F-1 1 y35652fv1.htm FORM F-1 F-1
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As filed with the Securities and Exchange Commission on July 10, 2007
Registration No. 333-      
 
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
 
 
Form F-1
REGISTRATION STATEMENT
UNDER THE
SECURITIES ACT OF 1933
 
 
 
 
VOLTAIRE LTD.
(Exact Name of Registrant as Specified in its Charter)
 
         
State of Israel
(State or Other Jurisdiction of
Incorporation or Organization)
  3571
(Primary Standard Industrial
Classification Code Number)
  Not Applicable
(I.R.S. Employer
Identification No.)
 
 
 
 
Voltaire Ltd.
9 Hamenofim Street Building A
Herzeliya 46725
Israel
+972 (9) 971-7666
(Address, Including Zip Code, and Telephone Number,
Including Area Code, of Registrant’s Principal Executive Offices)
 
Voltaire, Inc.
6 Fortune Drive
Billerica, Massachusetts 01821
(978) 439-5400
(Name, Address, Including Zip Code, and Telephone Number,
Including Area Code, of Agent for Service)
 
Copies of Communications to:
 
             
Joshua G. Kiernan, Esq.
Colin J. Diamond, Esq.
White & Case LLP
1155 Avenue of the Americas
New York, New York 10036
Tel: (212) 819-8200
Fax: (212) 354-8113
  Ori Rosen, Adv.
Oren Knobel, Adv.
Ori Rosen & Co.
One Azrieli Center
Tel Aviv 67021
Israel
Tel: +972 (3) 607-4700
Fax: +972 (3) 607-4701
  Phyllis G. Korff, Esq.
Skadden, Arps, Slate,
Meagher & Flom LLP
4 Times Square
New York, New York 10036
Tel: (212) 735-3000
Fax: (212) 735-2000
  Dr. Avraham Ortal, Adv.
Zellermayer, Pelossof
& Co., Advocates
Rubenstein House
20 Lincoln Street
Tel Aviv 67134
Israel
Tel: +972 (3) 625-5555
Fax: +972 (3) 625-5500
 
Approximate date of commencement of proposed sale to the public:
 
As soon as practicable after effectiveness of this registration statement.
 
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, as amended (the “Securities Act”), check the following box.  o
 
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o
 
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o
 
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earliest effective registration statement for the same offering.  o
 
If delivery of the prospectus is expected to be made pursuant to Rule 434 under the Securities Act, check the following box.  o
 
 
 
 
CALCULATION OF REGISTRATION FEE
 
 
             
            Amount of
Title of Each Class of
    Proposed Maximum
    Registration
Securities to be Registered     Aggregate Offering Price(1)     Fee
Ordinary shares, par value NIS 0.01
    U.S.$123,857,300     U.S.$3,802
             
 
(1) Estimated solely for the purpose of computing the amount of the registration fee pursuant to Rule 457 under the Securities Act of 1933.
 
 
 
 
The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.
 


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The information contained in this prospectus is not complete and may be changed. Neither we nor the selling shareholders may sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.
 
SUBJECT TO COMPLETION, DATED JULY 10, 2007
PROSPECTUS
 
(VOLTAIRE LOGO)
 
7,693,000 Shares
 
Ordinary Shares
 
 
 
 
We are offering 5,770,000 ordinary shares and the selling shareholders are offering 1,923,000 ordinary shares. We will not receive any proceeds from the sale of shares by the selling shareholders. No public market currently exists for our ordinary shares.
 
We have applied to have our ordinary shares approved for listing on The Nasdaq Global Market under the symbol “VOLT”. We anticipate that the initial public offering price will be between $12.00 and $14.00 per ordinary share.
 
Investing in our ordinary shares involves risks. See “Risk Factors” beginning on page 7.
 
                 
    Per Share     Total  
 
Public Offering Price
  $                $             
Underwriting Discount
  $                $             
Proceeds to Voltaire Ltd. (before expenses)
  $       $    
Proceeds to selling shareholders (before expenses)
  $                $             
 
The underwriters may also purchase up to an additional 865,462 shares from us and 288,488 shares from the selling shareholders at the public offering price, less the underwriting discount, within 30 days from the date of this prospectus to cover overallotments.
 
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
 
The underwriters expect to deliver the ordinary shares on or about          , 2007.
 
 
 
 
JPMorgan Merrill Lynch & Co.
 
 
 
 
Thomas Weisel Partners LLC RBC Capital Markets
 
          , 2007


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VOLTAIRE PAGE FRONT COVER


 

