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Article by DailyStocks_admin    (02-06-08 06:05 AM)

The Daily Magic Formula Stock for 02/05/2008 is Airvana Inc. According to the Magic Formula Investing Web Site, the ebit yield is 10% and the EBIT ROIC is >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.


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BUSINESS OVERVIEW

Business Description
Airvana, Inc. (the “Company”) is a leading provider of network infrastructure products used by wireless operators to provide mobile broadband services. The Company’s software and hardware products are based on Internet Protocol (“IP”) technology and enable wireless networks to deliver broadband-quality multimedia services to mobile phones, laptop computers and other mobile devices. These services include Internet access, e-mail, music downloads, video, IP-TV, gaming, push-to-talk and voice-over-IP. The Company has offices in Chelmsford, Massachusetts; Dallas, Texas; Bangalore, India; Cambridge, United Kingdom; Madrid, Spain; Beijing, China; Seoul, Korea; and Tokyo, Japan.
2. Summary of Significant Accounting Policies
Basis of Presentation and Principles of Consolidation
The accompanying condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, after elimination of intercompany transactions and balances. These condensed consolidated financial statements are unaudited and have been prepared in accordance with accounting principles generally accepted in the United States applicable to interim periods, and in the opinion of management, include all normal and recurring adjustments that are necessary to present fairly the results of operations for the reported periods. These financial statements and notes should be read in conjunction with the audited consolidated financial statements and related notes, together with management’s discussion and analysis of financial condition and results of operations, contained in the Company’s final Prospectus dated July 19, 2007 (the “Prospectus”) related to its Initial Public Offering (“IPO”).
Unaudited Interim Financial Statements
The accompanying unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in financial statements have been condensed or omitted pursuant to such SEC rules and regulations. In the opinion of management, the unaudited condensed consolidated financial statements and notes have been prepared on the same basis as the audited consolidated financial statements in the Prospectus, and include all adjustments (consisting of normal, recurring adjustments) necessary for the fair presentation of the Company’s financial position at September 30, 2007, results of operations for the three months ended October 1, 2006 and September 30, 2007 and the nine months ended October 1, 2006 and September 30, 2007, and cash flows for the three and nine month periods ended October 1, 2006 and September 30, 2007. The interim periods are not necessarily indicative of the results to be expected for any other interim period or the full year.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
Significant estimates and judgments relied upon by management in preparing these financial statements include the timing of revenue recognition, expensing or capitalizing research and development costs for software, the determination of the fair value of stock awards issued, the recoverability of the Company’s deferred tax assets, the amount of the Company’s income tax expenses and the classification of deferred product costs and deferred revenues.

Although the Company regularly assesses these estimates, actual results could differ materially from these estimates. Changes in estimates are recorded in the period in which they become known. The Company bases its estimates and judgments on historical experience and various other factors that it believes to be reasonable under the circumstances.
Fiscal Year
The Company’s fiscal year ends on the Sunday nearest to December 31. The Company’s fiscal quarters end on the Sunday that falls closest to the last day of the third calendar month of the quarter.
Cash and Cash Equivalents
Cash equivalents consist of highly liquid instruments with original maturities of three months or less at the date of purchase. Cash equivalents are carried at cost, which approximates their fair market value.
Investments
The Company determines the appropriate categorization of investments in debt securities at the time of purchase. As of December 31, 2006 and September 30, 2007, the Company’s investments are categorized as held-to-maturity and are presented at their amortized cost, which approximates market value. The short-term or long-term classification of debt securities at each balance sheet date is based on the remaining period to maturity.
Revenue Recognition
The Company derives revenue from the licensing of software products and software upgrades; the sale of hardware products, maintenance and support services; and the sale of professional services, including training. The Company’s products incorporate software that is more than incidental to the related hardware. Accordingly, the Company recognizes revenue in accordance with the American Institute of Certified Public Accountants’ Statement of Position (“SOP”), No. 97-2, Software Revenue Recognition.
Under multiple-element arrangements where several different products or services are sold together, the Company allocates revenue to each element based on vendor specific objective evidence (“VSOE”) of fair value. It uses the residual method when fair value does not exist for one or more of the delivered elements in a multiple-element arrangement. Under the residual method, the fair value of the undelivered elements are deferred and subsequently recognized when earned. For a delivered item to be considered a separate element, the undelivered items must not be essential to the functionality of the delivered item and there must be VSOE of fair value for the undelivered items in the arrangement. Fair value is generally limited to the price charged when the Company sells the same or similar element separately or, when applicable, the stated substantive renewal rate. If evidence of the fair value of one or more undelivered elements does not exist, all revenue is deferred and recognized when delivery of those elements occurs or when fair value can be established. For example, in situations where the Company sells a product during a period when it has a commitment for the delivery or sale of a future specified software upgrade, the Company defers revenue recognition until the specified software upgrade is delivered.
Significant judgments in applying the accounting rules and regulations to the Company’s business practices principally relate to the timing and amount of revenue recognition given its current concentration of revenues with one customer and its inability to establish VSOE of fair value for specified software upgrades.
The Company sells its products primarily through original equipment manufacturer (“OEM”) arrangements with telecommunications infrastructure vendors such as Nortel Networks. The Company has collaborated with its OEM customers on a best efforts basis to develop initial product features and subsequent enhancements for the products that are sold by a particular OEM to its wireless operator customers. For each OEM customer, the Company expects to continue to develop products based on its core technology that are configured for the requirements of the OEM’s base stations and its operator customers.
This business practice is common in the telecommunications equipment industry and is necessitated by the long planning cycles associated with wireless network deployments coupled with rapid changes in technology. Large and complex wireless networks support tens of millions of subscribers and it is critical that any changes or upgrades be planned well in advance to ensure that there are no service disruptions. The evolution of the Company’s infrastructure technology therefore must be planned, implemented and integrated with the wireless operator’s plans for deploying new applications and services and any equipment or technology provided by other vendors.

