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Article by DailyStocks_admin    (05-21-08 09:24 AM)

The Daily Magic Formula Stock for 05/21/2008 is Novatel Wireless Inc. According to the Magic Formula Investing Web Site, the ebit yield is 33% and the EBIT ROIC is 75-100 %.

Dailystocks.com only deals with facts, not biased journalism. What is a better way than to go to the SEC Filings? It's not exciting reading, but it makes you money. We cut and paste the important information from SEC filings for you to get started on your research on a specific company.


Dailystocks.com makes NO RECOMMENDATIONS whatsoever, and provides this for informational purpose only.

BUSINESS OVERVIEW

Overview

We were incorporated in 1996 under the laws of the State of Delaware. We are a leading provider of wireless broadband access solutions for the worldwide mobile communications market. Our broad range of products includes third generation, or 3G, wireless PC card and ExpressCard modems, embedded modems, Fixed-Mobile Convergence, or FMC, and communications software and solutions for wireless network operators, infrastructure providers, distributors, laptop PC and other original equipment manufacturers, or OEMs, and vertical markets worldwide. Through the integration of our hardware and software, our products are designed to operate on a majority of wireless networks in the world and provide mobile subscribers with secure and convenient high speed access to corporate, public and personal information through the Internet and enterprise networks. We also offer software engineering, integration and design services to our customers to facilitate the use of our products.

Our global end-customer base is comprised of wireless operators, laptop PC and other OEMs, distributors and various companies in other vertical markets. Our current customer base includes wireless operators and other wireless market participants such as AT&T, Hutchison 3G, Optimus, Orange, Sprint PCS, Telefonica, Verizon Wireless, Vodafone and OEM partners such as Dell, Panasonic, Sony, and Toshiba. We have strategic technology, development and marketing relationships with several of these customers.

For the years ended December 31, 2007, 2006 and 2005, revenue recognized from sales of our products was $429.9 million, $218.0 million, and $161.2 million, respectively. For the years ended December 31, 2007 and 2006 revenue recognized from development services was zero. For the year ended December 31, 2005, revenue recognized from development services was $500,000.

Our Products

Our products are designed to operate across 3G networks, including:


•

Code Division Multiple Access , or CDMA , 1xEV-DO is designed to be employed by CDMA operators and provide wireless access speeds comparable to wireline digital subscriber line, or DSL, services. Subscribers can attain wireless access to data at maximum speeds of up to 2.4 megabits per second, or Mbps, on CDMA 1xEV-DO Rev 0 networks and 3.1 Mbps on CDMA 1xEV-DO Rev A networks.


•

High Speed Downlink Packet Access, or HSDPA, is an enhancement of the Universal Mobile Telecommunications System, or UMTS, standard which enables packet data transmission in the UMTS downlink with data transmission at maximum speeds of up to 14.4 Mbps. HSDPA can be implemented as an upgrade to current UMTS infrastructure. With UMTS , subscribers can attain wireless access to data at maximum speeds of up to 384 kilobits per second, or kbps. UMTS is also referred to as Wideband Code Division Multiple Access, or W-CDMA.


•

High Speed Uplink Packet Access , or HSUPA , is another release to the evolving 3G standards. HSUPA employs an extremely efficient procedure for sending data on the uplink channel. The theoretical speed for data on the uplink is 5.76Mbps and the downlink will achieve HSDPA theoretical speeds of up to 14.4Mbps.

Merlin Wireless PC Card and ExpressCard Modems

Our Merlin Wireless PC Card and ExpressCard modems provide mobile subscribers with secure and convenient high-speed wireless access to data including corporate, public and personal information through the Internet and enterprise networks. Each of our Merlin Wireless PC Card and ExpressCard modems slides inside standard laptop PCs and other products employing PCMCIA or ExpressCard/34/54 interfaces, respectively. All our modems utilize modem manager software and are compatible with a range of devices including laptop PCs, PDAs, mobile phones, as well as operating systems including Microsoft Windows 98, 2000, Millennium Edition, XP, Vista and Pocket PC. The following is a representative selection of our current Merlin Wireless PC Card and ExpressCard modems :


•

The Merlin PC720 is a dual band (800/1900 MHz) wireless ExpressCard modem designed to provide mobile broadband connections up to 3.1 Mbps on CDMA 1xEV-DO Rev A networks in North America and is backward compatible to legacy CDMA networks. The Merlin PC720 incorporates an external flip antenna, maximizing data speed performance and allowing for stronger network signal reception.


•

The Merlin X720 ExpressCard provides high-speed connectivity to EV-DO Rev A networks with data speeds up to 3.1 Mbps in North America and is backward compatible to legacy CDMA networks. It has an advanced dual band diversity antenna system design that incorporates an external flip antenna, maximizing data speed performance and allowing for stronger network signal reception. The Merlin X720 contains A-GPS capability allowing the end-user to retrieve location data from GPS satellites.


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The Merlin XU870 is a tri-band HSDPA/UMTS (850/1900/2100 MHz) and quad-band EDGE/GPRS (850/900/1800/1900 MHz) wireless ExpressCard Modem designed to provide mobile subscribers with high-speed wireless access to data over 3G UMTS/HSDPA networks. The Merlin XU870 enables mobile broadband connections up to 7.2 Mbps with software upgrade. The Merlin XU870 operates on networks in North America, Europe and countries around the world in supported bands.


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The Merlin X950D ExpressCard is a tri-band HSUPA and quad-band EDGE/GPRS wireless modem designed to be used in both ExpressCard/34 and 54 slots as well as with our adapters in PCMCIA and USB slots. The X950D enables mobile broadband connections of up to 2.1 Mbps and download speeds up to 7.2 Mbps on HSDPA networks, and contains GPS capability. The Merlin X950D operates on networks in Europe and countries around the world in supported bands.

Expedite Embedded PCI Express Mini Card Modems for OEMs

Our Expedite Embedded PCI Express Mini Card modems are a form factor specification designed for easy integration into multiple laptop platforms and other wireless devices. Each Expedite Embedded PCI Express Mini Card modem enables wireless high-speed streaming video and audio, secure access to emails with large attachments and other corporate information stored behind firewalls providing reliable connectivity, maximum data throughput and efficient management of device power consumption. The following is a representative selection of our current Expedite Embedded PCI Express Mini Card modems :


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The Expedite EV620 PCI Express Mini Card includes receiver diversity on 800 and 1900 MHz band CDMA2000 1xEV-DO and CDMA2000 1X networks, and enables wireless broadband data access on CDMA 1xEV-DO networks at speeds up to 2.4 Mbps.


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The Expedite E725 PCI Express Mini Card provides dual band (800/1900 MHz) wireless access and is designed to provide mobile broadband connections at speeds up to 3.1 Mbps on CDMA 1xEV-DO Rev A networks.


