication devices such as handsets and information technology ("IT") products.



Despite the opportunities for growth in segments of the telecommunications market, these opportunities are not without challenges for market participants, such as telecommunications operators and network equipment and application providers.

Telecommunications Operators—Wireless and Wireline

Telecommunications operators, who provide wireless and wireline services, face a highly competitive and capital-intensive environment. Key challenges and initiatives in the industry include:

•
Improving network performance. Both wireline and wireless carriers are in the process of enhancing their underlying networks to a technology base that can provide high-speed data as well as voice services. In wireline and cable networks, much of the voice traffic is already carried in pure IP, Voice over IP ("VoIP") formats. Wireless operators are aggressively upgrading their networks to next-generation infrastructures that enable both voice and data. Most have already migrated to 2.5G, and others are aggressively moving to 3G, the standard for bandwidth-intensive data services like video.

•
Retaining customers. Changing industry regulations are minimizing previous barriers to customer migration between telecommunications operators, while customer acquisition costs are still high. Operators, particularly in the wireless market, are under increasing pressure to reduce customer churn by providing high quality voice services as well as a wide range of other services and functionality, such as access to Internet content, multi-media messaging, and video applications.

•
Enhancing revenue streams. Intense competition has compromised operators' ability to compete on price, with the ARPU for voice traffic declining even though usage is increasing. Operators are combating this decline in ARPU with new and differentiated premium service offerings that can be deployed rapidly and cost effectively. Many of these services are data and multi-media based, which are enabled by the 2.5G and 3G networks' enhanced data-carrying capabilities.

Network Equipment and Application Providers

Network equipment providers, as well as application providers, who include systems integrators, original equipment manufacturers and independent software vendors, provide network systems, applications and a broad range of value-added services to telecommunications operators and enterprises. These offerings include interactive voice response systems, customer self-service and contact center solutions, signaling and media services, conferencing over Public Switched Telephone Network ("PSTN"), IP and mobile networks, unified communications, multimedia messaging, short message systems, call personalization applications, mobile video applications and services, and content-based applications like ringback tones. These offerings enable telecommunications operators and enterprises to rapidly deploy premium services for their customers.

Network equipment and application providers operate in a market dictated largely by rapid changes in technologies and customer requirements. Key challenges they face include:

•
Delivering products quickly and cost-efficiently. Network equipment and application providers are under continuous pressure to reduce the costs and implementation times of product installations. In order to accomplish this, they must build on highly efficient tools and platforms and more frequently seek to customize existing applications and systems to their specific needs.

•
Accessing leading-edge technologies and applications. In order to help their customers gain a competitive advantage, network equipment and application providers need access to leading-edge enabling technologies and applications, which can be deployed quickly and easily in their own markets. Experience gained in emerging and innovative markets is often highly leveragable into mature or more traditional markets.

Our Solutions

We believe our products and services provide solutions that address the needs of telecommunications operators, network equipment providers and application providers.

NMS Communications Division

Our NMS Communications division offerings address a wide range of our customers' needs as they seek to develop and deploy enhanced voice and data services and applications, and improve the quality and efficiency of communications networks. We believe that our offerings provide one or more of the following benefits to our customers:

Speed time to market for network equipment and application providers. Network equipment and application providers leverage our offerings to provide lower cost, higher quality telecommunications systems more quickly to meet the demands of their service provider and enterprise customers. Our offerings are designed for flexibility in various development and network environments, utilizing open interfaces and industry standards. We believe that with our offerings, our network equipment and application provider customers are able to reduce product lifecycle costs, increase competitive value and remain focused on their core competencies and technologies.

Enable cost-effective and timely deployment of communications applications and services. Our media servers and system building block boards and software provide a comprehensive set of enabling technologies for developing and deploying next-generation applications.

Provide flexible, interoperable, scalable and low cost of ownership solutions. Our products are designed to provide maximum flexibility in designing and upgrading applications, by utilizing open interfaces, industry standards and network flexibility for PSTN, signaling system 7 ("SS7"), IP and IP multimedia subsystem ("IMS") based networks. Our products are also highly scalable and can address needs ranging from a handful of users to millions of subscribers. Additionally, our servers, building block boards and applications leverage mass-market components and custom silicon, with the objective of price/performance leadership. Our products have lower acquisition costs than many competitive products, are space-efficient, consume minimal power, and integrate with operators' existing network infrastructures, resulting in low cost of ownership.

LiveWire Mobile Division

Our LiveWire Mobile division offerings enable cutting-edge personalization services, such as ringback tones, for mobile operators.

Our LiveWire Mobile division delivers end-to-end subscriber personalization solutions that integrate with existing operator networks and deliver music content, subscriber profiles and preference capabilities used by service providers for revenue producing services such as ringback tones. We sell these solutions both as a bundled product and services (including installation, maintenance support and training) purchase (which we refer to as a "cap-ex" arrangement) and also as a recurring managed service.

Products and Services

NMS Communications Division Products

Our NMS Communications division offers a comprehensive line of products and services that enable our partners to more quickly and efficiently develop and deploy enhanced voice, video and data value added services and applications in wireline and wireless networks and enterprises. These products encompass core enabling technologies, provided by our Open Access family; servers and application

platforms, offered within our Vision family; application components, which deliver largely-complete pre-developed applications for selected mobile video applications and Voice Quality Systems ("VQS").