 
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  F-1
 EX-1.1: FORM OF UNDERWRITING AGREEMENT
 EX-3.1: MEMORANDUM OF ASSOCIATION
 EX-3.2: ARTICLES OF ASSOCIATION
 EX-3.3: FORM OF ARTICLES OF ASSOCIATION
 EX-3.4: SPECIMEN SHARE CERTIFICATE
 EX-5.1: OPINION OF ORI ROSEN & CO.
 EX-10.1: SHARE PURCHASE AGREEMENT
 EX-10.2: SHARE PURCHASE AGREEMENT
 EX-10.3: SHARE PURCHASE AGREEMENT
 EX-10.4: AMENDED AND RESTATED SHAREHOLDERS RIGHTS' AGREEMENT
 EX-10.5: PURCHASE AGREEMENT
 EX-10.6: LETTER AGREEMENT
 EX-10.7: BASE AGREEMENT
 EX-10.8: STATEMENT OF WORK FOR BASE AGREEMENT
 EX-10.9: TECHNICAL SERVICES AGREEMENT
 EX-10.10: STATEMENT OF WORK FOR TECHNICAL SERVICES AND INTEROPERABILITY VERIFICATION
 EX-10.11: PURCHASE AGREEMENT
 EX-10.12: SOFTWARE LICENSE AND DISTRIBUTION AGREEMENT
 EX-10.13: ADDENDUM 1 TO PURCAHSE AGREEMENT
 EX-10.14: FIRST AMENDMENT TO PURCHASE AGREEMENT
 EX-10.15: 2001 STOCK OPTION PLAN
 EX-10.16: 2001 SECTION 102 STOCK OPTION/STOCK PURCHASE PLAN
 EX-10.17: 2003 SECTION 102 STOCK OPTION/STOCK PURCHASE PLAN
 EX-10.18: 2001 2007 INCENTIVE COMPENSATION PLAN
 EX-10.19: FORM OF DIRECTOR AND OFFICER LETTER OF INDEMNIFICATION
 EX-21.1: LIST OF SUBSIDIARIES
 EX-23.1: CONSENT OF KESSELMAN & KESSELMAN
 EX-23.2: CONSENT OF BDO ZIV HAFT CONSULTING & MANAGEMENT, LTD.
 
You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with information different from that contained in this prospectus. This prospectus is not an offer to sell or a solicitation of an offer to buy our ordinary shares in any jurisdiction where it is unlawful. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of ordinary shares.


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PROSPECTUS SUMMARY
 
You should read the following summary together with the entire prospectus, including the more detailed information in our consolidated financial statements and related notes appearing elsewhere in this prospectus. You should carefully consider, among other things, the matters discussed in “Risk Factors.”
 
Voltaire Ltd.
 
We design and develop server and storage switching and software solutions that enable high-performance grid computing within the data center. As the computing requirements of enterprises and institutions continue to expand, the demand for data center solutions that can efficiently and cost-effectively scale and manage computing resources is dramatically increasing. Our solutions allow one or more discrete computing clusters to be linked together as a single unified computing resource, or fabric. We create this unified fabric by integrating high-performance switching with dynamic management and provisioning software. We refer to our server and storage switching and software solutions as the Voltaire Grid Backbonetm. Our Grid Backbone provides a scalable and cost-effective way for customers to manage the growth of their data center computing requirements.
 
We have significant expertise in developing switching and routing platforms based on the InfiniBand architecture as well as grid management software. InfiniBand is an industry-standard architecture that provides specifications for high performance interconnects. We offer 24 to 288 port server and storage switches that benefit from the high performance and low latency characteristics of the InfiniBand architecture, and also integrate with Ethernet and Fibre Channel architectures. Our management software solutions provide fabric management, performance monitoring, application acceleration and grid provisioning functionality.
 
We sell our products primarily through server original equipment manufacturers, or OEMs, which incorporate our products into their solutions, as well as through value-added resellers and systems integrators. We currently have OEM relationships with International Business Machines Corporation, Hewlett-Packard Company, Silicon Graphics, Inc., Sun Microsystems, Inc. and NEC Corporation, five of the top ten global server vendors. To date, our solutions have been implemented in the data centers of over 250 end customers across a wide range of vertical markets and geographies. We outsource the manufacture of our products to two contract manufacturers. We obtain the application-specific integrated circuit, or ASIC, the main component used in our Grid Directortm director-class switches and Grid Switchtm edge switches, from Mellanox Technologies Ltd., currently the only manufacturer of this component. Our switch products accounted for approximately 54% of our revenues in 2006.
 
We had revenues of $15.4 million in 2005, $30.4 million in 2006 and $8.6 million in the three months ended March 31, 2007. Three OEMs accounted for 58% of our revenues in 2005, 63% of our revenues in 2006 and 67% of our revenues in the three months ended March 31, 2007. We had net losses of $10.0 million in 2005, $8.8 million in 2006 and $3.0 million in the three months ended March 31, 2007. We had 150 employees as of March 31, 2007.
 
Industry Background
 
We provide server and storage switching and software solutions to enable grid computing in the data center. We leverage the InfiniBand protocol to provide high performance solutions to our clients. IDC, an independent research company, estimates that the market for InfiniBand switch ports will grow from $95 million in 2006 to $468 million in 2010 and that the market for InfiniBand host channel adapters will grow from $62 million in 2006 to $181 million in 2010. Based on these estimates, we believe that the market for InfiniBand-based products will grow from $157 million in 2006 to $649 million in 2010.
 