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The Expedite EU860D PCI Express Mini Card operates globally on 850, 1900, and 2100 MHz bands on HSDPA and UMTS networks with mobile broadband connection speeds up to 3.6 Mbps on the downlink and up to 384 Kbps on the uplink on HSDPA/UMTS capable networks.


•

The Expedite EU870D is optimized for Europe and offers diversity, equalizer and operates globally on 850, 1900 and 2100 MHz bands on HSDPA and UMTS networks. The Expedite EU870D transmits wireless data at speeds up to 3.6 Mbps on the downlink and up to 384 Kbps on the uplink on HSDPA/UMTS networks

Fixed-Mobile Convergence Solutions

Our Ovation USB product line provides wireless connectivity interchangeably to both desktop and other fixed computing devices and to laptop PCs and other portable computing devices. The following is a representative selection of our current Ovation products:


•

The Ovation MCD3000 provides dual band (800/1900 MHz) wireless access and is designed based on the USB standard to provide mobile broadband connections at speeds up to 3.1 Mbps on CDMA 1xEV-DO Rev A networks. The Ovation MCD3000 has a dual band diversity antenna system design that incorporates an external flip antenna.


•

The Ovation MC727 operates on EV-DO Rev A networks (backwards compatible to Rev 0 and 1xRTT) CDMA 800 MHz and CDMA 1900 MHz with connection speeds up to 3.1 Mbps on the downlink and up to 1.8 Mbps on the uplink on EV-DO Rev A capable networks. The MC727 contains a hot-swappable removable memory via microSD up to 4GB and is GPS capable.


•

The Ovation MC950D offers both receiver diversity (2100 MHz) and equalizer support with download rates of 7.2 Mbps and upload speeds of up to 2.1 Mbps. The MC950D is optimized for Europe and Japan, and any territories around the world which support the 2100 MHz band. Software is included on the device so that users don’t need to install drivers from a CD.

MobiLink Mobile Communications Suite

Our MobiLink mobile communications software suite, which resides on the mobile subscriber’s computing device, is an object-oriented application that enables a user to gain quick and simple access to advanced connectivity features such as SMS, multimedia messaging and virtual private networking. MobiLink also offers video telephony and wireless local area networks, or WLAN management capabilities. MobiLink’s graphical user interface and underlying functionality are designed to be modular, easily configurable and expandable in order to enable our customers to differentiate their product offerings. MobiLink is engineered to work with all our wireless modems.

Our Strategy

Our objective is to be the leading provider of broadband multimedia (data and voice) solutions for the worldwide mobile communications market. The key elements of our strategy are to:


•

Broaden our Product Offering. We intend to diversify and continue to broaden our product line in the following areas: wireless PC Card and ExpressCard modems, embedded modems, Fixed-Mobile Convergence solutions, and software services and solutions.


•

Expand Our 3G Wireless PC Card and ExpressCard Modem Offerings Worldwide. We intend to continue expanding our portfolio of 3G wireless PC Card and ExpressCard modem products with leading wireless operators worldwide. We have introduced fourteen 3G products, including EV-DO, HSDPA and HSUPA products and plan to continue to introduce new products aimed at the next generation technologies.


•

Lead the Embedded Market . From the beginning of 2005 to the end of 2007, we received design wins from six leading laptop manufacturers and additional mass market device manufacturers to embed our 3G products into their product lines. These wins include Dell and Toshiba, two of the world’s largest laptop PC manufacturers. In addition during that period we also received several upgrade orders from existing key customers for our next-generation 3G products. In the future, we will continue to pursue additional opportunities with current OEM partners and with other leading OEM partners as we look to consolidate the largest market share of the embedded market. For some of our OEM partners, we build to order; for others, our technology is embedded in specific wireless SKUs; and for others, our technology is embedded into complete product lines. Most of our customers are addressing world-wide markets and are shipping our EV-DO, HSDPA and HSUPA products.


•

Capitalize on Our Direct Relationships with Wireless Operators. We intend to continue to capitalize on our direct relationships with wireless operators in order to increase our worldwide market position. In the United States and internationally, we are working closely with wireless operators of EV-DO, UMTS HSDPA and HSUPA wireless networks.


•

Leverage Strategic Relationships with Wireless Industry Leaders. We believe that strategic relationships with wireless and mobile computing industry leaders are critical to our ability to leverage sales opportunities and ensure that our technology investments address customer needs. Through strategic relationships, we believe that we can increase market penetration and differentiate our products by accessing the resources of others, including access to distribution resources, and dedicated sales and marketing resources and addressing new market opportunities through innovation with our selected partners. We intend to continue the development and leverage of strategic relationships in the industry.


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Continue to Target Key Vertical Market Opportunities and Penetrate New Markets. We believe that on-going developments in wireless technologies will create additional vertical market opportunities and more applications for our products. Currently, we market our broadband wireless access solutions to key vertical industry segments by offering innovative products that are intended to increase productivity, reduce costs and create operational efficiencies.


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Increase the Value of Our Products . We will continue to add new features and functionality to our products and develop new services and software applications to enhance the overall value and ease of use that our products provide to our customers and end users.

Customers

Our global end-customer base is comprised of wireless operators, OEMs, distributors and various companies in other vertical markets. Our current customer base includes wireless operators and other wireless market participants such as AT&T, Hutchison 3G, Optimus, Orange, Sprint PCS, Telefonica, Verizon Wireless, Vodafone and OEM partners such as Dell, Panasonic, Sony, and Toshiba. We have strategic technology, development and marketing relationships with several of these customers.

Our strong customer relationships provide us with the opportunity to expand our market reach and sales:


•

Wireless Operators and Distributors . By working closely with our wireless operator and distributor customers, we are able to drive demand for our products by combining our expertise in wireless technologies with our customers’ sales and marketing reach over a global subscriber base. Our customers also provide us with important services, including field trial participation, technical support, wireless data marketing and access to additional indirect distribution channels.


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OEMs . Our OEM customers integrate our products into devices that they manufacture and sell to end-users through their own direct sales forces and indirect distribution channels. Our products are capable of being integrated into a broad range of devices, including but not limited to laptop PCs, PDAs, M2M devices, and vehicle location devices. We seek to build strong relationships with our OEM partners by working closely with them and providing radio frequency, or RF, design consulting, performance optimization, software integration and customization and application engineering support during the integration of our products.

Strategic Relationships

We continue to develop and maintain strategic relationships with wireless and computing industry leaders like Dell, QUALCOMM, Sony, Sprint PCS, Verizon Wireless and Vodafone and major software vendors. Through strategic relationships, we have been able to increase market penetration by leveraging the resources of our channel partners, including their access to distribution resources, increased sales opportunities and market opportunities.

Our strategic relationships include technology and marketing relationships with wireless operators, OEM partners that integrate our products into other devices, distributors and leading hardware and software technology providers.