Given the nature of the Company’s business, the majority of its sales are generated through multiple-element arrangements comprised of a combination of product, maintenance and support services and, importantly, specified product upgrades. The Company has established a business practice of negotiating with OEMs the pricing for future purchases of new product releases and specified software upgrades. The Company expects that it will release one or more optional specified upgrades annually. To determine whether these optional future purchases are elements of current purchase transactions, the Company assesses whether such new products or specified upgrades will be offered to the OEM customer at a price that represents a significant and incremental discount to current purchases. Because the Company sells uniquely configured products through each OEM customer, it does not maintain a list price for its products and specified software upgrades. Additionally, as it does not sell these products and upgrades to more than one customer, the Company is unable to establish VSOE of fair value for these products and upgrades. Consequently, the Company is unable to determine if the license fees it charges for the optional specified upgrades include a significant and incremental discount. As such, the Company defers all revenue related to current product sales, software-only license fees, maintenance and support services and professional services until all specified upgrades committed at the time of shipment have been delivered. For example, the Company recognizes deferred revenue from sales to an OEM customer only when it delivers a specified upgrade that it had previously committed. However, when it commits to an additional upgrade before it has delivered a previously committed upgrade, the Company defers all revenue from product sales after the date of such commitment until it delivers the additional upgrade. Any revenue that the Company had deferred prior to the additional commitment is recognized after the previously committed upgrade is delivered.
If there are no commitments outstanding for specified upgrades, the Company recognizes revenue when all of the following have occurred: (1) delivery (FOB origin), provided that there are no uncertainties regarding customer acceptance; (2) there is persuasive evidence of an arrangement; (3) the fee is fixed or determinable; and (4) collection of the related receivable is reasonably assured, as long as all other revenue recognition criteria have been met. If there are uncertainties regarding customer acceptance, the Company recognizes revenue and related cost of revenue when those uncertainties are resolved. Any adjustments to software license fees are recognized when reported to the Company by an OEM customer.
For its direct sales to end user customers, which have not been material to date, the Company has recognized product revenue upon delivery provided that all other revenue recognition criteria have been met.
The Company’s support and maintenance services consist of the repair or replacement of defective hardware, around-the-clock help desk support, technical support and the correction of bugs in its software. The Company’s annual support and maintenance fees are based on a fixed dollar amount associated with, or a percentage of the initial sales price for, the applicable hardware and software products. Included in the price of the product, the Company provides maintenance and support during the product warranty period, which is two years for base station channel cards and one year for software products.
When VSOE of fair value for maintenance and support services exists, the Company allocates a portion of the initial product revenue to the maintenance and support services provided during the warranty period based on the fees the Company charges for annual support and maintenance when sold separately. This revenue is also deferred with the associated product revenue until such time as all outstanding specified software upgrades at the time of shipment are delivered, at which time the earned support and maintenance revenue is recognized and the unearned support and maintenance revenue is recognized over the remainder the applicable warranty period.
When VSOE of fair value for maintenance and support services does not exist, revenue is deferred and recognized ratably over the warranty period. If there are outstanding specified upgrades at the time of shipment, revenue is deferred until such time as all upgrades are delivered. At the time of the delivery of the specified upgrade, the Company will recognize the earned product, support and maintenance revenue, and the unearned product, support and maintenance revenue will be recognized over the remainder of the applicable maintenance period. In connection with an amendment to the Company’s OEM arrangement with Nortel dated September 28, 2007, the Company can no longer assert VSOE of fair value for maintenance and support services to Nortel. This is not expected to have a material impact on Company’s results of operations in fiscal 2007.

For maintenance and service renewals, the Company recognizes revenue for such services ratably over the service period as services are delivered.
The Company provides professional services for deployment optimization, network engineering and radio frequency deployment planning, and provides training for network planners and engineers. The Company generally recognizes revenue for these services as the services are performed as it has deemed such services not essential to the functionality of its products. The Company has successfully resolved all product defects to date and has not issued any refunds on products sold. As such, no provisions have been recorded against revenue or related receivables for potential refunds.
Segment and Geographic Information
Statement of Financial Accounting Standards (“SFAS”) No. 131, Disclosures About Segments of an Enterprise and Related Information , establishes standards for reporting information about operating segments in annual financial statements and requires selected information of these segments be presented in interim financial reports to stockholders. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision making group, in making decisions on how to allocate resources and assess performance. The Company’s chief operating decision making group, as defined under SFAS No. 131, consists of the Company’s chief executive officer, chief financial officer and executive vice presidents. The Company views its operations and manages its business as one operating segment.
Stock-Based Compensation
In December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123 (revised 2004), Share-Based Payment (“SFAS No. 123(R)”), which is a revision of SFAS No. 123. SFAS No. 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their estimated fair values. In accordance with SFAS No. 123(R), the Company recognizes the compensation cost of share-based awards on a straight-line basis over the vesting period of the award, which is generally four to five years, and the Company has elected to use the Black-Scholes option pricing model to determine fair value. SFAS No. 123(R) eliminated the alternative of applying the intrinsic value method of Accounting Principles Board (“APB”) Opinion No. 25 to stock compensation awards. The Company adopted the provisions of SFAS No. 123(R) on the first day of fiscal 2006 using the prospective-transition method. As such, the Company will continue to apply APB No. 25 in future periods to equity awards granted prior to the adoption of SFAS No. 123(R).
Comprehensive Income
SFAS No. 130, Reporting Comprehensive Income , establishes standards for reporting and displaying comprehensive income and its components in financial statements. Comprehensive income is defined as the change in stockholders’ equity of a business enterprise during a period from transactions and other events and circumstances from nonowner sources. The comprehensive income for all periods presented is equal to the reported net income.
Income Taxes
The Company accounts for income taxes in accordance with SFAS No. 109, Accounting for Income Taxes , which is the asset and liability method for accounting and reporting income taxes. Under SFAS No. 109, deferred tax assets and liabilities are recognized based on temporary differences between the financial reporting and income tax bases of assets and liabilities using statutory rates. In addition, SFAS No. 109 requires a valuation allowance against net deferred tax assets if, based upon the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.
The Company adopted the provisions of Financial Standards Accounting Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN 48”) on January 1, 2007. FIN 48 is an interpretation of “Statement of Financial Accounting Standards No. 109”, which provides criteria for the recognition, measurement, presentation and disclosures of uncertain tax positions. A tax benefit from an uncertain tax position may be recognized if it is “more likely than not” that the position is sustainable based solely on its technical merits.