In addition to the market for InfiniBand-based products, we believe that the overall market for grid computing interconnect solutions includes storage switching, 10 Gigabit Ethernet switching, and their associated management and messaging software. Storage switching refers to interconnects used in storage networks and is estimated by IDC to grow from $1.5 billion in 2006 to $1.8 billion in 2010. 10 Gigabit Ethernet switching refers to 10 Gigabit Ethernet switch deployments in enterprise data centers and is estimated by IDC to grow from $1.2 billion in 2006 to $2.8 billion in 2010. Management software refers to the software


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used to provision and monitor the grid and is estimated by IDC to grow from $355 million in 2006 to $758 million in 2010. Messaging software optimizes specific application types to maximize performance and is estimated by IDC to grow from $679 million in 2006 to $793 million in 2010. Based on these estimates, we believe that the overall grid computing market will grow from $3.9 billion in 2006 to $6.9 billion by 2010. Our solutions address the high performance segments of this market, which we believe currently represent a small and growing portion of this market.
 
Our Solutions
 
Our server and storage switching and software solutions provide a scalable and cost-effective way for customers to manage the growth of data center compute requirements. We leverage the performance, scalability and latency benefits of InfiniBand and provide leading interconnect functionality for data center environments that rely on industry-standard server and storage units. In addition to InfiniBand, our multi-protocol switches also support Fibre Channel and Ethernet grid computing interconnect architectures. Our solutions offer the following key benefits:
 
  •  Lower latency for acceleration of information delivery.  Based on published product specifications, our InfiniBand-based solutions provide significantly lower end-to-end latency than existing Ethernet- and Fibre Channel-based solutions. Through our relationships with independent software vendors, or ISVs, in our targeted vertical markets, we are able to further reduce end-to-end latency and deliver greater application acceleration benefits to our end customers.
 
  •  Higher bandwidth for improved resource utilization.  In high-performance computing environments, customers require optimal bandwidth to address and eliminate performance bottlenecks. Based on published product specifications, our InfiniBand-based solutions provide significantly higher bandwidth than existing Ethernet- and Fibre Channel-based solutions.
 
  •  Greater scalability to grow with customers’ demands.  Our server and storage switching solutions enable linear scalability by off-loading communication processing to allow servers to run applications more efficiently.
 
  •  Simplified data center infrastructure.  Our solutions eliminate the need for multiple adapters and related cables for each grid computing interconnect architecture. Because we are able to reduce the number of required adapters and cables to multiple networks, our solutions reduce the complexity of the data center.
 
  •  Improved grid performance, manageability and provisioning through enhanced software.  Our software solutions are designed to maximize grid performance and efficiency.
 
Our Strategy
 
Our goal is to be the leading provider of server and storage switching and software solutions that enable high-performance grid computing within the data center. Key elements of our strategy include:
 
  •  Continue to develop high-performance grid computing interconnect solutions.  We intend to continue to extend our market position, technical expertise and customer relationships to further develop high-performance grid computing interconnect solutions built upon unified fabric architectures. To broaden our market opportunity, we will continue to promote grid adoption and develop products that are compatible with other grid computing interconnect architectures, while further expanding our InfiniBand-based solutions.
 
  •  Extend our software offerings.  We intend to expand our portfolio of grid infrastructure software. We are primarily focused on enhancing our existing software offerings in the areas of performance monitoring and management, as well as fabric virtualization.
 
  •  Leverage our OEM relationships to expand market position.  We intend to continue to expand our relationships with our existing server OEMs, while establishing similar relationships with other server,


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  storage and communication OEMs. We believe these relationships will help to accelerate the adoption of our high-performance grid computing interconnect solutions.
 
  •  Expand existing and new vertical and geographic markets.  We intend to further penetrate existing vertical markets and enter new vertical markets. We believe that our relationships with ISVs allow us to bring the benefits of our grid solutions to end customers across a broad range of vertical markets. We also plan to expand our sales and marketing efforts in new geographic markets to meet the needs of end customers in our various vertical markets.
 
Risks
 
Our business is subject to numerous risks as more fully described under “Risk Factors” including the following:
 
  •  We have a history of losses, may incur future losses and may not achieve profitability.
 
  •  Our revenues and prospects may be harmed if the InfiniBand-based architecture is not widely adopted in the grid computing interconnect market.
 
  •  Enterprises may not adopt our technology and may continue to use Ethernet-based solutions, which could harm our future growth.
 
  •  A small number of OEM customers currently account for the majority of our revenues, and the loss of one or more of these OEM customers, or a significant decrease or delay in sales to any of these OEM customers, could reduce our revenues significantly.
 
  •  We may be unable to compete effectively with other companies in our market which offer, or may in the future offer, competing products.
 
  •  Our reliance on Mellanox Technologies Ltd. and other limited-source suppliers could harm our ability to meet demand for our products in a timely manner or within budget.
 
Company Information
 
We were incorporated under the laws of the State of Israel in April 1997. Our principal executive offices are located at 9 Hamenofim Street Building A, Herzeliya 46725, Israel and our telephone number is +972 (9) 971-7666. Our website address is www.voltaire.com. The information on our website does not constitute part of this prospectus.
 
The terms “Voltaire,” “we,” “us” and “our” refer to Voltaire Ltd. and our wholly-owned subsidiaries.
 
 
The terms “Voltaire,” “NVIGOR” and our logo are registered trademarks and we have filed trademark applications to register “Grid Backbone,” “GridVision,” “GridBoot” and “GridStack.” All other registered trademarks appearing in this prospectus are owned by their holders.