Sales and Marketing

We sell our wireless broadband solutions primarily to wireless operators either directly or through strategic relationships, as well as to OEM partners and distributors located worldwide. Most of our sales to wireless operators and OEM partners are sold directly through our sales force. To a lesser degree, we also use an indirect sales distribution model through the use of select distributors. A significant portion of our revenues comes from a small number of customers. Our revenues from sales to Verizon, Sprint PCS and Dell represented approximately 34.9%, 25.9% and 10.9%, respectively, of our total revenues for the year ended December 31, 2007.

In order to maintain strong sales relationships, we provide co-marketing, trade show support, product training and demo units for merchandising. We are also engaged in a wide variety of activities, such as awareness and lead generation programs as well as product marketing. Other marketing initiatives include public relations, seminars, and co-marketing and co-branding with partners.

We are continuing to drive widespread adoption of our products through increased global marketing activities, expansion of our sales team and distribution networks and continued leverage of our strategic relationships with wireless industry leaders.

We have operations in the United States, Canada and Europe. The amount of our assets in the United States, Canada and Europe as of December 31, 2007 were $288.8 million, $6.3 million, and $1.5 million, respectively. As of December 31, 2006 the amount of our assets in the United States, Canada and Europe were $172.8 million, $18.0 million and $835,000, respectively, and as of December 31, 2005 were $166.5 million, $9.6 million and zero, respectively.

For the years ended December 31, 2007, 2006 and 2005, approximately 25%, 37% and 58%, respectively, of our revenue was derived from international customers. See Note 10 to our Consolidated Financial Statements for further explanation of our revenue based on geography. Our continuing reliance on sales in international markets exposes us to risks attendant to foreign sales. See “Item 1A. Risk Factors—We are subject to the risks of doing business abroad, which could negatively affect our international sales activities and our ability to obtain products from our foreign manufacturers”.

Product Research and Development

Our product development efforts are focused on developing innovative wireless broadband access solutions to address opportunities presented by next generation wireless networks and improving the functionality, design and performance of our products. Our research and development expenses for the years ended December 31, 2007, 2006 and 2005 were $37.6 million, $31.3 million and $20.5 million, respectively. In addition, costs recovered from customer funded development contracts for the years ended December 31, 2007 and 2006 were zero, and for the year ended December 31, 2005 was $200,000, and was included in cost of revenue.

We intend to continue to identify and respond to our customers’ needs by introducing new product designs with an emphasis on supporting cutting edge WAN technology, ease-of-use, performance, size, weight, cost and power consumption.

We manage our products through a structured life cycle process, from identifying initial customer requirements through development and commercial introduction to eventual phase-out. During product development, emphasis is placed on time-to-market, meeting industry standards and customer product specifications, ease of integration, cost reduction, manufacturability, quality and reliability.

Our product development efforts leverage our core expertise in the following key technology areas:


•

Advanced Radio Frequency and Hardware Design. Advanced Radio Frequency, or RF, design is the key technology that determines the performance of wireless devices. We have specialized in 800/900/1800/1900 and 2100 MHz designs for digital cellular, packet data and CDMA technology. Our expertise in RF and baseband technology contributes to the performance, cost advantages and small size of our products.


•

Miniaturization and System Integration . Small systems integration is the integration of application specific integrated circuits, or ASICs, RF and baseband integrated circuits and packaging technologies. The complete wireless modem is packaged into a module less than half the size of a credit card through the use of advanced integrated circuit designs, embedded software modems and multi-layer RF stripline technologies. We will continue to augment our miniaturization technology, working to further reduce the size and cost of current and future products.


•

Firmware and Software development. We have specialized in integrating 3G (HSDPA/HSUPA and 1xEV-DO) protocol stacks and customizing the firmware to meet carrier and regulatory requirements. We supply end-to-end WAN modem solutions to our customers including the modem hardware, the customized firmware that runs on the 3G processor and the modem manager application that controls the modem operation.

Manufacturing and Operations

We have agreements with LG Innotek Co., Ltd, or LG Innotek, a subsidiary of LG Group, located in South Korea, and with Inventec Appliances Corp., or IAC, located in China, for the outsourced manufacturing of our products. Under our manufacturing agreements, LG Innotek and IAC provide us with services including component procurement, product manufacturing, final assembly, testing, quality control, fulfillment and delivery. In addition, we have an agreement with Mobiltron (Europe) Limited, or Mobiltron, for distribution, fulfillment and repair services related to our business in Europe, Middle East, and Africa, or EMEA. We outsource our manufacturing in an effort to:


•

focus on our core competencies;


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minimize our capital expenditures and lease obligations;


•

realize manufacturing economies of scale;


•

achieve production scalability by adjusting manufacturing volumes to meet changes in demand; and


•

access best-in-class manufacturing resources.

We believe that additional assembly line efficiencies are realized due to our product architecture and our commitment to process design. Direct materials for our products consist of custom tooled parts such as printed circuit boards, molded plastic components and fabricated metal components, as well as industry-standard components such as ASICs, RF power amplifiers, flash memory, transistors, integrated circuits, piezo-electric filters, duplexers, inductors, resistors and capacitors. Many of the components used in our products are similar to those used in cellular telephone handsets, helping to reduce our manufacturing costs through the use of standard components.

Our operations organization manages our relationships with LG Innotek, IAC and Mobiltron as well as key second tier suppliers. The organization focuses on supply chain management, quality, cost optimization, customer order management and new product introduction.

Intellectual Property

We hold a number of trademarks including Merlin, Expedite, MobiLink, Ovation, and Conversa, each with its accompanying designs, as well as the Novatel Wireless name and logo.

Our wireless broadband access solutions and operations rely on and benefit from our portfolio of intellectual property. We currently own 34 United States patents, two of which are also registered in Canada. In addition, we currently have 29 patent applications pending. From time to time we also seek to have our patents registered in selected foreign jurisdictions. The patents that we currently own expire at various times between 2008 and 2024.

We have licensed software and other intellectual property for use in our products from third-parties, such as QUALCOMM. In the case of QUALCOMM, these licenses allow us to manufacture CDMA, UMTS, HSDPA, HSUPA and EV-DO-based wireless modems and to sell or distribute them worldwide. In connection with such sales, we pay royalties to QUALCOMM. The license from QUALCOMM does not have a specified term and may be terminated by us or by QUALCOMM for cause or upon the occurrence of other specified events. In addition, we may terminate the licenses for any reason upon 60 days prior written notice. We have also granted to QUALCOMM a nontransferable, worldwide, nonexclusive, fully-paid and royalty-free license to use, in connection with wireless communications applications, certain intellectual property of ours that is used in our products which incorporate the CDMA technology licensed to us by QUALCOMM. This license allows QUALCOMM to make, use, sell or dispose of such products and the related components.