Open Access. Open Access is a family of boards and software that enable developers to create innovative and profitable voice, video and data applications. The Open Access products are open, scalable, high-density building blocks that give developers the processing power and capacity needed to rapidly develop an ever-increasing array of current and next-generation capabilities such as live, streaming two-way video, speech-enabled call centers, VoIP conferencing, voice and video SMS and prepaid call processing. Open Access products are flexible, supporting a variety of networks including time division multiplexing, IP and 3G, enabling developers to meet the needs of large carrier-grade networks and IMS technologies.

Open Access products include: software-based or printed-circuit board-based media processing that offers a variety of video, voice and data services; network signaling boards and software to handle a variety of signal protocols such as session initiation protocol, integrated services digital network/channel associated signaling and SS7, so operators can scale their services to meet growing demand; and a powerful, flexible development environment that enables users to develop custom applications using one set of unified tools. Board based products are available in a variety of form factors, including peripheral component interconnect ("PCI"), PCI express, compact PCI, and advanced telecommunications architecture.

Vision Family. The Vision family of media servers and gateways is a broad line of application-optimized communication servers designed to help OEMs and application providers rapidly develop and deploy converged multimedia applications for 2G and 3G wireless, VoIP, fixed-mobile convergence networks. Vision provides the broadest and most capable set of off-the-shelf, system-level media solutions for creating a broad range of converged multimedia applications including ringback, prepaid calling, network conferencing, mobile centrex and video-enabled applications. All Vision products are IMS-ready (IP Multimedia Subsystem, the emerging generation of carrier network infrastructure) and SIP-enabled, providing a future safe way to create applications that will last.

Application Components. In conjunction with our development partners, we offer selected partner-developed pre-programmed mobile video applications created by our development partners for sale through local system integrators and OEM partners. These pre-created "application components" provide largely complete application frameworks that can be quickly customized for a particular carrier or OEM's need, designed to provide absolutely the fastest time to market. Solutions are integrated with all required NMS Communications third party products, and are ready for deployment.

Voice Quality Systems. The VQS product line is built on technology that we acquired from Lucent Technologies, Inc. in 2005. These products incorporate electrical echo cancellation and acoustic echo control technology to reduce or eliminate the echo inherent in long distance, wireless and VoIP networks. Prior to 2007, VQS consisted of both chip-level product sales to network equipment manufacturers and system-level product sales sold to network operators. Since 2007, the product line has consisted primarily of chip-level sales to network equipment manufacturers, although we realize revenues from maintenance services and upgrades sales to network operators.

LiveWire Mobile Division Products

Mobile network operators add LiveWire Mobile applications and services to drive subscriptions, content consumption and advertising revenue, thereby growing ARPU, reducing turnover, and growing their revenue.

MyCaller Ringback Platform. MyCaller allows mobile subscribers to select original recordings of popular or other commercial music, sounds and voices for callers to hear in place of the conventional ringback ("ring, ring") tone until the call is answered. MyCaller runs on an open, scalable, ready-to-deploy service delivery system that makes it possible for mobile operators worldwide to offer multiple services, including market-specific and content-based, on the same system.

In 2006, we acquired Openera Technologies Inc. ("Openera"). Openera has developed a set of client handset applications aimed at IMS and peer-to-peer communications services. These applications include peer-to-peer video, active phonebook, and location-based services. We believe this set of applications complements our existing application offerings. We did not recognize any revenues from such products in 2007, but anticipate revenue in 2008.

NMS Communications Division and LiveWire Mobile Division Services

We offer a complete range of technical and professional services to support our customers throughout the product lifecycle including planning and design, evaluation, development, deployment and maintenance. Our service offerings span basic customer service and support to advanced architecture and system design, custom programming, installation and support, based on the needs of our customers. Service resources are distributed worldwide in our facilities to provide fast and accurate response to customer needs. Our services include:

•
installation and commissioning;

•
maintenance;

•
training;

•
custom services and consulting; and

•
managed services (LiveWire Mobile division only).

Growth Strategy

NMS Communications Division

Our NMS Communications division's primary focus is on mobility and next generation video-enabled services. Our strategies for growth include the following elements:

•
Provide our customers high value offerings that enable them to get their services to market quickly and cost effectively.

•
Focus on growing market niches, where we can create a sustainable leadership position.

•
Leverage our leadership in media processing, networks and mobile applications, our "best partner" practices and our supply chain expertise.

LiveWire Mobile Division

Our LiveWire Mobile division's strategies for growth include the following elements:

•
Provide our mobile operator customers with high-value offerings that enable them to get services to market quickly, grow revenue and increase profitability.

•
Focus on the growing market opportunity of ringback and personalization services.

•
Create a predictable, sustainable and growing revenue stream that captures an increasing percentage of revenue generated from our target market.

•
Leverage our global leadership in ringback services to build new and expanded relationships with leading mobile operators.

•
Develop cutting-edge products that will expand our breadth of mobile personalization offerings.

•
Bring best-in-class managed service programs for deployment, operations, and marketing to the mobile personalization marketplace.