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THE OFFERING
 
Ordinary shares offered:
 
  By Voltaire 5,770,000 shares.
 
  By the selling shareholders 1,923,000 shares.
 
Shares to be outstanding after this offering 20,480,554 shares.
 
Use of proceeds We intend to use the net proceeds of this offering to fund our research and development activities, business development and marketing activities, and for general corporate purposes and working capital. We also intend to use a portion of the net proceeds to repay in full a loan with an outstanding principal amount of $5.0 million. We also may use a portion of the net proceeds to acquire or invest in complementary companies, products or technologies although we currently do not have any acquisition or investment planned. We will not receive any proceeds from the sale of shares by the selling shareholders.
 
Risk Factors See “Risk Factors” and other information included in this prospectus for a discussion of factors you should carefully consider before deciding to invest in our ordinary shares.
 
Proposed Nasdaq Global Market symbol “VOLT”.
 
The number of ordinary shares to be outstanding after this offering excludes as of July 9, 2007:
 
  •  3,768,508 ordinary shares reserved for issuance under our share option plans, of which options to purchase 3,469,007 ordinary shares at a weighted average exercise price of $2.41 per share and options to purchase 2,931 ordinary shares at an exercise price of $320.00 per share have been granted; and
 
  •  140,625 ordinary shares issuable upon the exercise of warrants to purchase Series E preferred shares granted to an entity that made a loan to us at an exercise price of $4.00 per share and 59 ordinary shares issuable upon the exercise of warrants to purchase ordinary shares granted to an Israeli non-profit organization at an exercise price of $1,270 per share.
 
Unless otherwise indicated, all information in this prospectus:
 
  •  reflects the conversion upon the closing of this offering of all of our issued and outstanding preferred shares into 13,946,624 ordinary shares on a one-for-one basis;
 
  •  assumes an initial public offering price of $13.00 per ordinary share, the midpoint of the estimated initial public offering price range;
 
  •  assumes no exercise of the underwriters’ option to purchase up to an additional 865,462 ordinary shares from us and 288,488 ordinary shares from the selling shareholders to cover overallotments; and
 
  •  reflects a 1-for-100 reverse share split effected on March 7, 2004 and a 1-for-4 reverse share split effected on July 5, 2007.


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SUMMARY CONSOLIDATED FINANCIAL DATA
 
The following table presents summary consolidated financial and operating data derived from our consolidated financial statements. You should read this data along with the sections of this prospectus entitled “Selected Consolidated Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this prospectus. Results for interim periods are not necessarily indicative of the results that may be expected for the entire year.
 
                                         
    Year Ended December 31,     Three Months Ended March 31,  
    2004     2005     2006     2006     2007  
                      (unaudited)  
    (in thousands, except share and per share data)  
 
Consolidated statements of operations data:
                                       
Revenues
  $ 4,916     $ 15,366     $ 30,427     $ 4,389     $ 8,580  
Cost of revenues
    3,565       10,830       19,223       2,846       5,391  
                                         
                                         
Gross profit
    1,351       4,536       11,204       1,543       3,189  
Operating expenses:
                                       
Research and development, gross(1)
    6,658       6,538       7,694       2,003       2,714  
Less royalty-bearing participation
    700       621                    
                                         
                                         
Research and development, net
    5,958       5,917       7,694       2,003       2,714  
                                         
                                         
Sales and marketing(1)
    4,327       6,045       8,281       1,604       2,106  
General and administrative(1)
    2,271       2,681       3,534       711       979  
                                         
                                         
Total operating expenses
    12,556       14,643       19,509       4,318       5,799  
                                         
                                         
Loss from operations
    (11,205 )     (10,107 )     (8,305 )     (2,775 )     (2,610 )
Financial income (expenses), net
    144       191       (460 )     102       (355 )
                                         
                                         
Loss before income tax expenses
    (11,061 )     (9,916 )     (8,765 )     (2,673 )     (2,965 )
Income tax expenses
          (111 )     (84 )           (35 )
                                         
                                         
Net loss
    (11,061 )     (10,027 )     (8,849 )     (2,673 )     (3,000 )
                                         
                                         
Accretion of redeemable convertible preferred shares(2)
    (2,144 )     (2,959 )     (3,573 )     (893 )     (1,054 )
Benefit to Series A, B and B1 shareholders(3)
    (1,800 )                        
Charge for beneficial conversion feature of Series D and D2 redeemable convertible preferred shares
    (362 )     (482 )     (535 )     (134 )     (149 )
                                         
                                         
Net loss attributable to ordinary shareholders
  $ (15,367 )   $ (13,468 )   $ (12,957 )   $ (3,700 )   $ (4,203 )
                                         
                                         
Net loss per share attributable to ordinary shareholders — basic and diluted
  $ (29.67 )   $ (21.16 )   $ (19.92 )   $ (5.73 )   $ (6.30 )
                                         
                                         
Weighted average number of ordinary shares used in computing net loss per share attributable to ordinary shareholders — basic and diluted
    517,926       636,536       650,476       645,419       667,631  
                                         
                                         
Pro forma net loss per share attributable to ordinary
                                       
shareholders — basic and diluted (unaudited)(4)
                  $ (0.69 )           $ (0.22 )
                                         