4. Income Taxes
For the nine months ended September 30, 2007, the Company’s effective tax rate, inclusive of discrete items, was 13.9% compared to a benefit of 13.0% for the nine months ended October 1, 2006. The increase in the effective tax rate from the previous period relates principally to the projection of taxable income for the year offset partially by the release of valuation allowances against deferred tax assets. The effect of discrete items on the estimated annual effective tax rate for the nine months ended September 30, 2007 was 4.58%.
During the second and third quarters, discrete income tax expenses in the amounts of $1,984 and $702, respectively, were recorded adjusting income tax receivable amounts related to anticipated tax refund claims to be filed during the year and the write-off of in-process research and development costs associated with the Company’s acquisition of 3Way Networks Limited (“3Way Networks”). A discrete tax benefit in the amount of $76 was recorded in the third quarter related to the tax effect of recently enacted changes in the United Kingdom’s future tax rate on the valuation of deferred tax assets and liabilities.
The Company recognizes future tax benefits or expenses attributable to its taxable temporary differences and net operating loss carry forwards. Recognition of deferred tax assets is subject to the Company’s determination that realization is more likely than not. Based on taxable income projections, the Company believes that the recorded deferred tax assets will be realized.
The Company adopted the provisions of Financial Standards Accounting Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN 48”), an interpretation of SFAS No. 109, on January 1, 2007. The Company recognized no material adjustment in the liability for unrecognized income tax benefits as a result of the implementation of FIN 48. At January 1, 2007, the Company did not have any unrecognized tax benefits. At September 30, 2007, the Company had $1,598 of unrecognized tax benefits, the benefit of which, if recognized, would reduce the Company’s effective tax rate.
The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. At January 1, 2007 and September 30, 2007, the Company did not have any recorded interest or penalties related to unrecognized tax benefits.
The Company and its subsidiaries file income tax returns in the U.S. federal tax jurisdiction as well as in various state and foreign jurisdictions. The tax years 2000 through 2007 remain open to examination by the major taxing jurisdictions for which the Company is subject to income tax.

5. Property and Equipment
Property and equipment are recorded at cost. The Company provides for depreciation by charges to operations on a straight-line basis in amounts estimated to allocate the cost of the assets over their estimated useful lives. Depreciation expense was $555 and $754 for the three months ended October 1, 2006 and September 30, 2007, respectively, and $1,651 and $2,258 for the nine months ended October 1, 2006 and September 30, 2007, respectively. Expenditures for repairs and maintenance are expensed as incurred. Property and equipment consist of the following:

In connection with a lease incentive arrangement entered into as part of the Company’s new headquarters lease, the Company received reimbursements of approximately $2,800 and $790 for leasehold improvements capitalized in the years ended January 1, 2006 and December 31, 2006, respectively. As a result of this arrangement, the Company recorded a lease incentive obligation for the reimbursed amount, and is amortizing that obligation as a reduction to rent expense over the term of the lease. As of December 31, 2006 and September 30, 2007, the unamortized amount was $2,740 and $2,349, respectively. During the three months ended October 1, 2006 and September 30, 2007, the Company amortized the lease incentive obligation by approximately $130 and $131, respectively. During the nine months ended October 1, 2006 and September 30, 2007, the Company amortized the lease incentive obligation by approximately $411 and $391, respectively. The remaining lease incentive amounts are classified either as components of other accrued expenses or other long-term liabilities based on the future timing of amortization against rent expense.
6. Concentrations of Credit Risk and Significant Customers
Financial instruments that subject the Company to credit risk consist of cash and cash equivalents, short-term investments and accounts receivable. The Company maintains its cash and cash equivalents and investment accounts with two major financial institutions. The Company’s cash equivalents and investments are invested in securities with high credit ratings.
Nortel accounted for 99% and 98% of accounts receivable at December 31, 2006 and September 30, 2007, respectively. Nortel accounted for 92%, 99%, 95%, and 100% of revenue for the three months ended October 1, 2006, three months ended September 30, 2007, nine months ended October 1, 2006 and nine months ended September 30, 2007, respectively. The Company has made an assessment that all of its accounts receivable are collectible and, therefore, has not provided any reserve for doubtful accounts as of December 31, 2006 and September 30, 2007.
7. Common Stock
Stock Option Plans
As of December 31, 2006, the Company had one stock-based employee compensation plan, the Company’s 2000 Stock Incentive Plan (the “2000 Plan”). Under the 2000 Plan, the Company’s Board of Directors (the “Board”) may grant incentive stock options (“ISOs”) and nonstatutory stock options (“NSOs”) to officers, employees, directors, consultants and advisors of the Company. ISOs may be granted only to employees and NSOs may be granted to officers, employees, directors, consultants and advisors of the Company. The Board determines the option price for all stock options, which generally expire ten years from the date of grant.
In June 2007, the Company’s stockholders approved the 2007 Stock Incentive Plan (the “2007 Plan”). The 2007 Plan permits the Company to grant ISOs, NSOs, restricted stock awards and other stock-based awards. The number of shares of common stock that may be issued under the 2007 Plan equals the sum of 11,252,813 shares of common stock, any shares of common stock reserved for issuance under the 2000 Plan that remained available for issuance under the 2000 Plan immediately prior to the closing of the IPO and any shares of common stock subject to awards under the 2000 Plan which awards expire, terminate, or are otherwise surrendered, canceled, forfeited or repurchased without having been fully exercised; provided, however, that the maximum number of shares of common stock that may initially be issued under the 2007 Plan cannot exceed 20,130,557, including the number of shares that rolled over upon expiration of the 2000 Plan.
As there was no public market for the Company’s common stock prior to July 19, 2007, the date of the Company’s IPO, the Company determined the volatility percentage used in calculating the fair value of stock options it granted based on an analysis of the historical stock price data for a peer group of companies that issued options with substantially similar terms. The expected volatility percentage used in determining the fair value of stock options granted in the three months ended October 1, 2006 and September 30, 2007 was 89% and 78%, respectively. The expected life of options has been determined utilizing the “simplified” method as prescribed by the SEC’s Staff Accounting Bulletin No. 107, Share-Based Payment. The expected life of options granted during the three months ended October 1, 2006 and September 30, 2007 was 6.5 years and 6.25 years, respectively. For the three months ended October 1, 2006 and September 30, 2007, the weighted-average risk free interest rate used was 4.95% and 4.93%, respectively. The risk-free interest rate is based on a 7-year treasury instrument whose term is consistent with the expected life of the stock options. Although the Company paid a one-time special cash dividend in April 2007, the expected dividend yield is assumed to be zero as it does not currently anticipate paying cash dividends on its shares of common stock in the future. In addition, SFAS No. 123(R) requires companies to utilize an estimated forfeiture rate when calculating the expense for the period, whereas SFAS No. 123 permitted companies to record forfeitures based on actual forfeitures, which was the Company’s historical policy under SFAS No. 123. As a result, the Company applied an estimated forfeiture rate of 3.0% for the three months ended October 1, 2006 and September 30, 2007 in determining the expense recorded in its consolidated statement of operations. This rate was derived by review of the Company’s historical forfeitures since 2000.