Business Segments and Geographic Information

We operate in two business segments: the NMS Communications division and the LiveWire Mobile division. For the years ended December 31, 2007, 2006 and 2005, 60%, 58% and 62%, respectively, of our total revenues were derived from operations outside North America and South America, collectively, of which 35%, 31% and 40% of overall revenues, respectively, were derived from Asia and 25%, 27% and 22% of overall revenues, respectively, were derived from Europe, Middle East and Africa, collectively. For more segment and geographic information, including revenue by segment and geographic area, operating income (loss) from continuing operations by segment for each of the three last fiscal years, and long-lived assets by segment and geographic area for each of the two last fiscal years, see our consolidated financial statements included in this annual report on Form 10-K, including Note 17 "Segment and Geographic Information."

Customers

We sell our products and services through our direct sales force and through channel partners, which include value-added resellers, distributors, systems integrators and network equipment providers. For the years ended December 31, 2007, one customer represented 10% of our revenues. For the years ended December 31, 2006 and 2005, one customer represented 15% and 24%, respectively, of our total revenues.

Sales and Marketing

We sell our products on a direct basis as well as through channel partners, which include value-added resellers, distributors, systems integrators and network equipment providers, to telecommunications operators and application providers. As of December 31, 2007, our sales and marketing organization consisted of 86 employees in 12 offices worldwide, including 35 employees in Asia, 32 employees in North America and 19 employees in Europe. A portion of our direct sales force has been focused on selling our NMS Communications division products to network equipment and application providers. Another segment of our direct sales force is focused on selling LiveWire Mobile applications and related managed services to network operators. Prior to the sale of the NI division on December 21, 2007, a portion of our direct sales force was focused on selling our wireless backhaul optimization products to network operators.

At the same time, we have recruited additional channel partners to expand the reach and improve coverage for our products and to enhance geographic coverage for our mobile applications offerings. In addition to performing sales and some level of marketing support, these channel partners provide all or some of the following: pre- and post-sales support, systems integration, and fulfillment and credit services. For the year ended December 31, 2007, 51% of our total revenues were generated by direct sales, and 49% was derived through channel partners. Our marketing strategy consists of three primary methods to increase awareness and create demand for our offerings: public and analyst relations, direct marketing and trade show events. Our public relations efforts are focused on communications industry-related and general business media relationships, which increase general awareness of our business and products, and on industry analysts who can act as independent references and provide opinions on our technologies. With our direct marketing effort, we target specific audiences with a variety of promotional materials consisting of mostly web-based communications. We also participate in selected industry trade shows around the world.

Manufacturing

We utilize third-party contract manufacturing partners to assemble, test and ship all of our hardware product offerings. Through a supply agreement, we outsource the manufacturing and order fulfillment of all printed circuit board products and subassemblies to Plexus Corporation ("Plexus"), a provider of advanced electronics design, testing and manufacturing services. Arrow Electronics, Inc., a provider of manufacturing services, manufactures our Vision family and LiveWire Mobile products.

We seek to use industry-standard components for our products. Many of these components are generally available from multiple suppliers. We also rely on sole source suppliers for certain custom integrated circuits and other devices that are components of one or more of our products. In particular, Texas Instruments, Inc. is our sole source for the digital signal processors ("DSPs") used in many of our products. In addition, Agere Systems, Inc. ("Agere") is a sole supplier for certain integrated circuits used in our products. Although we believe we could develop other sources for each of these custom devices, the process to qualify new suppliers could take several months. The manufacturing processes for our products are designed to comply with Federal Communications Commission, Canadian Standards Association and Underwriters Laboratories safety requirements, and to IPC-610 standards of assembly workmanship. Additionally, we maintain a formal product-specific structure for all required international regulatory and compliance testing. Consistent with our commitment to provide the highest quality products and services to our customers, in 2002 and 2005 we received ISO 9001:2000 certification. This certification includes all design and development activities. In 2005, we also received ISO 14001 certification. With the exception of our VQS products, our products are ROHS 5/6 compliant.

Research and Product Development

We believe that the extension and enhancement of existing products, the development of new products and the development of open technologies, are critical to our future success. Therefore, we undertake direct research and development, engage in joint product development with selected partners and participate in the development of industry standards where appropriate. Our research and development activities consist of the design, development, testing and enhancement of our products. During the years ended December 31, 2007, 2006 and 2005, we spent $18.2 million, $21.8 million and $22.0 million, or 22%, 23%, and 20%, respectively, of our revenue on research and development. As of December 31, 2007, our current product development is conducted by 148 employees located at our headquarters in Framingham, Massachusetts, and at our offices in, Schaumburg, Illinois, St.-Hubert, Quebec and Bangalore, India.

Intellectual Property

Our success depends in part on proprietary technology and know-how. We rely primarily on a combination of trade secret and copyright laws and restrictions on access to protect our trade secrets and proprietary rights. We hold 34 issued patents and have filed an additional 17 patent applications. We distribute our software products under license agreements, which grant customers a non-exclusive license to use the software and contain certain terms and conditions prohibiting its unauthorized reproduction or transfer. We enter into confidentiality agreements with our suppliers and customers when we disclose proprietary information to them. In addition, we enter into confidentiality agreements and assignment of invention agreements with our employees and consultants. Despite these precautions, unauthorized third parties may copy aspects of our products or obtain information that we regard as proprietary. We believe that our products and technology do not infringe on any existing proprietary rights of others.