Backlog

We do not believe that backlog is a meaningful indicator of our future business prospects due to the many variables, some outside our control, which could cause the actual volume of our product shipments to differ from those that comprise our backlog, and our dependency on evolving wireless network standards. Therefore, we do not believe that backlog information is relevant to an understanding of our overall business.

Competition

The market for wireless broadband access solutions is rapidly evolving and highly competitive. It is likely to continue to be significantly affected by the evolution of new wireless technology standards, new product introductions and the market activities of industry participants. We believe the principal competitive factors impacting the market for our products are form factor, time-to-market, features and functionality, performance, quality, brand and price. To maintain and improve our competitive position, we must continue to develop new products, expand our customer base, grow our distribution network and leverage our strategic relationships.

Our wireless communications products currently compete with a variety of devices, including other wireless modems, wireless handsets, wireless handheld computing devices and other wireless devices. Our current and potential competitors include:


•

wireless data modem providers, such as Huawei, Option International, Sierra Wireless, Kyocera, Pantech, Sony-Ericsson, and UTStarcom; and


•

wireless handset and infrastructure manufacturers, such as Motorola, Nokia, Siemens and Sony-Ericsson.

We believe that we have advantages over each of our primary competitors due to the technical and engineering design of our products, the broad range of solutions that we offer, the ease-of-use of our products, our ability to adapt our products to specific customer needs and our competitive pricing. As the market for wireless broadband access solutions expands, other entrants may seek to compete with us.

Employees

As of December 31, 2007, we had 301 employees, including 44 in operations, 65 in sales and marketing, 149 in research and development, and 43 in general and administrative functions. We also use the services of consultants and temporary workers from time to time. Our employees are not represented by any collective bargaining unit and we consider our relationship with our employees to be good.

CEO BACKGROUND

John R. Ross , age 44, has served as a director since June 2007. Mr. Ross is currently the President and Chief Executive Officer of Media Connex, Inc., a technology support and services company providing residential and small company network and IT services. Before founding Media Connex, Mr. Ross served in leadership positions at Novatel Wireless both in Engineering, from August 2000 to January 2005, and in Business Development, from February 2005 to February 2007. Prior to that, Mr. Ross held leadership positions at Motorola’s subscriber equipment division participating in the development of high volume consumer handsets, most notably contributing to the roll out of the Japan CDMA network and the launch of the CDMA StarTACs for North America. Mr. Ross has also held engineering positions with US Robotics and Littlefuse, Inc. Mr. Ross holds a Bachelor of Science in Electrical Engineering from Washington University and a Master of Business Administration from the Kellogg School of Management at Northwestern University. Mr. Ross currently serves as the Chairman of our Corporate Governance Committee.

David A. Werner , age 55, has served as a director since January 2004. Since 2004, Mr. Werner has been Co-Owner of Aerofit, Inc., an engineered component manufacturer. Prior to that, Mr. Werner was a Partner at Engineered Components, an acquisition and business development company serving the engineered components market, which he joined in 2002. Prior to Engineered Components, Mr. Werner served as Executive Vice President and Chief Financial Officer of Day Runner, Inc. from 1999 to 2002. Prior to that, Mr. Werner was Executive Vice President and a member of the Board of Directors for Kaynar Technologies, Inc., a specialty component manufacturer, from 1994 to 1999. Prior to that, Mr. Werner served as Vice President and Chief Financial Officer of Microdot, Inc. from 1990 to 1993. Prior to that, Mr. Werner served in various accounting, financial, operating and executive positions with Lear Siegler from 1978 to 1990. Prior to that, Mr. Werner worked for Peat, Marwick, Mitchell & Co. (currently KPMG) from 1974 to 1978. Mr. Werner is a Certified Public Accountant and received both a Bachelor of Science in Business Administration and a Master of Business Administration from the University of Southern California. Mr. Werner currently serves as the Chairman of our Audit Committee.



Peter V. Leparulo , age 49, was appointed as our Chief Executive Officer in April 2008. Since November 2006, he has served as our Executive Chairman of the Board and has been a director since May 2003. He previously served as our Chief Executive Officer from January 2003 to November 2006. Prior to January 2003, he was our Senior Vice President, General Manager, CDMA Operations since May 2001. From September 2000 to May 2001, he served as our Senior Vice President, Corporate and Strategic Development and General Counsel. From June 1998 until September 2000, Mr. Leparulo was a Senior Partner at the law firm of Orrick, Herrington & Sutcliffe LLP, where he specialized in corporate finance, mergers and acquisitions, securities, intellectual property and general corporate matters. Prior to joining Orrick, Mr. Leparulo was a Partner at the law firm of Pillsbury Madison & Sutro LLP, from January 1992 until June 1998, and an Associate at that firm from October 1989 until January 1992. He holds a Bachelor of Science from Colgate University and a Juris Doctor from Case Western Reserve University. Mr. Leparulo currently serves as a member of our Corporate Governance Committee.

Horst J. Pudwill , age 62, has served as a director since July 2003. He is currently Chairman of the Board and Executive Director of Techtronic Industries Co., Ltd., a Hong Kong-listed global manufacturer of industry leading brands in power tools, lawn and garden equipment, and floor care appliances, which he founded in 1985 and of which he was Chief Executive Officer from 1985 to 2008. Mr. Pudwill co-founded Novatel Wireless and previously served on our Board from 1996 until 2000. Mr. Pudwill received a master’s degree in commerce and engineering from Technical College, Flensburg, Germany and a degree in Engineering from Technical College, Verden, Germany. Mr. Pudwill currently serves as a member of our Compensation Committee and a member of our Nominating Committee.

James Ledwith , age 62, has served as a director since March 2008. Since 1992, Mr. Ledwith has served as a partner at J.H. Cohn, an accounting and consulting firm and, from 2000 to 2007, was a lecturer at San Diego State University. He is also a director of San Diego Trust Bank. Mr. Ledwith is a Certified Public Accountant and received his undergraduate degree from Babson College and a Master of Business Administration from the Wharton Graduate Division of the University of Pennsylvania. Mr. Ledwith currently serves as a member of our Audit Committee and as a member of our Nominating Committee.

Greg Lorenzetti , age 45, has served as president of Titan Partners, LLC, a private equity and technology commercialization investment firm since 2002. He is a founding member of HFI, a privately held investment company based in the United Kingdom. In the past, he served as an executive within the financial sector, and advised boards and principals of public and private companies on capital formation, marketing, and strategic planning issues. Mr. Lorenzetti is a founding shareholder of Cardiovax, a biotech company currently developing a vaccine for heart disease in a joint commercialization project. He has been an investor in numerous early stage technology companies such as Nomadix, a company recently acquired by Maginet. Mr. Lorenzetti has been an active investor and advisor in oil and gas exploration projects around the world over the last three years. The most recent project involved several concessions in a farmout agreement in East Africa aggregating more than 10 million acres between two privately held companies. Mr. Lorenzetti majored in Economics at Stanford University. Mr. Lorenzetti currently serves as our Lead Independent Director, the Chairman of our Compensation Committee and a member of our Audit Committee and Nominating Committee.