Weighted average number of ordinary shares used in computing pro forma net loss per share attributable to ordinary shareholders — basic and diluted (unaudited)(4)
                    12,794,446               13,776,282  
                                         


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(1) Includes share-based compensation expense related to options granted to employees and others as follows:
 
                                         
    Year Ended December 31,     Three Months Ended March 31,  
    2004     2005     2006     2006     2007  
                      (unaudited)  
    (in thousands)  
 
Research and development, net
  $     $ 9     $ 59     $ 14     $ 18  
Sales and marketing
                90       21       26  
General and administrative
    382       65       161       33       73  
                                         
Total
  $ 382     $ 74     $ 310     $ 68     $ 117  
                                         
 
(2) Accretion of redeemable convertible preferred shares represents the original purchase price plus accrued dividends calculated using the interest method. Certain holders of our preferred shares have the option, after March 7, 2009, to require us to redeem all of the preferred shares for an amount equal to the greater of (i) the original purchase price plus accrued dividends (and, with respect to the Series D preferred shares, plus certain interest payments) and (ii) the then current fair market value of such shares. The redemption option and the related accretion of the preferred shares will terminate upon conversion of the preferred shares into ordinary shares upon the closing of this offering.
 
(3) In connection with the sale of our Series E preferred shares in 2004, our Series A, Series B and Series B1 preferred shares were converted into ordinary shares. At the time of this conversion, we issued junior liquidation securities to the holders of such shares, which entitle the holders to an aggregate payment of $1.8 million, following payment of certain required amounts to the holders of our Series C, D, E and E2 preferred shares, if we complete a merger transaction or are acquired or liquidated. The junior liquidation securities do not have voting rights and will be cancelled upon the closing of this offering for no consideration.
 
(4) Pro forma basic and diluted loss per ordinary share gives effect to the conversion upon the closing of this offering, assuming such closing occurred on March 31, 2007, of all of our issued and outstanding preferred shares into ordinary shares on a one-for-one basis. See Note 2w to our consolidated financial statements for an explanation of the number of shares used in computing per share data.
 
                 
    As of March 31, 2007
        Pro Forma As
    Actual   Adjusted
    (unaudited)
    (in thousands)
 
Consolidated balance sheet data:
               
Cash and cash equivalents
  $ 17,221     $ 79,721  
Restricted deposit
    269       269  
Working capital
    19,733       82,233  
Total assets
    41,789       104,289  
Long-term loan
    5,000        
Total liabilities
    27,694       21,773  
Redeemable convertible preferred shares
    76,167        
Accumulated deficit
    (66,285 )     66,285  
Total shareholders’ equity (capital deficiency)
    (62,072 )     82,516  
 
Pro forma as adjusted information included above in the consolidated balance sheet data reflects our receipt of estimated net proceeds of $62.5 million from our sale of the ordinary shares in this offering, based on an initial public offering price of $13.00 per share, the midpoint of the estimated initial public offering price range, after deducting underwriting discounts and estimated offering expenses, and the application of a portion of such net proceeds to repay a loan with an outstanding principal amount of $5.0 million as described under “Use of Proceeds.”


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RISK FACTORS
 
This offering and an investment in our ordinary shares involve a high degree of risk. You should consider carefully the risks described below, together with the financial and other information contained in this prospectus, before you decide to buy our ordinary shares. If any of the following risks actually occurs, our business, financial condition and results of operations would suffer. In this case, the trading price of our ordinary shares would likely decline and you might lose all or part of your investment.
 
Risks Relating to Our Business
 
We have a history of losses, may incur future losses and may not achieve profitability.
 
We have incurred net losses in each fiscal year since we commenced operations in 1997. We incurred net losses of $3.0 million in the three months ended March 31, 2007, $8.8 million in 2006, $10.0 million in 2005 and $11.1 million in 2004. As of March 31, 2007, our accumulated deficit was $66.3 million. Our losses could continue for the next several years as we expand our sales and marketing activities, continue to invest in research and development, expand our general and administrative operations and incur additional costs related to being a public company. We made our first sales of products in the grid computing market in 2003 and accordingly, we have a limited operating history. We may not generate sufficient revenues in the future to achieve or maintain profitability.
 
Our revenues and prospects may be harmed if the InfiniBand-based architecture is not widely adopted in the grid computing interconnect market.
 
Our solutions leverage the performance and latency benefits of the InfiniBand grid computing interconnect architecture and provide interconnect functionality for data center environments that rely on industry-standard server and storage units. The InfiniBand architecture was first introduced in October 2000 and has a relatively short history and limited adoption in the grid computing interconnect market. End customers that purchase information technology, or IT, products and services from server vendors, such as our original equipment manufacturer, or OEM, customers, must find InfiniBand to be a compelling solution to meet their grid computing needs. We cannot control third-party adoption of InfiniBand over competing grid computing interconnect architectures such as Ethernet, Fibre Channel and other proprietary technologies. InfiniBand may fail to compete effectively with these architectures, some of which are well established. If other architectures continue to remain the market standard or if a superior alternative architecture to InfiniBand is developed, our revenues and prospects may be harmed. Furthermore, we may be required to incur substantial costs to modify our existing products to remain competitive with new or existing architectures and we can provide no assurance that we will succeed in doing so.
 