We depend on development, supply, marketing, licensing and other relationships with companies for complementary technologies necessary for us to offer a broad range of products. These relationships are generally non-exclusive and run for a finite term.

We believe that, due to the rapid pace of innovation within the industry in which we participate, factors such as the technological and creative skills of our personnel, and ongoing reliable product maintenance and support, are more important in establishing and maintaining a leadership position within the industry than are the legal protections for technologies conferred by intellectual property laws.

Competition

Competition in the markets that we target for our products is intense and diverse. There is always the potential for new competitors to enter the markets we serve in the future. A significant number of our target customers, both telecommunications operators and network equipment and application providers, currently use in-house development to provide products and solutions similar to our offerings. While we must compete against these companies' in-house efforts, we believe that a trend towards outsourcing this type of development will continue to broaden our market opportunity. We also believe that the key competitive differentiators in these markets include product quality and functionality, ease-of-use, integration capabilities, price performance, cost of ownership, speed of deployment, technical support and integration and professional services. Current third party competitors for our product areas include:

NMS Communications Division

Open Access and Vision Family—AudioCodes Ltd., Dialogic Corporation, Hewlett Packard, Inc.

LiveWire Mobile Division

MyCaller Ringback Platform—Huawei Technologies Co., Ltd., Comverse Technology, Inc., WiderThan Co., Ltd. (acquired by Real Networks, Inc.)

Employees

As of December 31, 2007, we had 347 full-time employees, consisting of 148 in research and development, 63 in sales, 61 in administration and finance, 37 in services, 23 in marketing and business development and 15 in operations. None of our employees are represented by a labor union. We have never experienced a work stoppage and consider our relations with our employees to be good.

CEO BACKGROUND

Ofer Gneezy
56
Mr. Gneezy has served as a director of the Company since 2000. Mr. Gneezy was a co-founder, and has been, since 1996, President, Chief Executive Officer and a Director of iBasis, Inc., a provider of Internet-based communications services for international carriers.

Robert P. Schechter
59
Mr. Schechter has served as the Company's Chief Executive Officer since 1995 and as Chairman of the Board since 1996. Mr. Schechter served as the Company's President from 1995 to 2007. Mr. Schechter is also a director of Moldflow Corporation, a provider of software solutions for optimizing the design and manufacture of plastic products, Unica Corporation, a developer of Enterprise Marketing Management Software solutions and Soapstone Networks, Inc., a developer of resource and service control software for networks.

Ronald W. White
67
Mr. White has served as a director of the Company since 1988. Mr. White has been, since 2002, a consultant and private investor. Since 2007, he has been the managing director of the Olympus Angels, an organization providing funding for firms with significant growth potential.

W. Frank King, Ph.D.
68
Dr. King has served as a director of the Company since 1997. Dr. King has been, since 1998, a private investor. He is a director of eOn Communications Corporation, a provider of telecommunications applications; and iBasis, Inc., a provider of Internet-based communications services.

Pamela D. A. Reeve,
58
Ms. Reeve has served as a director of the Company since 1997. Since 2006, Ms. Reeve has served as the Chief Executive Officer of openairboston.net, the Boston wireless initiative to build a wireless network in the city of Boston. From 1993 to 2004, Ms. Reeve served as Chief Executive Officer and a director and, from 1989 to 1993, as President, Chief Operating Officer and a director of Lightbridge, Inc., a provider of products and services which enable wireless telecommunications carriers to improve customer acquisition and retention processes, and the leading internet payment gateway. Ms Reeve is a director of American Tower Corporation, a provider of infrastructure facilities and services to the wireless, internet and broadcasting industries.

MANAGEMENT DISCUSSION FROM LATEST 10K

Overview

We operate in the large and rapidly evolving telecommunications industry. Our products include system building blocks, media processing, signaling and service delivery systems, personalized mobile communications applications, and voice quality systems. We sell our products through our direct sales force and channel partners. We have established businesses in North and South America (the "Americas"), Europe, the Middle East, Africa (collectively, "EMEA") and Asia. The majority of our products are manufactured by third party manufacturers. Our research and development activities focus primarily on opportunities relating to emerging wireless applications, next generation voice and video applications, and emerging IP-based services, including VoIP.

Effective January 1, 2007, we consolidated two of our former reportable segments (Platform Solutions and Mobile Applications) into a single segment (Technology and Mobile Applications), and re-organized our business primarily according to functional business area.

Effective July 2, 2007, we reorganized our previously reported Technology and Mobile Applications segment into two separate business divisions: Communications Platforms and Mobile Applications. The change in organization was the result of our efforts to organize product development, sales, services and marketing teams to better align to serve each of these divisions' distinct markets. During the fourth quarter of 2007, these divisions were renamed as the NMS Communications divisions (formerly Communications Platforms) and the LiveWire Mobile division (formerly Mobile Applications). Our Network Infrastructure ("NI") division remained unchanged and continued to focus on solutions for the radio access network portion of mobile operators' infrastructure. Corporate and unallocated costs include general and administrative functions and restructuring charges.