MANAGEMENT DISCUSSION FROM LATEST 10K

Overview and Background

We are a provider of wireless broadband access solutions for the worldwide mobile communications market. Our broad range of products includes 3G wireless PC card and ExpressCard modems, embedded modems, FMC solutions and communications software for wireless network operators, infrastructure providers, distributors, OEMs and vertical markets worldwide. Through the integration of our hardware and software, our products are designed to operate on a majority of global wireless networks and provide mobile subscribers with secure and convenient high speed access to corporate, public and personal information through the Internet and enterprise networks. We also offer software engineering, integration and design services to our customers to facilitate the use of our products.

Our strong customer relationships provide us with the opportunity to expand our market reach and sales. Most of our sales to wireless operators and OEMs are sold directly through our sales force. To a lesser degree, we also use an indirect sales distribution model through the use of select distributors. We are continuing to drive widespread adoption of our products through increased global marketing activities, expansion of our sales team and distribution networks and continued leverage of our strategic relationships with wireless industry leaders.

We intend to continue to identify and respond to our customers’ needs by introducing new product designs with an emphasis on supporting cutting edge WAN technology, ease-of-use, performance, size, weight, cost and power consumption. We manage our products through a structured life cycle process, from identifying initial customer requirements through development and commercial introduction to eventual phase-out. During product development, emphasis is placed on time-to-market, meeting industry standards and customer product specifications, ease of integration, cost reduction, manufacturability, quality and reliability.

We have agreements with LG Innotek and IAC for the outsourced manufacturing of our products. Under our manufacturing agreements, LG Innotek and IAC provide us with services including component procurement, product manufacturing, final assembly, testing, quality control, fulfillment and delivery. In addition, we have an agreement with Mobiltron for certain distribution, fulfillment and repair services related to our business in EMEA.

Factors Which May Influence Future Results of Operations

We have entered into and expect to continue to enter into new customer contracts for the development and supply of our products and this may place significant demands on our resources.

Revenue. We believe that our revenue growth will be influenced largely by the speed and breadth of the increase in demand for wireless access to data through the use of next generation networks including demand for 3G products and 3G data access services, particularly in Europe, North America and Asia; customer acceptance for our new products that address these markets; and our ability to meet customer demand. Factors that could potentially affect customer demand for our products include the following:


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demand for broadband access services and networks;


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use of the Internet;


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rate of change to new products;


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loss of significant customers;


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increase in competition;


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timing of deployment of 3G networks by carriers;


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drop in demand for EV-DO, HSDPA and HSUPA products; and


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changes in technologies.

We began shipping our first 3G products in December 2003 and anticipate introducing additional 3G products during 2008. We continue to develop and maintain strategic relationships with wireless and computing industry leaders like Dell, QUALCOMM, Sony, Sprint PCS, Verizon Wireless and Vodafone and major software vendors. Through strategic relationships, we have been able to increase market penetration by leveraging the resources of our channel partners, including their access to distribution resources, increased sales opportunities and market opportunities.

Our strategic relationships include technology and marketing relationships with wireless operators, OEM partners that integrate our products into other devices, distributors and leading hardware and software technology providers.

Cost of Revenue. We currently outsource our manufacturing operations to LG Innotek and IAC. In addition, we currently outsource certain distribution, fulfillment and repair services related to our business in EMEA to Mobiltron. All costs associated with these manufacturers and Mobiltron are included in our cost of revenue. Cost of revenue also includes warranty costs, amortization of intangible licenses, royalties based on a percentage of revenue, operations group expenses, costs related to development services and costs related to inventory adjustments, including write downs for excess and obsolete inventory. Inventory adjustments are impacted primarily by demand for our products, which is influenced by the factors discussed above. During 2007, 2006 and 2005, we recorded inventory write downs of $2.8 million, $2.9 million and $2.9 million, respectively, primarily due to the decrease in demand for the affected products. We expect to continue to outsource our manufacturing operations, and as our business grows we expect our manufacturing activity to increase.

Operating Costs and Expenses. Many of our products target wireless operators and other customers in Europe, North America and Asia. If these markets continue to grow, we will likely develop new products to serve these markets, resulting in increased research and development expenses associated with such new product development. We have in the past and expect to continue to incur these expenses in future periods prior to recognizing revenue from sales of these products. The accounting for stock options began in the first quarter of 2006 and required us to use the fair value method to account for all stock-based compensation pursuant to Statement of Financial Accounting Standards, or SFAS, No. 123(R), which significantly increased our operating expenses.

Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets, liabilities, revenues, expenses and disclosures of contingent assets and liabilities. Actual results could differ from these estimates. Critical accounting policies and significant estimates include revenue recognition, allowance for doubtful accounts receivable, provision for excess and obsolete inventory, valuation of intangible and long-lived assets, provision for warranty costs, royalty costs, income taxes, foreign exchange forward contracts, and share-based compensation expense.

Revenue Recognition. Our revenue is generated from the sale of wireless modems to wireless operators, OEMs and distributors. Revenue from product sales is recognized upon the later of transfer of title or shipment of the product to the customer. For product sales with acceptance conditions based upon the passage of contractually specified time periods, revenue is recognized upon the earlier of such time that the acceptance period expires or is waived by our customers upon request. We grant price protection provisions to certain customers and track pricing and other terms offered to customers buying similar products to assess compliance with these provisions. We establish allowances for estimated product returns and price protection in the period in which revenue is recognized. In estimating future product returns, we consider various relevant factors, including our stated return policies and practices, and historical trends. We recognize revenue in accordance with Staff Accounting Bulletin, or SAB, No. 101, Revenue Recognition in Financial Statements, as amended by SAB No. 104, which provides guidance on the application of U.S. generally accepted accounting principles to selected revenue recognition issues.

Allowance for Doubtful Accounts Receivable. We provide an allowance for our accounts receivable for estimated losses that may result from our customers’ inability to pay. We determine the amount of the allowance by analyzing known uncollectible accounts, aged receivables, economic conditions, historical losses, and changes in customer payment cycles and our customers’ credit-worthiness. Amounts later determined and specifically identified to be uncollectible are charged or written off against this allowance. To minimize the likelihood of uncollectibility, we review our customers’ credit-worthiness periodically based on credit scores generated by independent credit reporting services, our experience with our customers and the economic condition of our customers’ industries. Material differences may result in the amount and timing of expense for any period if we were to make different judgments or utilize different estimates. If the financial condition of our customers deteriorates resulting in an impairment of their ability to make payments, additional allowances may be required. We have not experienced significant variances in the past between our estimated and actual allowance for doubtful accounts and anticipate that we will be able to continue to make reasonable estimates in the future.