8. Net Income Per Share
The Company calculates net income per share in accordance with SFAS No. 128, Earnings Per Share , as clarified by Emerging Issues Task Force (“EITF”) Issue No. 03-6, which clarifies the use of the “two-class” method of calculating earnings per share as originally prescribed in SFAS No. 128. Effective for periods beginning after March 31, 2004, EITF Issue No. 03-6 provides guidance on how to determine whether a security should be considered a “participating security” for purposes of computing earnings per share and how earnings per share should be allocated to a participating security when using the two-class method for computing basic earnings per share. The Company has determined that its convertible preferred stock represented a participating security and therefore has adopted the provisions of EITF Issue No. 03-6 retroactively for all periods presented.
Under the two-class method, basic net income per share is computed by dividing the net income applicable to common stockholders by the weighted-average number of common shares outstanding for the fiscal period. Diluted net income per share is computed using the more dilutive of (a) the two-class method or (b) the if-converted method. The Company allocated net income first to preferred stockholders based on dividend rights under the Company’s charter and then to common and preferred stockholders based on ownership interests. Net losses are not allocated to preferred stockholders. Diluted net income per share gives effect to all potentially dilutive securities, including stock options using the treasury stock method and unvested restricted common stock.

9. Lease Commitments
The Company conducts its operations in leased facilities, and rent expense charged to operations for the three months ended October 1, 2006 and September 30, 2007 was $189 and $401, respectively. Rent expense for the nine months ended October 1, 2006 and September 30, 2007 was $529 and $915, respectively.
In October 2004, the Company entered into a seven-year lease agreement for its headquarters facility. The Company is obligated to pay monthly rent through 2012. As part of this agreement, the Company obtained a standby letter of credit for the landlord totaling $142. The letter of credit is fully collateralized by a certificate of deposit maintained at the major financial institution that issued the letter of credit and is classified as a restricted investment in the accompanying balance sheets.
In August 2005, the Company leased additional space adjacent to its headquarters, and increased the letter of credit and certificate of deposit by $51.

10. Deferred Revenue and Deferred Product Cost
Under the Company’s revenue recognition policy, as described above in Note 2 “Summary of Significant Accounting Policies,” the Company recognizes revenue from sales to an OEM customer only when it delivers a specified upgrade that it has previously committed. When the Company commits to an additional upgrade before it has delivered a previously committed upgrade, it defers all revenue from product sales after the date of such commitment until it delivers the additional upgrade.
The Company’s product revenue in fiscal 2006 of $145.8 million consisted primarily of software license fees and hardware shipments to its primary OEM customer from fiscal 2002 through the first quarter of fiscal 2005, which is when it made an additional commitment for a specified future software upgrade. The Company refers to that software upgrade as its April 2005 specified upgrade. The Company delivered the April 2005 specified upgrade in April 2007, and therefore recognized in the second quarter of fiscal 2007 the $156.5 million of revenue deferred from the second quarter of fiscal 2005, which is when it committed to the April 2005 specified upgrade, to the third quarter of fiscal 2006, which is when it committed to a subsequent specified upgrade. The Company refers to that subsequent specified upgrade as its September 2006 specified upgrade. In June 2007, the Company made an additional commitment to a specified upgrade, which it refers to as its June 2007 specified upgrade.

12. Acquisition
On April 30, 2007, the Company acquired 3Way Networks, a United Kingdom-based provider of personal base stations and solutions for the Universal Mobile Telecommunications System (“UMTS”) market, for an aggregate purchase price of approximately $11,000 in cash and 441,845 shares of the Company’s common stock. This acquisition furthered the Company’s strategy to address the UMTS market and to deliver fixed-mobile convergence and in-building mobile broadband solutions.
In connection with this acquisition, the Company recorded $7,997 of goodwill, $2,340 of in-process research and development expense and $4,880 of intangible assets related to developed technology, customer relationships, and non-compete agreements with estimated useful lives ranging from 36 to 60 months.

Management used various valuation methods to determine the fair value of the acquired assets of 3Way Networks. To value the developed technology and customer relationship intangible assets, an income approach was used, specifically the relief-from-royalty method and the excess earning method, respectively. For the developed technology intangible asset, expenses and income taxes were deducted from estimated revenues attributable to the developed technologies. For the customer relationship intangible asset, expenses and income taxes were deducted from estimated revenues attributable to the existing customers. The projected net cash flows for each were then tax affected using an effective rate of 40% and then discounted using a discount rate of 34% for the developed technology intangible asset and 39% for the customer relationship intangible asset to determine the value of the intangible assets, respectively. To value the non-compete agreements an income approach was used, specifically the “with or without” model. Management then projected net cash flows for the Company with and without the non-compete agreements in place. The present value of the sum of the difference between the net cash flows with and without the non-compete agreements in place was calculated, based on a discount rate of 39%. In-process research and development was determined by discounting forecasted cash flows directly related to the products expecting to result from the research and development, net of returns on contributory assets including fixed assets, and the acquired workforce and applying a discount rate of 42%.
Results of operations for 3Way Networks have been included in the Company’s results of operations since the acquisition date of April 30, 2007.
Pro Forma Results of Operations
The following pro forma results of operations for the three and nine months ended October 1, 2006 and September 30, 2007 have been prepared as though the acquisitions of 3Way Networks had occurred as of January 2, 2006.