Prior to 2007, the Company had organized into three business units, which constituted our reportable segments (Platforms Solutions, Mobile Applications, and NI). Accordingly, segment revenue and operating income (loss) have been reclassified to conform to current period presentation.

On December 21, 2007, we entered into an Asset Purchase Agreement (the "Agreement"), dated December 20, 2007, with Verso Technologies, Inc. a Minnesota Corporation ("Verso"), to sell our NI division. The closing of the transaction occurred on December 21, 2007. Net loss from the discontinued operations was $2.4 million (net of income tax benefit of $0.1 million), $7.7 million (net of income tax benefit of $0.1 million) and $9.5 million (net of income tax benefit of $0.2 million) for the years ended December 31, 2007, 2006 and 2005, respectively. In the fourth quarter of 2007, we recorded a gain on the sale of the transaction of $1.6 million (net of income tax expense of $6 thousand).

For the year ended December 31, 2007, we incurred a net loss from continuing operations. Our net loss from continuing operations increased $0.5 million from $8.1 million for the year ended December 31, 2006 to $8.6 million for the year ended December 31, 2007. Our net loss is attributable to decreases in our NMS Communications division revenues of $17.9 million partially offset by growth in our LiveWire Mobile division revenues of $4.3 million.

In response to weak market conditions, in the second half of 2006, management took restructuring actions to reduce our cost structure. These actions included the closure of our New Jersey facility, workforce reductions and the sublease of a portion of our corporate headquarters office space. Management continually monitors the activities of our competitors and analyzes the future of our industry to appropriately align our business focus.

For the year ended December 31, 2007, we generated $0.1 million of cash from operations. We have used, and may continue to use, our cash for general corporate purposes, which may include working capital, capital expenditures and potential acquisitions. As of December 31, 2007, we had $30.2 million in cash, cash equivalents and marketable securities, including $1.8 million of Verso common stock.

In January 2008, to contribute to our growth strategy of the LiveWire Mobile division, we created a wholly-owned subsidiary, LiveWire Mobile, Inc., with which we acquired Groove Mobile, Inc. ("Groove Mobile") on March 17, 2008 for cash consideration of $14.5 million. Groove Mobile, whose operations are based in Bedford, Massachusetts, is a provider of mobile music solutions. We believe the acquisition will enable LiveWire Mobile to expand its ability to offer a portfolio of managed services, including ringback tones, ringtones, and full track music and video downloads delivered through an integrated storefront.

We believe the Company has sufficient cash available to execute on its business objectives for at least the next twelve months.

Critical Accounting Policies

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to stock-based compensation, revenue recognition, allowances for doubtful accounts, write-downs for excess and obsolete inventories, possible impairment of long-lived assets and goodwill, income taxes, restructuring and other related charges, and accounting for acquisitions. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. We have noted that our estimates used in the past have been consistent with actual results. Actual results may differ from these estimates under different assumptions or conditions. For a discussion of how these estimates and other factors may affect our business, see also our discussion under the heading "Risk Factors" in this annual report on Form 10-K.

We believe the following critical accounting policies involve our more significant judgments and estimates used in the preparation of our consolidated financial statements:

Revenue Recognition. We derive revenues from two sources: (i) sales of products, including hardware and software licenses, and (ii) services, including maintenance and support services, professional services and managed services. Maintenance and support services consist of on-site support, telephone and online support, and training. Professional services projects may consist of multiple elements including hardware and/or software installation, configuration, integration and customization services provided to customers. Managed services consist of supplying, outsourcing and/or maintaining systems for the benefit of customers. These systems may be Company owned pursuant to a managed services arrangement or customer owned pursuant to a cap-ex arrangement.

We sell our products and services through our direct sales force and through channel partners, which include resellers, distributors and systems integrators. When the software is more than incidental and is essential to the functionality of the hardware, we recognize revenue in accordance with the provisions of the American Institute of Certified Public Accountants ("AICPA") Statement of Position ("SOP") 97-2, Software Revenue Recognition ("SOP 97-2"), and related interpretations. We recognize revenue from the sale of products when persuasive evidence of an arrangement exists; delivery has occurred; the fee is fixed or determinable; and collection is considered probable. For all sales, we use a binding contract and/or a purchase order as evidence of an arrangement with the customer or channel partner. Sales to our channel partners are evidenced by a master agreement governing the relationship, together with binding purchase orders for individual transactions. We consider delivery to occur when we ship the product, so long as title and risk of loss have passed to the customer. At the time of a transaction, we assess whether the sale amount is fixed or determinable based upon the terms of the documented agreement. If we determine the fee is not fixed or determinable, we recognize revenue when the fee is fixed. We assess if collection is probable based on a number of factors, including past transaction history and the creditworthiness of the customer. If we determine that collection is not probable, we do not record revenue until such time as collection becomes probable, which is generally upon the receipt of cash or when payments become due.

For arrangements with customers that include acceptance provisions, we recognize revenue upon the customer's acceptance of the product, which occurs upon the earlier of receipt of a written customer acceptance or expiration of the acceptance period. In accordance with SOP 97-2, in some circumstances we recognize revenue on arrangements that contain certain acceptance provisions when we have historical experience that the acceptance provision is perfunctory.