Provision for Excess and Obsolete Inventory. Inventories are stated at the lower of cost (first-in, first-out method) or market. We review the components of our inventory and our inventory purchase commitments on a regular basis for excess and obsolete inventory based on estimated future usage and sales. Write-downs in inventory value depend on various items, including factors related to customer demand, economic and competitive conditions, technological advances or new product introductions by us or our customers that vary from our current expectations. Whenever inventory is written down, a new cost basis is established and the inventory is not subsequently written up if market conditions improve.

We believe that, when made, the estimates we use in calculating the inventory provision are reasonable and properly reflect the risk of excess and obsolete inventory. We have not experienced significant variances in the past between our estimated and actual inventory write-downs. If customer demand for our inventory is substantially less than our estimates, inventory write-downs may be required, which could have a material adverse effect on our consolidated financial statements.

Valuation of Intangible and Long-Lived Assets. We periodically assess the valuation of intangible and long-lived assets, which requires us to make assumptions and judgments regarding the carrying value of these assets. We consider assets to be impaired if the carrying value may not be recoverable based upon our assessment of the following events or changes in circumstances: the asset’s ability to continue to generate income from operations and positive cash flow in future periods; loss of legal ownership or title to the asset; significant changes in our strategic business objectives and utilization of the asset; or significant negative industry or economic trends.

Our assessment includes comparing the carrying amounts of intangible and long-lived assets to their fair values, which are determined using a discounted cash flow model. This model requires estimates of our future revenues, profits, capital expenditures, working capital and other relevant factors. We estimate these amounts by evaluating our historical trends, current budgets, operating plans and other industry data. If the assets are considered to be impaired, the impairment charge recognized is the amount by which the asset’s carrying value exceeds its estimated fair value.

The timing and frequency of our impairment test is based on an ongoing assessment of triggering events that could reduce the fair value of our long-lived assets below their carrying value. We monitor our intangible and long-lived asset balances and conduct formal tests on at least an annual basis or earlier when impairment indicators are present. We believe that the assumptions and estimates we used to value intangible and long-lived assets were appropriate based on the information available to management. The majority of our long-lived assets are being amortized or depreciated over relatively short periods, typically three to five years. This reduces the risk of large impairment charges in any given period. However, most of these assets are associated with technology that changes rapidly and such changes could have an immediate impact on our impairment analysis.

Provision for Warranty Costs. We accrue warranty costs based on estimates of future warranty related replacement, repairs or rework of products. Our warranty policy generally provides one to three years of coverage for products following the date of purchase. Our policy is to accrue the estimated cost of warranty coverage as a component of cost of revenue in the consolidated statements of operations at the time revenue is recognized. In estimating our future warranty obligations we consider various relevant factors, including the historical frequency and volume of claims, and the cost to replace or repair products under warranty. The warranty provision for our products is determined by using a financial model to estimate future warranty costs. Our financial model takes into consideration actual product failure rates; estimated replacement over the contractual warranty period, repair or rework expenses; and potential risks associated with our different products. The risk levels, warranty cost information, and failure rates used within this model are reviewed throughout the year and updated, if and when, these inputs change.

We actively engage in product improvement programs and processes to limit our warranty costs, but our warranty obligation is affected by the complexity of our product, product failure rates and costs incurred to correct those product failures. The industry in which we operate is subject to rapid technological change, and as a result, we periodically introduce newer, more complex products. We have not experienced significant variances in the past between our estimated and actual warranty costs. Depending on the quality of our product design and manufacturing, actual product failure rates or actual warranty costs could be materially greater than our estimates, which could harm our financial condition and results of operations.

Royalty Costs. We have intellectual property license agreements which generally require us to make royalty payments based on a percentage of the revenue generated by sales of products incorporating the licensed technology. We recognize royalty obligations in accordance with the terms of the respective royalty agreements. We have also accrued for estimated royalty costs in situations where we do not have agreements based upon our current best estimate of the royalty obligation. These estimates are based on various market data information and other relevant information. If we enter into such agreements, or when additional market data becomes available, we will revise our estimates if necessary.

Income Taxes . In July 2006, the Financial Accounting Standards Board, or FASB, issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes—An Interpretation of FASB Statement No. 109 (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an entity’s financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes, and prescribes a recognition threshold and measurement attributes for financial statement disclosure of tax positions taken or expected to be taken on a tax return. Under FIN 48, the impact of an uncertain income tax position on the income tax return must be recognized at the largest amount that is more-likely-than-not to be sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained. Additionally, FIN 48 provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.

We recognize federal, state and foreign current tax liabilities or assets based on our estimate of taxes payable to or refundable by tax authorities in the current fiscal year. We also recognize federal, state and foreign deferred tax liabilities or assets based on our estimate of future tax effects attributable to temporary differences and carry forwards and record a valuation allowance to reduce any deferred tax assets by the amount of any tax benefits that, based on available evidence and judgment, are not expected to be realized. We regularly review our deferred tax assets for recoverability and assess the valuation allowance based on historical taxable income, projected future taxable income, the expected timing of the reversals of existing temporary differences and the implementation of tax-planning strategies. If we are unable to generate sufficient future taxable income in certain tax jurisdictions, or if there is a material change in the actual effective tax rates or time period within which the underlying temporary differences become taxable or deductible, we could be required to increase our valuation allowance against our deferred tax assets which could result in an increase in our effective tax rate and an adverse impact on operating results. During 2007, 2006 and 2005, we recorded a non-cash deferred income tax benefit of $1.0 million, $2.8 million and $2.4 million respectively, for the change in the valuation allowance on certain deferred tax assets. We will continue to evaluate the necessity of the valuation allowance based on the remaining deferred tax assets.

Foreign Exchange Forward Contracts. We use foreign exchange forward contracts to hedge the economic exposure associated with accounts receivable balances denominated in Euros. Our forward contracts do not qualify as accounting hedges. We mark-to-market the forward contracts and include unrealized gains and losses in the current period as a component of other income (expense). During 2007, 2006, and 2005, we recorded unrealized losses of approximately $100,000, $1.4 million and $1.8 million, respectively, on our forward contracts. These unrealized losses were offset by realized foreign currency gains on Euro denominated transactions of approximately $500,000 and $2.8 million during 2007 and 2006, respectively. The Company realized foreign currency losses of approximately $2.1 million during 2005. Realized gains and losses on foreign exchange transactions are recorded in other income and (expense). As of December 31, 2007, the total amount of outstanding forward contracts amounted to 14 million Euros.