13. Special Cash Dividend
On March 8, 2007, the Company declared a special cash dividend of $1.333 per common stock equivalent payable on April 5, 2007 to stockholders of record on March 28, 2007. The payment to holders of common stock and redeemable convertible preferred stock in April 2007 was $72,707. In conjunction with this dividend and as required by the Company’s stock incentive plan, all vested and unvested options outstanding were adjusted by multiplying the exercise price by 0.8113 and the number of shares of common stock issuable upon exercise of the option by 1.2326. As the fair value of the modified stock option grants was the same as the fair value of the original option grants immediately before the modification, no incremental compensation cost will be recognized as a result of this special cash dividend. The option information in Note 7 reflects these adjustments to the outstanding awards. The Company has not declared or paid any other cash dividends on its capital stock.
14. Reverse Stock Split
On May 22, 2007, the Board approved, and on June 18, 2007, the stockholders of the Company approved, a 1-for-1.333 reverse stock split of the Company’s common stock, which was effective on June 29, 2007. All share data shown in the accompanying condensed consolidated financial statements and related notes have been retroactively revised to reflect the reverse stock split.
15. Related Party Transactions
In 2004, the Company entered into an agreement with Qualcomm Incorporated under which it licenses software for use in the development of infrastructure equipment. The Company also entered into a supply and distribution agreement with Qualcomm relating to its ipBTS products. The Company paid Qualcomm approximately $658 in the first three quarters of fiscal 2007 in upfront license payments, royalties and component purchases under its license and supply agreements with Qualcomm. In the first three quarters of fiscal 2007, Qualcomm paid the Company $189 for prototype purchases. Amounts due to Qualcomm of $201 and $455 were included in accrued expenses and other current liabilities as of December 31, 2006 and September 30, 2007, respectively. As of September 30, 2007, Qualcomm owned approximately 9.2% of the Company’s common stock.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

Overview
We are a leading provider of network infrastructure products used by wireless operators to provide mobile broadband services. Our software and hardware products, which are based on Internet Protocol, or IP, technology, enable wireless networks to deliver broadband-quality multimedia services to mobile phones, laptop computers and other mobile devices. These services include Internet access, e-mail, music downloads, video, IP-TV, gaming, push-to-talk and voice-over-IP.
Our current products are based on a wireless communications standard known as CDMA2000 1xEV-DO, or EV-DO. In 2002, we began delivering commercial infrastructure products based on the first generation EV-DO standard known as Revision 0, or Rev 0. The second generation EV-DO standard is known as Revision A, or Rev A, and supports push-to-talk, voice-over-IP and faster Internet services. During the third quarter of fiscal 2006, Nortel Networks began delivering our Rev 0 software products in conjunction with OEM base station channel cards that can be upgraded with software that we are developing to utilize Rev A. In April 2007, we delivered our Rev A software release.
We are also developing new products to expand our business. Our fixed-mobile convergence, or FMC, products will enable operators to take advantage of wireline broadband connections that already exist in most offices and homes to deliver wireless services through a combination of mobile and Wi-Fi networks. Our FMC products under development include versions to support CDMA, UMTS and WiMAX networks. Our FMC products are an important component of our growth and diversification strategy. We do not expect meaningful sales from FMC products until fiscal 2008. We also utilize our mobile broadband technology and products in specialized market segments that need their own mobile networks.
We were founded in March 2000 and sold our first product in the second quarter of fiscal 2002. Our growth has been driven primarily by sales through our OEM customers to wireless operators already using our EV-DO products as they increase the capacity and geographic coverage of their networks, and by an increase in the number of wireless operators that decide to deploy our EV-DO products on their networks. We have sold over 40,000 channel card licenses for use by over 60 operators worldwide. In fiscal 2006, sales to Nortel Networks accounted for 95% of our revenue and 94% of our product and service billings. During the nine month period ended September 30, 2007, Nortel Networks accounted for 100% of our revenue and 100% of our product and service billings.

In April 2007, we acquired 3Way Networks, a United Kingdom-based provider of personal base stations and solutions for UMTS networks, for an aggregate purchase price of approximately $11.0 million in cash and 441,845 shares of common stock. The acquisition furthers our strategy to address the UMTS market and to deliver FMC and in-building mobile broadband solutions.
In July 2007, we completed our IPO of common stock in which we sold and issued 8.3 million shares of our common stock at an issue price of $7.00 per share. We raised a total of $58.1 million in gross proceeds from the IPO, or $50.8 million in net proceeds after deducting underwriting discounts and commissions of $4.1 million and other offering costs of approximately $3.2 million.
In September 2007, we entered into an agreement with Nortel Networks amending certain provisions of the Development and Purchase and Sale Agreement for CDMA High Data Rate (1xEV-DO) Products, dated as of October 1, 2001 between us and Nortel Networks. We agreed to pricing for our products and services, including pricing for our subsequent 1xEV-DO software products and upgrades that are under development based upon mutually agreed specifications. We expect to release such subsequent software products in 2008.
In September 2007, we entered into an agreement with Nokia Siemens Networks, or Nokia, to certify interoperability of Airvana’s UMTS home base station femtocell product with Nokia’s femto gateway product. We and Nokia plan to provide a joint solution to operators, and cooperate in joint marketing, sales and support programs.
In October 2006, we entered into an agreement to develop a certain EV-DO product for Alcatel Lucent. Based upon a recent reassessment of the commercial opportunity for this product, we have mutually agreed with Alcatel Lucent to stop funding this project.
Our OEM Business Model
We operate in the highly consolidated and competitive market for mobile broadband equipment. To compete in this market, we have developed OEM channels, unique products and a business approach that targets the needs of large equipment vendors and their end customers, wireless operators. Wireless operators invest significantly in building out large-scale wireless networks, which are very costly to replace. Equipment vendors compete aggressively to win market share and they retain their market position by upgrading their installed systems regularly, thereby enabling their wireless operator customers to deliver new services to their subscribers. These vendors develop detailed product roadmaps and look to us to design and deliver software upgrades that are consistent with their roadmaps.
We collaborate with our OEM customers to develop specific features for products that they sell to their wireless operator customers. We expect to continue to develop for each OEM customer products based on our core technology that are configured specifically to meet the requirements of each particular OEM and its customers. We also offer our OEM customers the option to purchase and make available to their wireless operator customers new products and specified upgrades at prices that we set typically 12 to 24 months prior to the new product or specified upgrade release. We expect that we will release one or more specified upgrades per year and that revenue from these specified upgrades will increase as a percentage of our product revenue over time.
Our OEM customers are typically also potential competitors of ours in the markets that they serve. We face the competitive risk that our OEM customers might seek to develop internally alternative solutions or to purchase alternative products from our competitors. Our future success depends on our ability to continue to develop products that offer advantages over alternative solutions that our OEM customers might develop or purchase from others.
Our typical sales arrangements involve multiple elements, including: perpetual licenses for our software products and specified software upgrades; the sale of hardware, maintenance and support services; and the sale of professional services, including training. Software is more than incidental to all of our products and, as a result, we recognize revenue in accordance with the American Institute of Certified Public Accountants’ Statement of Position, or SOP, No. 97-2, Software Revenue Recognition.