When an arrangement involves multiple elements, such as hardware and software products, maintenance and/or professional services, we allocate the entire sale price to each respective element based on vendor specific objective evidence ("VSOE") of fair value for each undelivered element. When arrangements contain multiple elements and VSOE of fair value exists only for all undelivered elements, we recognize revenue for the delivered elements using the residual method in accordance with the provisions of the AICPA SOP 98-9, Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions ("SOP 98-9"). The residual method requires that the portion of the total arrangement fee attributable to undelivered elements, as indicated by VSOE of fair value, be deferred and subsequently recognized when delivered. We establish VSOE of fair value for undelivered elements based on either substantial renewal rates of maintenance and support agreements, the price we charge when the same element is sold separately or the price established by management who have the relevant authority to set prices for an element not yet sold separately. For arrangements containing multiple elements where VSOE of fair value does not exist for all undelivered elements, we defer revenue for the delivered and undelivered elements until VSOE of fair value exists for all undelivered elements or all elements have been delivered.

We reduce revenue by provisions for estimated sales returns associated with rights offered to a limited number of channel partners. These rights allow the channel partner to exchange a percentage of its inventory based on the volume of its prior purchases. We provide for these return rights each quarter in an amount equal to estimated returns. On a quarterly basis, we review our estimates and compare to our actual returns experience. Our actual results have been in line with our expectations. An increase in our allowance for sales returns would reduce our revenue in the period for which the increase is recorded.

We evaluate our revenue recognition policies based on the specific facts and circumstances related to each of our channel partners. When selling to resellers and distributors, we generally do not recognize revenue upon shipment, unless a credit history has been established, since many of these customers are thinly capitalized and their ability to pay is, in substance, contingent upon their resale of our product. In these cases, we defer revenue until collection is deemed probable. When revenue is deferred, if reliable reporting from the reseller or distributor exists, we will recognize revenue when the reseller or distributor sells the product to an end-user ("sell through"). When reliable reporting does not exist, revenue will be recognized upon our receipt of payment, or in limited circumstances upon receipt of a letter of credit or similar arrangement. We further monitor the payment history of our resellers and distributors and overall days sales outstanding ("DSO"). We believe this revenue recognition policy minimizes the risk that product is shipped in excess of end-user demand and allows us to reasonably and reliably estimate any sales returns.

Services revenue is primarily comprised of professional services, maintenance and support services and managed services. We recognize revenue from professional services as the services are performed. Service revenue represented less than 10% of revenue for each of the years ended December 31, 2007, 2006 and 2005. Maintenance and support services, which are typically sold separately from products, consist of on-site support, telephone and on-line support and training. We defer maintenance and support services revenue, whether sold separately or as part of a multiple element arrangement, and recognize it ratably over the term of the maintenance contract, generally twelve months. We provide managed services under long term arrangements, typically two to three years. The arrangements may contain provisions requiring customer acceptance of the set-up activities, including installation and implementation activities, prior to the commencement of the ongoing services arrangement. We recognize maintenance and support and managed services revenue in accordance with SAB No. 101, Revenue Recognition in Financial Statements , as amended by SAB No. 104, Revenue Recognition . Accordingly, amounts are earned when all of the following conditions are satisfied: there is persuasive evidence of an arrangement; the service has been provided to the customer; the amount of fees to be paid by the customer is fixed or determinable; and the collection of fees from the customer is reasonably assured.

When there are shipping and handling fees, we invoice customers for such fees. We recognize the invoiced amounts as revenue and the related costs are recognized as a cost of revenue.

Capitalization of Managed Services Costs. We capitalize certain costs associated with the set-up activities of a managed services arrangements. These costs represent incremental external or internal costs that are directly related to the set-up, enhancement or expansion of certain managed services offerings. The types of costs that are capitalized include labor and related fringe benefits, subcontractor costs, consulting costs, travel costs, inventory costs and third party product costs. We begin to capitalize costs in the period when there is existence of an arrangement. Managed services arrangements may also require the procurement of equipment, development of internally developed software and consulting services related to system enhancements and expansions. These related costs are also capitalized. We amortize these capitalized costs upon acceptance or commercial launch of the initial set-up, enhancement or expansion of the service over the expected relationship period or the expected economic useful life, as appropriate, using the straight-line method. Expenses incurred to maintain and sustain the service delivery after the initial setup, enhancement or expansion of a managed services arrangement are expensed as incurred. We evaluate the lives and realizability of the capitalized costs on a periodic basis or as needed.

In the event indications exist that a capitalized managed services cost balance to a particular contract may be impaired, undiscounted estimated cash flows of the contract are projected over its remaining term, and compared to the unamortized managed services contract cost balance. If the projected cash flows are not adequate to recover the unamortized cost balance, the balance would be adjusted to equal the contract's fair value in the period such determination is made. The primary indicator used to determine when impairment testing should be performed is when a contract is materially underperforming, or is expected to materially underperform in the future, as compared to the financial model that was developed as part of the original proposal process and subsequent annual budgets.