Share-based Compensation Expense. We grant stock options and restricted stock to our employees and non-employee directors under our current stock plan. The benefits provided under this plan are share-based payments subject to the provisions of SFAS No. 123(R). Effective January 1, 2006, we adopted the requirements of SFAS No. 123(R) which addresses the accounting for share-based payment transactions in which an enterprise receives employee services in exchange for (a) equity instruments of the enterprise or (b) liabilities that are based on the fair value of the enterprise’s equity instruments or that may be settled by the issuance of such equity instruments. As a result of implementation of this accounting requirement, our consolidated financial statements for the years ended December 31, 2007 and 2006 include compensation expense as calculated per the provisions of SFAS No. 123(R). In adopting SFAS No. 123(R), we elected to use the modified prospective transition method, thus our consolidated financial statements for periods prior to January 1, 2006 do not include any impact of SFAS No. 123(R). Share-based compensation expense related to stock options, our ESPP and restricted stock was $9.9 million and $10.0 million for the years ended December 31, 2007 and 2006 respectively.

Upon adoption of SFAS No. 123(R) on January 1, 2006, we elected to value our share-based payment option awards using the Black-Scholes option pricing model as we had under the pro forma provisions of SFAS No. 123. The determination of fair value of share-based awards on the date of grant is affected by our stock price as well as assumptions regarding a number of complex and subjective variables. These significant assumptions include our expected stock price volatility over the expected term of the awards and the expected term of stock options.

Results of Operations

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

Revenue. Revenue for the year ended December 31, 2007 increased $211.9 million, or 97.2%, to $429.9 million compared to $218.0 million for 2006. The overall increase in revenue was primarily attributable to an increase in demand for our EV-DO, HSDPA, and HSUPA products, which includes EV-DO and HSDPA ExpressCards and Embedded Modules, and EV-DO and HSUPA FMC products. The increase in EV-DO product sales for the year ended December 31, 2007 compared to 2006 was approximately $167.0 million, mostly consisting of FMC USB modems. Our HSDPA/HSUPA product sales also increased by approximately $44.4 million during 2007 compared to 2006, primarily as a result of the increase in shipments of Embedded Modules and FMC USB modems. Overall, EV-DO revenue, which consists primarily of North American products, represented approximately 73% of revenue in 2007 compared to 66% in 2006 while HSDPA/HSUPA products represented approximately 27% of revenue in 2007 compared to 34% in 2006. The mix of revenue by technology is expected to continue to depend primarily upon, among other things, the geographic region of our sales efforts and demand by our customers.

Cost of revenue. Cost of revenue for the year ended December 31, 2007 increased $136.4 million, or 83.8%, to $299.1 million compared to $162.7 million in 2006. The increase in cost of revenue was primarily related to an increase in product cost of $118.4 million due to the increase in product sales. In addition, freight and distribution costs increased by approximately $3.9 million due to the additional volume of products shipped in 2007 compared to 2006. The remaining increase in cost of revenue primarily consists of an increase in royalty costs for intellectual property licenses of $8.4 million, an increase in manufacturing overhead costs of approximately $2.9 million, and an increase of approximately $2.1 million related to depreciation expense of production equipment procured to increase manufacturing capacity compared to 2006. Cost of revenue in fiscal 2007 included share-based compensation of approximately $700,000, compared to approximately $500,000 in fiscal 2006.

Gross margin. Gross margin for the year ended December 31, 2007 increased by $75.6 million, or 137.0%, to $130.8 million compared to $55.2 million for 2006. The increase was primarily attributable to the increase in revenue as discussed above. Gross margin as a percent of revenue increased to 30.4% for the year ended December 31, 2007 compared to 25.3% for 2006. The increase in gross margin as a percentage of revenue was primarily attributable to the additional revenue that exceeded our fixed cost structure, and increased sales of higher margin EV-DO products in 2007 as compared to 2006.

Research and development expenses. Research and development expenses for the year ended December 31, 2007 increased $6.3 million, or 20.1%, to $37.6 million compared to $31.3 million for 2006. The increase was primarily attributable to an increase of $4.7 million in salary and related expenses due to increased headcount to support our new product development. Other increases consist of equipment and overhead costs of approximately $700,000, depreciation expenses of approximately $700,000 due to capital equipment purchases, increase in outside consulting services of approximately $200,000 mainly related to product certification costs, and an increase of approximately $100,000 in travel and related expenses in 2007 compared to 2006. Research and development expenses in fiscal 2007 included share-based compensation of approximately $2.5 million, compared to approximately $2.3 million in fiscal 2006.

Sales and marketing expenses. Sales and marketing expenses for the year ended December 31, 2007 increased $6.7 million, or 47.2%, to $20.9 million compared to $14.2 million for 2006. The increase was primarily attributable to an increase in sales and marketing efforts during 2007 resulting in increased salary and related expenses of $4.4 million as our salesforce increased. In addition to the increases in personnel expenses, product marketing and advertising expenses increased by approximately $1.6 million which consisted primarily of programs entered into with certain carriers to promote our products, and travel and related expenditures increased $500,000 in 2007 compared to 2006. Sales and marketing expenses in fiscal 2007 included share-based compensation of approximately $1.9 million, compared to approximately $2.0 million in fiscal 2006.

General and administrative expenses. General and administrative expenses for the year ended December 31, 2007 increased $2.6 million, or 16.0%, to $18.9 million compared to $16.3 million for the same period in 2006. The increase was primarily attributable to an increase in salary and related expenses of approximately $1.9 million, building and utility expenses of approximately $1.4 million related to additional office spaces leased due to continued company growth. General and administrative expenses in fiscal 2007 included share-based compensation of $4.7 million, compared to $5.3 million in fiscal 2006.

Interest income and expense. Interest income, net increased by approximately $2.7 million for the year ended December 31, 2007 compared to the same period in 2006 primarily due to the increase in our average cash and marketable securities balances in 2007, as well as an increase in the average yields realized on our marketable securities and cash balances, which resulted in higher income as compared to the same period in 2006.

Other income (expense). Other income (expense) for the year ended December 31, 2007 decreased by approximately $900,000, or 64.3%, to approximately $500,000 compared to $1.4 million for the same period in 2006. This decrease was primarily due to the decrease in our foreign exchange gains on our Euro denominated receivable and cash balances.

Provision for Income Taxes. We recorded an income tax expense of approximately $20.8 million for the year ended December 31, 2007, which represents an effective tax rate of 34.9%. The difference between the federal and state statutory combined rate of 37% and our effective tax rate for 2007 is primarily due to the impact of accounting for share-based compensation, for which certain share-based awards are treated as permanent differences and the impact of tax credits for increased research and development expenses.

During 2007, management evaluated the deferred tax valuation allowance and determined that the valuation allowance on the U.S. deferred tax assets should not be significantly revised. Approximately $900,000 of deferred tax valuation allowance relating to the Company’s Canadian subsidiary was released based on capital gains realized during 2007, and due to higher future taxable income projections. This determination was based on 2005, 2006 and 2007 operating results and in anticipation of using net operating losses due to current projections of future taxable income. The effective tax rate for the year ended December 31, 2007 was approximately 36.5%, excluding the valuation allowance revision. The effective tax rate for the year ended December 31, 2006 was approximately negative 3%, excluding the valuation allowance revision of 2006. The income tax benefit was approximately $2.7 million, which was primarily due to a revision of our valuation allowance on specific Canadian and U.S. deferred tax assets of approximately $2.8 million.