Impact of SOP No. 97-2, Software Revenue Recognition
To recognize revenue from current product shipments, we must establish vendor specific objective evidence, or VSOE, of fair value for all undelivered elements of our sales arrangements, including our specified software upgrades. The best objective evidence of fair value would be to sell these specified software upgrades separately to multiple customers for the same price. However, because of our OEM business model, the features and functionality delivered in our software upgrades are defined in collaboration with our OEMs based on each OEM’s particular requirements. As a result, it is highly unlikely that we will ever be able to sell the same standalone software upgrade to a different OEM customer and thus establish VSOE of fair value for such upgrade.
As a result, we defer all revenue from sales to OEMs until all elements without VSOE of fair value have been delivered. This deferral is required because there is no basis to allocate revenue between the delivered and undelivered elements of the arrangement without VSOE of fair value. The revenue deferral is necessary even though (1) our specified software upgrades are not essential to the standalone functionality of any product currently deployed, (2) the purchase of our upgrades are based on separate decisions by our OEM customers and generally require separate payment at the time of delivery and (3) there is no refund liability for payments received on any previously shipped and installed product in the event we are not able to deliver the specified upgrade.
We recognize deferred revenue from sales to an OEM customer only when we deliver a specified upgrade that we have previously committed. When we commit to an additional upgrade before we have delivered a previously committed upgrade, we defer all revenue from product sales after the date of such commitment until we deliver the additional upgrade. Any revenue that we had deferred prior to the additional commitment is recognized when the previously committed upgrade is delivered.
The following diagram presents a hypothetical example of how software product releases and commitments to specified upgrades affect the relationship between billings, revenue and deferred revenue under a business model similar to ours. The diagram is not intended to reflect the actual timing of any of our software releases or the actual level of our product and service billings, revenue or deferred revenue in any period.