Allowance for Doubtful Accounts. We maintain an allowance for doubtful accounts based upon our historical experience and any specifically identified customer collection issues. We monitor and analyze accounts receivable and the composition of the accounts receivable aging, historical bad debts, and current economic trends, regional factors and other known factors when evaluating the adequacy of the allowance for doubtful accounts. Based upon the analysis and estimates of the uncollectibility of our accounts receivable, we record an allowance for doubtful accounts when the prospect of collecting a specific account receivable becomes doubtful. Actual results could differ from the allowances for doubtful accounts of $0.1 million recorded as of December 31, 2007, and this difference may have a material effect on our financial position and results of operations.

Revenues. Revenues consist primarily of product and license sales and, to a lesser extent, services provided to our customers. NMS Communications division revenues consist of sales of our systems building block products and services, video products and services, and voice quality enhancement and echo cancellation products, systems and services. LiveWire Mobile division revenues consist of sales of our MyCaller Ringback Platform and related services, including managed services.

Cost of revenues. Cost of revenues consists primarily of product costs, cost of services provided to our customers, including the costs of managed services, and overhead associated with fulfillment operations. Our manufacturing process is outsourced to contract manufacturers. The amortization of certain acquired intangible assets and stock-based compensation expense are also included in cost of revenues.

Selling, general and administrative expenses. Selling, general and administrative expenses consist primarily of salaries, stock-based compensation, commissions and related personnel and overhead expenses for those engaged in our sales, marketing, promotional, public relations, executive, accounting and administrative activities. The amortization of intangible assets related to acquired customer relationships from Openera are also included in selling, general and administrative expenses.

Research and development expenses. Research and development expenses consist primarily of salaries, personnel expenses, stock-based compensation, prototype and other discretionary fees related to the design, development, testing and enhancement of our products. These costs are expensed as incurred.

Restructuring and other related charges. Restructuring charges consist of involuntary severance related costs, facility closures or downsizing and disposal of excess or unused assets.

Other income (expense), net. Other income (expense), net consists primarily of interest income, interest expense, gains or losses realized on the repurchase of convertible debt and foreign currency translation gains and losses.

Discontinued Operations. On December 21, 2007, we sold our NI division to Verso. Accordingly, the operating results of the NI division have been reclassified as a discontinued operation in the consolidated statements of operations for all historic reporting periods.

The NI division had revenues of $5.4 million, $3.6 million and $0.9 million for the years ended December 31, 2007, 2006 and 2005, respectively. Net loss from the discontinued operations was $2.4 million (net of income tax benefit of $0.1 million), $7.7 million (net of income tax benefit of $0.1 million) and $9.5 million (net of income tax benefit of $0.2 million) for the years ended December 31, 2007, 2006 and 2005, respectively. For the year ended December 31, 2007, we recorded a gain on the sale of the transaction of $1.6 million (net of income tax expense of $6 thousand).

Year Ended December 31, 2007 Compared to Year Ended December 31, 2006

We experienced a decrease in the NMS Communications division revenues in the year ended December 31, 2007, as compared to the year ended December 31, 2006. The decrease of our NMS Communications division sales was due primarily to continued erosion of low-end time-division multi-plex ("TDM") solutions to standard IP computing platforms, as well as, the significant decrease of sales of our voice quality products in the first and second quarters of 2007 compared to the first and second quarters of 2006. This decrease was based primarily on deployments of our products in the 3G network of a major Japanese operator that concluded in the second quarter of 2006. Sales from our VQS product line were $6.0 million in 2007 and $16.0 million in 2006.

We experienced strong growth in the LiveWire Mobile division revenues during the year ended December 31, 2007, as compared to the year ended December 31, 2006, as a result of increased demand for our MyCaller Ringback Platform and related services. This increase was due to expansion orders from existing customers, as our customers experience growth in subscribers, and additional new customers. We continue to see growth in this area through new and existing operator deployments around the world. In the fourth quarter of 2007, we recognized $0.5 million related to our managed services offerings. We will continue to market managed services offerings and we expect them to become an increasingly important component of our revenue in 2008.

For the year ended December 31, 2007, revenues derived from the Americas market decreased as compared to the year ended December 31, 2006, primarily due to an unusually large $3.2 million sale of an end-of-life product in 2006, coupled with a decrease in demand for NMS Communications division platform products. For the year ended December 31, 2007, as compared to the year ended December 31, 2006, we experienced a decrease in the revenues from the EMEA market due to the decrease in demand for our NMS Communications division products and services. Revenues attributable to the Asia market declined during the year ended December 31, 2007, as compared to the year ended December 31, 2006, as a Japanese mobile operator completed its deployment of our voice quality products in its 3G network in 2006, offset by growth in sales of our MyCaller Ringback Platform and related services.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

RESULTS OF OPERATIONS

Revenues

Revenues consist primarily of product sales and, to a lesser extent, services provided to our customers. NMS Communications division revenues consist of sales of our systems building block products and services, video products and services, and voice quality enhancement and echo cancellation products, systems and services. LiveWire Mobile division revenues consist of sales of our mobile personalization platforms and related services, including managed services.

We experienced a decrease in the NMS Communications division revenues for both the three and six months ended June 30, 2008, respectively, as compared to the three and six months periods ended June 30, 2007, due to a decrease in demand for our products, primarily in the Asia region. Service revenues were $0.6 million and $0.6 million for the three months ended June 30, 2008 and 2007, respectively. Service revenues were $1.3 million and $1.3 million for the six months ended June 30, 2008 and 2007, respectively.