In accordance with SFAS No. 123(R), we recognize a tax benefit upon expensing certain share-based awards associated with our share-based compensation plans, including nonqualified stock options and restricted stock, but under current accounting standards we cannot recognize a tax benefit currently for those share-based compensation expenses associated with incentive stock options and employee stock purchase plan shares (qualified stock options). For qualified stock options that vested after our adoption of SFAS No. 123(R), we recognize a tax benefit only in the period when disqualifying dispositions of the underlying stock occur, and for qualified stock options that vested prior to our adoption of SFAS No. 123(R), the tax benefit is recorded directly to additional paid-in capital. During 2007, we recorded a tax benefit of approximately $2.7 million associated with total share-based compensation. The impact of share-based compensation permanent items resulted in an increase of 1.6 percentage points to the annual effective tax rate. Because we cannot recognize the tax benefit for share-based compensation expense associated with qualified stock options until the occurrence of future disqualifying dispositions of the underlying stock and because a portion of that tax benefit may be recorded directly to additional paid-in capital, our future quarterly and annual effective tax rates will be subject to greater volatility and, consequently, our ability to reasonably estimate our future quarterly and annual effective tax rates is diminished.

Net income. For the year ended December 31, 2007, we reported net income of $38.8 million, as compared to net income of approximately $400,000 for the same period in 2006. The increase in net income was due to the growth in revenue and overall profitability of the Company as discussed above.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

Results of Operations

Three Months Ended September 30, 2007 Compared to Three Months Ended September 30, 2006

Revenue. Revenue for the three months ended September 30, 2007 increased $49.5 million, or 89.8%, to $104.6 million compared to $55.1 million for the same period in 2006. The overall increase in revenue was primarily attributable to an increase in demand for our EV-DO and HSDPA ExpressCards and Embedded Modules, and our EV-DO and HSUPA FMC products. The increase in EV-DO product sales for the three months ended September 30, 2007 compared to the same period in 2006 was approximately $35.4 million. The increase in our HSDPA/HSUPA product sales for the three months ended September 30, 2007 compared to the same period in 2006 was approximately $14.1 million.

Cost of revenue. Cost of revenue for the three months ended September 30, 2007 increased $32.8 million, or 80.4%, to $73.6 million compared to $40.8 million for the same period in 2006. The increase in cost of revenue was primarily related to an increase in product cost of $29.1 million due to the increase in product sales. The remaining increase in cost of revenue primarily consisted of an increase of approximately $1.8 million in royalty costs for intellectual property licenses, an increase of approximately $700,000 related to depreciation of production equipment procured during 2007 to increase manufacturing capacity, an increase in manufacturing overhead costs of approximately $600,000, and an increase of approximately $600,000 in freight and distribution costs during the three months ended September 30, 2007 compared to the same period in 2006.

Gross margin. Gross margin for the three months ended September 30, 2007 increased by $16.7 million, or 116.8%, to $31.0 million compared to $14.3 million for the same period in 2006. The increase was primarily attributable to the changes in revenue and cost of revenue as discussed above. Gross margin as a percentage of revenue increased to 29.6% for the three months ended September 30, 2007 compared to 26.0% for same period in 2006. The increase in gross margin as a percentage of revenue was primarily attributable to the additional revenue that exceeded our fixed cost structure, and increased sales of EV-DO products, which carry higher margins than universal mobile terrestrial system, or UMTS, and HSDPA products.

Research and development expenses. Research and development expenses for the three months ended September 30, 2007 increased $1.0 million, or 11.5%, to $9.7 million compared to $8.7 million for the same period in 2006. The increase was primarily attributable to an increase in salary and related expenses of approximately $1.2 million, and approximately $300,000 related to research and development overhead costs. These increases were offset by a decrease of approximately $500,000 in outside services primarily related to product development certification costs during the three months ended September 30, 2007 as compared to the same period in 2006.

Sales and marketing expenses. Sales and marketing expenses for the three months ended September 30, 2007 increased approximately $1.2 million, or 32.4%, to $4.9 million compared to approximately $3.7 million for the same period in 2006. The increase was primarily a result of an increase in sales and marketing personnel resulting in increased salary and related expenses of approximately $1.3 million. Sales and marketing overhead expenses also increased by approximately $200,000, offset by a decrease in marketing expenses of approximately $200,000, and a decrease in SFAS No. 123(R) share-based compensation expense of approximately $100,000 for the three months ended September 30, 2007 as compared to the same period in 2006.

General and administrative expenses. General and administrative expenses for the three months ended September 30, 2007 increased approximately $200,000, or 5.4%, to $3.9 million compared to $3.7 million for the same period in 2006. The increase was primarily attributable to an increase in professional services and legal fees of approximately $600,000, salary and related expenses of approximately $500,000, building and utility expenses of approximately $300,000 related to additional office spaces leased due to continued company growth and travel and related expenses of approximately $100,000, offset by a decrease in share-based compensation expense of approximately $1.0 million, and a decrease in overhead costs of approximately $500,000 for the three months ended September 30, 2007 as compared to the same period in 2006.

Interest income and expense. Interest income and expense increased by approximately $1.0 million for the three months ended September 30, 2007 compared to the same period in 2006 primarily due to the increase in our average cash and marketable securities balances in 2007, as well as an increase in the average yields realized on our marketable securities and cash balances, which resulted in higher income as compared to the same period in 2006.

Other income (expense). Other income (expense) increased by approximately $400,000 for the three months ended September 30, 2007 compared to the same period in 2006 due to the increase in our foreign exchange gains on our Euro denominated receivable and cash balances, and on our forward foreign exchange contracts.

Income tax expense (benefit). Income tax expense (benefit) of approximately $5.3 million for the three months ended September 30, 2007 consisted of federal and state taxes at our estimated effective tax rate of approximately 36%. The difference between the federal and state statutory rate of 40% and our effective tax rate is due primarily to research and development credits generated in 2007 and a low effective state tax rate. This compares to an income tax benefit of approximately $400,000 recorded during the three months ended September 30, 2006. The income tax benefit and related deferred tax asset recorded during the third quarter of 2006 was based on the expected annualized effective tax rate. The effective tax rate for the three months ended September 30, 2006 was approximately 33%. The difference between the federal and state statutory combined rate of 40% and our effective tax rate for 2006 was primarily due to the decrease in our estimated 2006 tax rate to 64% during the third quarter as compared to our estimated 2006 tax rate of 73%.

Net income (loss). For the three months ended September 30, 2007, we reported net income of $9.2 million, as compared to a net loss of approximately $900,000 for the same period in 2006. The increase in net income was due to the growth in revenue and overall profitability of the Company as discussed above.

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