Enterprises may not adopt our technology and may continue to use Ethernet-based solutions, which could harm our future growth.
 
More than half of our revenues to date have been derived from end customers that are governmental, research or educational institutions, such as government-funded research laboratories and post-secondary educational institutions. An important element of our strategy is to accelerate the adoption of our InfiniBand-based solutions by enterprises, which have traditionally used products based on the Ethernet architecture. In order to compete effectively against providers of solutions that utilize Ethernet, we must convince current Ethernet users to move to a new technology, and incur the related marketing, education and maintenance costs associated with such a move. Potential enterprise customers may also elect to rely on internally-developed solutions or proprietary solutions developed by other companies instead of implementing our InfiniBand-based solutions. In addition, even if potential enterprise customers adopt InfiniBand, we may have to compete with other suppliers of InfiniBand-based products in the enterprise market. If a leading company or several companies in the enterprise market incorporates our InfiniBand-based products, but fails to achieve desired performance and reliability, our reputation and revenues could be adversely affected.


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A small number of our OEM customers currently account for the majority of our revenues, and the loss of one or more of these OEM customers, or a significant decrease or delay in sales to any of these OEM customers, could reduce our revenues significantly.
 
We market and sell our products to end customers primarily through our OEM customers who integrate our solutions into their product offerings. To date, we have derived a substantial portion of our revenues from a small number of OEM customers. Sales to our top three OEM customers accounted for 58% of our revenues in 2005, 63% of our revenues in 2006 and 67% of our revenues in the three months ended March 31, 2007, as follows:
 
                         
    Year Ended December 31,     Three Months Ended
 
    2005     2006     March 31, 2007  
 
International Business Machines Corp. (IBM)
    8 %     38 %     35 %
Sun Microsystems, Inc. 
    2       13       10  
Hewlett-Packard Company
    48       12       22  
                         
Total
    58 %     63 %     67 %
 
We anticipate that a large portion of our revenues will continue to be derived from sales to a small number of OEM customers in the future. Our sales to our OEM customers are made on the basis of purchase orders rather than long-term purchase commitments. Our relationships with our OEM customers are generally governed by non-exclusive agreements that typically have an initial term of one to three years and automatically renew for successive one year terms, have no minimum sales commitments and do not prohibit our OEM customers from offering products and services that compete with our products. In addition, our agreements typically require us to deliver our products to our OEM customers within 30 to 90 days from the time we receive the order, however, in many cases they may request faster delivery. A failure by us to meet product delivery deadlines may damage our relationship with our OEM customers and harm our market position. The size of purchases by our OEM customers typically fluctuates from quarter-to-quarter and year-to-year, and may continue to fluctuate in the future, which may affect our quarterly and annual results of operations.
 
In addition, our competitors may provide incentives to our existing and potential OEM customers to use or purchase their products and services or to prevent or reduce sales of our solutions. Some of our OEM customers also possess significant resources and advanced technical capabilities and may, either independently or jointly with our competitors, develop and market products and related services that compete with our solutions. If either of these were to occur, our OEM customers may discontinue marketing and distributing our solutions. Therefore, if any of our OEM customers reduces or cancels its purchases from us, or terminates its agreement with us for any reason, and we are unable to replace the lost revenues with sales to an alternate OEM customer, it would have an adverse effect on our revenues and results of operations.
 
We may be unable to compete effectively with other companies in our market which offer, or may in the future offer, competing products.
 
We compete in a rapidly evolving and highly competitive market. Our InfiniBand-based solutions currently address the high performance computing, or HPC, interconnect, the 10 Gigabit Ethernet switching, and the storage switching end-markets. These markets are characterized by continuous technological change and customer demand for high performance products. Our current principal competitor is Cisco Systems, Inc., which is a significant supplier of InfiniBand, Ethernet and Fibre Channel-based solutions, and has traditionally been the most recognized and dominant supplier for enterprises. We also compete with QLogic Corporation, a provider of Fibre Channel-based and InfiniBand-based solutions. These companies are substantially larger than we are and have significantly greater brand recognition and resources, which may allow them to respond more quickly to changes in customer requirements or to new or emerging technologies. We also compete to a lesser degree with providers of 10 Gigabit Ethernet and proprietary high-performance grid computing interconnect solutions. The entry of new competitors into our market and acquisitions of our existing competitors by companies with significant resources, better brand recognition and established relationships with our end


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customers could result in increased competition and harm our business. Increased competition may cause us to make competitive price reductions thereby reducing our gross margins and market share, any of which could have a material adverse effect on our business, financial condition or result of operations.
 
We depend significantly on our OEM customers to market, sell, install and provide initial and escalation level technical support for our products, and if any of these OEMs fails to adequately perform, then our sales may suffer.
 
Our OEM customers are responsible for integrating our solutions into their products and providing first call and second escalation service and support for products incorporating our solutions. As a result, we depend on the ability of our OEM customers to market, sell and service our solutions successfully to end customers and to provide adequate customer support. Any failure by our OEM customers to provide adequate support to end customers could result in customer dissatisfaction with us or our solutions, which could result in a loss of an end customer, harm our reputation and delay or limit market acceptance of our solutions. In addition, if any significant OEM customer should fail, individually or in the aggregate, to perform as an end customer expects, our sales may suffer. We cannot provide any assurance that our OEM customers will market our solutions effectively, receive and fulfill end-customer orders of our solutions on a timely basis or continue to devote adequate resources to support the sales, marketing and technical support of our products.
 