Software release A is delivered and related product and service billings are recognized as revenue because there are no outstanding commitments for upgrades.
‚ Software upgrade B is committed in Period 1 and, therefore, product and service billings for shipments of software release A after that point cannot be recognized as revenue before software upgrade B is delivered.
Ć’ Before software upgrade B is delivered, software upgrade C is committed in Period 2 and, therefore, product and service billings for shipments of software release A after that point cannot be recognized before software upgrade C is delivered.
„ When software upgrade B is delivered in Period 3, all deferred revenue, which consists of deferred revenue from billings of software release A, from the time of the commitment of software upgrade B until the time of the commitment of software upgrade C is recognized.
… When software upgrade C is delivered in Period 4, all remaining deferred revenue from the time of the commitment of software upgrade C, which consists of deferred revenue from billings of software release A and software upgrade B, is recognized because no commitments are outstanding.
In the same way as shown in this example, we record most of our revenue in periods during which we deliver specified upgrades. When we have such revenue recognition events, we recognize revenue from sales invoiced during multiple prior periods. As a result, we believe that our revenue, taken in isolation, provides limited insight into the performance of our business. We evaluate our performance by also assessing: product and service billings, which reflects our sales activity in a period; cost related to product and service billings, which reflects the cost associated with our product and service billings; deferred revenue at the end of the period, which reflects the cumulative billings that we were unable to recognize under our revenue recognition policy; deferred product cost at the end of a period, which reflects the cumulative costs that we were unable to recognize under our revenue recognition policy associated with our deferred product revenue; and cash flow from operating activities. We expect this pattern of commitments and delivery of future specified upgrades and the resulting impact on the timing of revenue recognition to continue with respect to our OEM business. As we introduce new products, the variability of the total revenue recognized in any fiscal period may moderate as sales of these new products grow as a percentage of our overall business.
Key Elements of Financial Performance
Revenue
Our revenue consists of product revenue and service revenue from sales through our OEM customers and directly to our end customers.
Product Revenue. Our product revenue is currently derived from the sale of our EV-DO mobile network products that are used by wireless operators to provide mobile broadband services. These products include three major components: base stations or OEM base station channel cards; radio network controllers; and network management systems. We have sold OEM base station channel cards both as hardware/software combinations and as software licenses when the OEM customer chooses to have the hardware manufactured for it by a third party. Radio network controllers and network management systems are usually sold as software licenses as the OEM customer buys the hardware from another vendor. Almost all of our revenue and product and service billings to date have been derived from sales of our EV-DO products through our OEM agreement with Nortel Networks.
We first derived revenue and product and service billings in fiscal 2002 from the sale of first generation EV-DO mobile network products based on the Rev 0 version of the standard. Prior to the third quarter of fiscal 2006, we sold Rev 0-based base station channel cards, which were manufactured for us by a third party, and licensed Rev 0 software for these OEM base station channel cards, as well as for radio network controllers and network management systems. In connection with the transition to products based on the Rev A version of the standard, Nortel Networks exercised its right to license our hardware design in order to manufacture the OEM base station channel cards that support Rev A instead of purchasing this hardware from us. As a result, beginning in the third quarter of fiscal 2006, our product sales to Nortel Networks are derived solely from the license of software, specifically Rev 0 and Rev A software for OEM base station channel cards, radio network controllers and network management systems as well as Rev A software upgrades.
Under our revenue recognition policy, as described above, we recognize revenue from sales to an OEM customer only when we deliver a specified upgrade that we have previously committed. When we commit to an additional upgrade before we have delivered a previously committed upgrade, we defer all revenue from product sales after the date of such commitment until we deliver the additional upgrade.
Our product revenue in fiscal 2006 consisted primarily of software license fees and hardware shipments to our primary OEM customer from fiscal 2002 through the first quarter of fiscal 2005, which is when we made an additional commitment for a specified future software upgrade. We refer to that software upgrade as our April 2005 specified upgrade. In April 2007, we delivered our April 2005 specified upgrade. As a result, we recognized product revenue of $141.6 million that consisted primarily of software license fees and hardware shipments to our primary OEM customer from April 2005 through September 2006, which is when we made another commitment for a specified future software upgrade. We refer to that software upgrade as our September 2006 specified upgrade. In June 2007, we made an additional commitment to a specified upgrade, which we refer to as the June 2007 specified upgrade. As of September 30, 2007, there were two specified software upgrades that we had not yet delivered, the September 2006 specified upgrade that we expect to deliver in the fourth quarter of fiscal 2007 and the June 2007 specified upgrade that we expect to deliver in fiscal 2008.
Service Revenue. Our service revenue is derived from support and maintenance services for our EV-DO products and other professional services, including training. Our support and maintenance services consist of the repair or replacement of defective hardware, around-the-clock help desk support, technical support and the correction of bugs in our software. Our annual support and maintenance fees are based on a fixed dollar amount associated with, or a percentage of the initial sales price for, the applicable hardware and software products. Included in the price for the product, we provide maintenance and support during our product warranty period, which is two years for our base station channel cards and one year for our software products. When VSOE of fair value for maintenance and support services exists, we allocate a portion of the initial product revenue to the maintenance and support services provided during the warranty period based on the fees we charge for annual support and maintenance and the length of the warranty period. This revenue is also deferred with the associated product revenue until such time as all outstanding specified future software upgrades at the time of shipment or sale are delivered, at which time a pro rata portion of the revenue is recognized over the remainder the applicable warranty period.
When VSOE of fair value for maintenance and support services does not exist, revenue is deferred and recognized ratably over the warranty period. If there are outstanding specified upgrades at the time of shipment, revenue is deferred until such time as all upgrades are delivered. At the time of the delivery of the specified upgrade, we will recognize the earned product, support and maintenance revenue and the unearned product, support and maintenance revenue will be recognized over the remainder of the applicable maintenance period. In connection with an amendment to our OEM arrangement with Nortel dated September 28, 2007, we can no longer assert VSOE of fair value for maintenance and support services to Nortel. This is not expected to have a material impact on our results of operations in fiscal 2007.
Our support and maintenance arrangements for our EV-DO products are typically renewable for one-year periods. We invoice our support and maintenance fees in advance of the applicable maintenance period, and we recognize revenue from maintenance and support services ratably over the term of the applicable maintenance and support period as services are delivered.
We also offer professional services such as deployment optimization, network engineering and radio frequency deployment planning, and provide training for network planners and engineers. We generally recognize revenue for these services as the services are performed.
We anticipate that service revenue will decrease during fiscal 2007 when compared to fiscal 2006 due in part to our completion of a professional services contract in fiscal 2006 for a direct customer, for which we recognized $8.0 million in service revenue in fiscal 2006.
Product and Service Billings
Product and service billings, which is a non-GAAP measure, represents the amount invoiced for products and services that are delivered and services that are to be delivered to our end customers directly or through our OEM channels for which we expect payment will be made in accordance with normal payment terms. Software-only product sales under our OEM agreements are invoiced monthly upon notification of sale by the OEM customer. We present the product and service billings metric because we believe it provides a consistent basis for understanding our sales activity and our OEM channel sales from period to period. We use product and service billings as a measure to assess our business performance and as a key factor in our incentive compensation program.
Wireless operators generally purchase communications equipment in stages — driven first by coverage and later by capacity. The initial stage involves deploying new services in selected parts of their networks, often those geographic regions with the highest concentration of customers. These wireless operators then typically expand coverage throughout their network. Later purchases are driven by a desire to expand capacity as the usage of new services grows. Initial purchases usually occur around the time that we and our OEM customers offer products that substantially improve the performance of the network. Subsequent purchases to expand the geographic coverage and capacity of an operator’s wireless network are difficult to predict because they are typically related to consumer demand for mobile broadband services. As a result, our product and service billings have fluctuated significantly from period to period and we expect them to continue to fluctuate significantly from period to period for the foreseeable future.
Our product and service billings were $30.8 million and $108.8 million in the three and nine month periods ending September 30, 2007, respectively. Product and service billings to Nortel Networks were 100% of billings in the three and nine month periods ending September 30, 2007. During the third fiscal quarter, we recognized service revenue of $3.6 million primarily as a result of maintenance renewals and had a deferred revenue balance of $192.3 million as of September 30, 2007.

Deferred Revenue
Product and service billings for invoiced shipments and software license fees, and related maintenance services for which revenue is not recognized in the current period are recorded as deferred revenue. Deferred revenue increases each fiscal period by the amount of product and service billings that are deferred in the period and decreases by the amount of revenue recognized in the period. We classify deferred revenue that we expect to recognize during the next twelve months as current deferred revenue on our balance sheet and the remainder as long-term deferred revenue. As of September 30, 2007, $192.2 million of deferred revenue is included in current liabilities and $0.1 million of deferred revenue is included in long-term liabilities.
Cost of Revenue
Cost of product revenue consists primarily of:
• cost for channel card hardware provided by contract manufacturers;

• cost of hardware for our radio network controllers and network management systems;

• license fees for third-party software and other intellectual property used in our products; and

• other related overhead costs.
Cost of service revenue consists primarily of salaries, benefits and stock-based compensation for employees that provide support services to customers and manage the supply chain. We expense all service-related costs as they are incurred.
Cost Related to Product and Service Billings
Cost related to product and service billings, which is a non-GAAP measure, includes the cost of products delivered and invoiced to our customers, the cost directly attributable to the sale of software-only products by our OEM partners and the cost of services in the current period. Cost related to product billings is recorded as deferred product cost until such time as the related deferred revenue is recognized as revenue upon the delivery of specified software upgrades. At the time of revenue recognition, we expense the related deferred product cost in our income statement as cost of revenue.