LiveWire Mobile revenues decreased $0.9 million during the three months ended June 30, 2008 as compared to the three months ended June 30, 2007, due to a $2.1 million decrease in product revenues offset by a $1.2 million increase in service revenues. Product revenues decreased primarlily due to the variability in the timing of completion of these arrangements. The increase in service revenues is due to our recently introduced managed service offerings, which includes $1.2 million of revenues from the customer relationships obtained in connection with the acquisition of Groove Mobile in March 2008.

LiveWire Mobile experienced a $3.0 million increase in revenues for the six months ended June 30, 2008, as compared to the six months ended June 30, 2007, due to a $0.2 million increase in product revenues and a $2.8 million increase in service revenues. The increase in product revenues is primarily attributable to the recognition of $1.6 million in handset software distribution royalties from one customer. We recorded $1.3 million of this amount in the first quarter of 2008. The increase was offset by a $1.4 million decrease in product revenue sales of our ringback platform due to the variability in the timing of completion of these arrangements. The increase in service revenue was primarily due to the recognition of $2.0 million related to our recent introduction of our managed service offerings, which includes $1.3 million of revenues from the customer relationships obtained in connection with the acquisition of Groove Mobile in March 2008. We also recorded $0.4 million of service revenues related to the multiple-element license and support arrangement described above.

Revenues derived from the Americas market increased $1.4 million during the three months ended June 30, 2008, as compared to the three months ended June 30, 2007, primarily due to the recognition of $1.0 million of service revenue from the customer relationships obtained in connection with LiveWire Mobile's acquisition of Groove Mobile in March 2008. Revenues derived from the EMEA and Asia markets decreased an aggregate of $4.9 million during the three months ended June 30, 2008, as compared to the three months ended June 30, 2007, due to a decrease in demand of our NMS Communications products in these markets and variability in the timing of completion of our ringback platform arrangements.

Revenues derived from the Americas region increased $0.1 million during the six months ended June 30, 2008, as compared to the six months ended June 30, 2007, due to the recognition of $1.1 million of service revenue from the customer relationships obtained in connection with LiveWire Mobile's acquisition of Groove Mobile offset by decreases in demand for NMS Communications products. Revenues derived from the EMEA and Asia markets decreased an aggregate of $2.4 million during the six months ended June 30, 2008, as compared to the six months ended June 30, 2007, due to lower demand of our NMS Communications division products offset by increases in our LiveWire Mobile division revenues. LiveWire Mobile revenues increased in the EMEA markets related to ringback platform expansions from existing customers. LiveWire Mobile revenue derived from the Asia market included $2.0 million in handset software and services revenue related to the multiple-element customer license and support arrangement described previously.

Gross Profit and Cost of Revenues

Cost of revenues consists primarily of product costs, cost of services provided to our customers, the costs of managed services, including content costs, and overhead associated with fulfillment operations. Our manufacturing process is outsourced to contract manufacturers. The amortization of certain intangible assets and stock-based compensation expense are also included in cost of revenues.

We experienced a decrease in gross profit in the three and six months ended June 30, 2008, as compared to the three and six months ended June 30, 2007, primarily due to the changes in revenues as described above. The decrease in gross profit is also affected by increases in cost of revenues related to amortization of acquired intangibles. During both the three and six month periods ended June 30, 2008, we recognized $0.7 million and $0.8 million of amortization expense related to the core technology acquired in connection with the Groove Mobile acquisition.

Selling, General and Administrative

Selling, general and administrative expenses consist primarily of salaries, stock-based compensation, commissions and related personnel and overhead expenses for those engaged in our sales, marketing, promotional, public relations, executive, accounting and administrative activities. The amortization of intangible assets related to acquired customer relationships is also included in selling, general and administrative expenses.

Selling, general and administrative expenses increased $0.5 million during the three months ended June 30, 2008, compared to the three months ended June 30, 2007. The increase was primarily due to the acquisition of Groove Mobile in March 2008, offset by a $0.5 million decrease in stock based compensation expense and a $0.2 million decrease in commission expense.

Selling, general and administrative expenses increased $0.8 million during the six months ended June 30, 2008 compared to the six months ended June 30, 2007. The increase was primarily due to the acquisition of Groove Mobile in March 2008, offset by a $0.1 million decrease in stock based compensation expense.

Research and Development

Research and development expenses consist primarily of salaries, personnel expenses, stock-based compensation, prototype and other discretionary fees related to the design, development, testing and enhancement of our products. These costs are expensed as incurred.

Our research and development spending increased $0.8 million and $1.3 million during the three and six months ended June 30, 2008, respectively, as compared to the three and six months ended June 30, 2007. These increases were primarily attributable to an increase in personnel and related costs associated with current roadmap initiatives as well as the Groove Mobile acquisition during the first quarter of 2008. Our research and development activities are primarily focused on opportunities relating to mobile personalization applications, IP-based services, including VoIP, enhancing our existing board and software families, next generation board and related software offerings (incorporating for example, video capabilities), our Vision media servers.

Restructuring

In the fourth quarter of 2006, we entered into an agreement to sublease to a third party office space located in Framingham, Massachusetts, which we formerly used as supplementary conference, training and corporate office space (the "2006 sublease").

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