We do not expect to sustain our recent revenue growth rate, which may reduce our share price.
 
Our revenues have grown rapidly over the last four years. Our revenues were $1.2 million in 2003, $4.9 million in 2004, $15.4 million in 2005, $30.4 million in 2006 and $8.6 million in the three months ended March 31, 2007. We do not expect to sustain our recent growth rate in future periods. You should not rely on our revenue growth in any prior quarterly or annual period as an indication of our future revenue growth. If we are unable to maintain adequate revenue growth, we may not have sufficient resources to execute our business objectives and our share price may decline. You must consider our business and prospects in light of the risks and difficulties we encounter as a rapidly growing technology company.
 
Our gross margins and results of operations may be adversely affected if we do not continue to achieve economies of scale and maintain or increase sales of higher margin products.
 
Our gross margins have increased from 27% in 2004 to 30% in 2005 and to 37% in 2006 and in the three months ended March 31, 2007. Our historical gross margins improved primarily due to reductions in costs of materials and manufacturing overhead due to higher production volumes. Our gross margins are also impacted by the mix of products that we sell. Our strategy is to increase our gross margins in the future by increasing sales of our Grid Director ISR 9288 and ISR 9096 director-class switches and Grid Switch edge switches as a percentage of revenues, while reducing sales of lower-margin host adapter cards as a percentage of revenues. We may not succeed in this strategy because customers may seek complete solutions that require us to sell host adapter cards to them and we may not succeed in our efforts to sell host adapter cards at premium prices. In addition, we may incur additional costs as a result of our efforts to increase sales of our higher-margin products and may not be successful in doing so. As a result, our financial position may be adversely affected. If we are unable to continue to achieve economies of scale and maintain or increase sales of higher margin products, we may not achieve our expected gross margin rate, resulting in lower than expected profitability.
 
Our reliance on Mellanox Technologies Ltd. and other limited-source suppliers could harm our ability to meet demand for our products in a timely manner or within budget.
 
We obtain the application-specific integrated circuit, or ASIC, the main component used in our Grid Directortm director-class switches and Grid Switchtm edge switches, from Mellanox Technologies Ltd., which is currently the only manufacturer of this chip. Our switch products accounted for approximately 54% of our revenues in 2006. We entered into a non-exclusive agreement with Mellanox dated as of October 7, 2005, for an initial period of two years, which automatically renews for successive one-year periods unless one party notifies the other party within 90 days prior to each annual termination date that it does not wish to renew the agreement. Standard lead-times under the agreement may be changed at Mellanox’s sole discretion upon


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30-days prior written notice. In addition, Mellanox may increase the ASIC purchase price upon 30-days prior notice and has the right to alter the ASIC upon 120-days prior notice, and to discontinue production of the ASIC upon six-months prior notice. During a period of six months after our receipt of a notice of discontinuance from Mellanox, we may purchase from Mellanox such commercially reasonable quantity of the discontinued product as we deem reasonably necessary for our future requirements. Mellanox is obligated to continue to provide us the discontinued product and to facilitate our transition to new products for a period not to exceed nine months following our receipt of the notice of discontinuance.
 
In the event that Mellanox is unable to supply the ASIC on a timely basis or in the quantities that we require, we would be unable to manufacture our switch products without incurring significant development and design costs. There is currently no alternative supplier for the ASIC produced by Mellanox. If an alternative supplier of the ASIC were to develop in the future, we would likely be forced to make changes to our switching products to ensure interoperability with the new ASIC. There can be no assurance that we will be able to successfully modify our switches to accommodate any alternate technology or any change in Mellanox’s product. As a result, a failure by Mellanox to supply the ASIC would materially adversely affect our business.
 
In addition, we have designed our products to incorporate several specific components, such as our InfiniBand connectors and backplanes, printed circuit boards, chassis and mechanical parts, power supplies and processor boards. We purchase these components from major industry suppliers, but do not have long-term supply contracts with these suppliers. We believe that substitute components are available from alternate sources, however, any change in these components would require us to qualify a new supplier’s components for inclusion in our products which would likely require significant engineering changes, which could take a number of months to complete.
 
We currently depend on two outside contract manufacturers, Sanmina-SCI Corporation and Zicon Ltd., to manufacture and warehouse our products and if they experience delays, disruptions, quality control problems or a loss in capacity, it could materially adversely affect our operating results.
 
We subcontract the manufacture, assembly and testing for our products to two contract manufacturers. These functions are performed by Sanmina-SCI Corporation and Zicon Ltd. These contract manufacturers provide us with full turn-key manufacturing and testing services. Sanmina-SCI is responsible for the manufacture of our Grid Switch InfiniBand Switch Router, or ISR, 9024. Zicon manufacturers all modules and mechanics related to our director class switches and their gateway modules for connecting to Ethernet and Fibre Channel. Our contract manufacturers also store our inventory of key components, as well as finished products after manufacturing and before shipping to customers. If any of these contract manufacturers experience delays, disruptions or quality control problems in manufacturing our products, including insufficient inventory or supply of components, or if we fail to effectively manage the relationship with any of these subcontractors, shipments of products to our customers may be delayed, which could have a material adverse effect on our relationships with our customers and end customers.
 