Deferred Product Cost
Cost related to product billings for invoiced shipments and software-only license fees for which revenue is not recognized in the current period is recorded as deferred product cost. Deferred product cost increases each fiscal period by the amount of product cost associated with product billings that are deferred in the period and decreases by the amount of product cost associated with revenue recognized in the period. We classify deferred product cost that we expect to recognize during the next twelve months as current deferred product cost on our balance sheet and the remainder as long term deferred product cost. All $1.3 million of deferred product cost at September 30, 2007 is included in current assets.
Gross Margin
Our gross margin varies from period to period according to the mix of revenue from hardware products, software products and services revenue. Our gross margin in the third quarter of fiscal 2007 of 54% represents revenue from maintenance and support renewals less related service costs. Our gross margin for the nine months ended September 30, 2007 represents an accumulation of revenue less related product cost associated with OEM product shipments and software license fees from the second quarter of fiscal 2005 through the third quarter of fiscal 2006. We expect our gross margin percentage for fiscal 2007 to be greater than it was in fiscal 2006 due to the discontinuation of sales of hardware products through our OEM relationship with Nortel Networks beginning in the third quarter of fiscal 2006.
Operating Expenses
Research and Development. Research and development expense consists primarily of:
• salaries, benefits and stock-based compensation related to our engineers;

• cost of prototypes and test equipment relating to the development of new products and the enhancement of existing products;

• payments to suppliers for design and consulting services; and

• other related overhead costs.
We expense all research and development cost as it is incurred. Our research and development is performed by our engineering personnel in the United States, India and the United Kingdom. We intend to continue to invest significantly in our research and development efforts, which we believe are essential to maintaining our competitive position and the development of new products for new markets. Accordingly, research and development expense has increased in amount and as a percentage of product and service billings in fiscal 2007.
Sales and Marketing. Sales and marketing expense consists primarily of:
• salaries, benefits and stock-based compensation related to our sales, marketing and customer support personnel;

• commissions payable to our sales personnel;

• travel, lodging and other out-of-pocket expenses;

• marketing program expenses; and

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

General and Administrative. General and administrative expense consists primarily of:
• salaries, benefits and stock-based compensation related to our executive, finance, legal, human resource and administrative personnel;

• professional services costs; and

• other related overhead costs.
General and administrative expense has increased in amount and as a percentage of product and service billings in 2007 and we expect this trend to continue in 2008 as we invest in infrastructure to support continued growth and incur additional expenses related to being a publicly-traded company, including additional audit and legal fees, costs of compliance with the Sarbanes-Oxley Act of 2002, disclosure obligations and other regulations, investor relations expense and insurance premiums.
Stock-Based Compensation Expense
We adopted the requirements of SFAS No. 123(R) in the first quarter of fiscal 2006. SFAS No. 123(R) addresses all forms of shared-based payment awards, including shares issued under employee stock purchase plans, stock options, restricted stock and stock appreciation rights. SFAS No. 123(R) requires us to expense share-based payment awards with compensation cost for share-based payment transactions measured at fair value. We currently expect that our adoption of SFAS No. 123(R) will continue to adversely affect our operating results to some extent in future periods.
Based on current stock option grants, we expect to recognize a future expense for non-vested options of $13.0 million over a weighted-average period of 4.2 years as of September 30, 2007. We expect stock-based compensation expense will increase for the foreseeable future as we expect to continue to grant stock-based incentives to our employees.
Interest Income, Net
Interest income, net, primarily relates to interest earned on our cash, cash equivalents and investments. In the first three quarters of fiscal 2007, interest income was partially offset by interest expense from our outstanding debt and non-cash interest expense relating to our preferred stock warrants.
Cash Flow from Operating Activities
Customer collections and, consequently, cash flow from operating activities are driven by sales transactions and related product and service billings, rather than recognized revenues. We believe cash flow from operating activities is a useful measure of the performance of our business because, in contrast to income statement profitability metrics that rely principally on revenue, cash flow from operating activities captures the contribution of changes in deferred revenue and deferred charges. We present cash flow from operating activities because it is a metric that management uses to track business performance and, as such, is a key factor in our incentive compensation program. In addition, management believes this metric is frequently used by securities analysts, investors and other interested parties in the evaluation of software companies with significant deferred revenue balances.
We expect cash flow from operating activities in fiscal 2007 to be greater than cash flow from operating activities in fiscal 2006 primarily due to the receipt in early January 2007 of a significant payment that was due in late December 2006 and, to a lesser extent, lower tax payments in fiscal 2007 compared to fiscal 2006.
Fiscal Year
Our fiscal year ends on the Sunday closest to December 31. Our fiscal quarters end on the Sunday that falls closest to the last day of the third calendar month of the quarter.

Critical Accounting Policies and Estimates
This management’s discussion and analysis of financial condition and results of operations is based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, management evaluates its estimates and judgments, including those related to revenue recognition. Management bases its estimates and judgments on historical experience and on various other factors that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
We regard an accounting estimate or assumption underlying our financial statements as a “critical accounting estimate” where (i) the nature of the estimate or assumption is material due to the level of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change; and (ii) the impact of the estimates and assumptions on financial condition or operating performance is material.
Our significant accounting policies are described in Note 2 of the Notes to Financial Statements in our prospectus filed with the SEC on July 19, 2007 pursuant to Rule 424(b)(4), or the Prospectus. Not all of these significant accounting policies, however, are “critical accounting estimates.” We believe that our accounting policies relating to revenue recognition and stock-based compensation, as described under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies” in our Prospectus, fit the definition of “critical accounting estimates.”

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