We currently have only a letter agreement with Sanmina-SCI and no long-term supply contract with Zicon. We are in the process of negotiating a long-term supply contract with Zicon and currently rely on committed purchase orders to meet our manufacturing requirements. Unless we enter into a long-term supply contract with each of these manufacturers, they will not be obligated to perform services or supply products to us for any specific period, in any specific quantities or at any specific price, except as may be provided in a particular purchase order. Neither of our contract manufacturers has provided contractual assurances to us that adequate capacity will be available to us to meet future demands for our products.
 
Sanmina-SCI’s facilities are located in Ma’alot, Israel and Zicon’s facilities are located in Petach Tikva, Israel. Ma’alot is located in northern Israel and is in range of rockets that were fired into Israel during the mid-2006 war with Hezbollah in Lebanon. In the event that the facilities of either contract manufacturer are damaged for any reason, including as a result of hostile action, our ability to deliver products to customers could be materially adversely affected. See also “—Risks Relating to Our Location in Israel—Conditions in Israel could adversely affect our business.”


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Our solutions are highly technical and any undetected software or hardware errors in our products could have a material adverse effect on our operating results.
 
Due to the complexity of our solutions and variations among customers’ computing environments and data centers, we may not detect product defects until our products are fully deployed in our customers’ high performance computing environments and data centers. Regardless of whether warranty coverage exists for a product, we may be required to dedicate significant technical resources to resolving any defects. If we encounter significant product problems, we could experience, among other things, loss of customers, cancellation of product orders, increased costs, delays in recognizing revenue and damage to our reputation. Some of our customers traditionally demand early delivery of products containing our most advanced technology prior to completion of our rollout. For example, during the third quarter of 2006, we provided early product delivery of a high-end switch based on the newly released double data rate, or DDR, chipset to a limited number of OEM and end customers desiring the newest technology available. Because the system did not perform as expected in the field under certain high stress environments, we had to defer recognition of $7.3 million of revenue, which we expect to recognize during the second and third quarters of 2007. We are currently in the process of finalizing our testing of the redesigned version of the DDR-based system required for general release to the market.
 
In addition, we could face claims for product liability, tort or breach of warranty. Defending a lawsuit, regardless of its merit, is costly and may divert management’s attention from normal business operations. If our business liability insurance is inadequate or future coverage is unavailable on acceptable terms or at all, our financial condition could be harmed.
 
We have limited visibility into end customer demand for our solutions, which introduces uncertainty into our manufacturing forecasts and business planning, and could negatively impact our financial results.
 
Our business is subject to uncertainty because of our limited visibility into end customers’ future buying patterns and demands, which poses a challenge for us in predicting the amount and timing of our revenue. Sales of our solutions are made on the basis of purchase orders rather than long-term purchase commitments. In addition, we place orders with our suppliers and contract manufacturers based on forecasts of our OEM customers’ demand, which are based on numerous assumptions, each of which may introduce variability and error into our estimates. This process requires us to make multiple demand forecast assumptions with respect to both our OEM customers’ and end customers’ demands. Because the lead time for fulfilling an order from an OEM customer is typically one to two months, while the lead-time to order certain of the components and assemble our products can be three to four months, forecasts of demand for our products must be made in advance of customer orders. In addition, we base business decisions regarding our growth on our forecasts of end customer demand. As we grow, anticipating end customer demand may become increasingly challenging. If we overestimate end customer demand, we may order more inventory of components and allocate more resources to manufacturing products than is necessary. In the event that we are unable to sell our finished product or in the event that our inventory of components becomes obsolete, we may be required to incur significant charges and write-offs related to our inventory. This could have an adverse affect on our balance sheet and results of operations. Conversely, if we underestimate end customer demand, we could forego revenue opportunities, lose market share and damage our end customer relationships.
 
If we fail to develop new products or enhance the performance of our existing solutions with improved technologies to meet rapid technological change and market demands in a timely and cost-effective manner, our business will suffer.
 
We invest heavily in advancing our technology and developing new solutions to keep pace with rapid changes in customer demand and with our competitors’ efforts to advance their technology. In particular, we must satisfy demand for improved computing performance. We are currently engaged in the development process for next generation solutions in order to meet these demands. The development process for these advancements is lengthy and requires us to accurately anticipate technological innovations and market trends.


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Developing and enhancing these products can be time-consuming, costly and complex. Successful product design, development and introduction on a timely basis require that we:
 
  •  design innovative and performance-enhancing features that differentiate our solutions from those of our competitors;
 
  •  identify emerging technological trends in our target markets;
 
  •  maintain effective sales and marketing strategies;
 
  •  respond effectively to technological changes or product announcements by others; and
 
  •  adjust to changing market conditions quickly and cost-effectively.
 
We may be unable to successfully develop additional next-generation products or product enhancements. In addition, we cannot provide any assurance that new products or enhancements, such as our next generation DDR optimized director class products and supporting software, will be completed in a timely manner. Delays in completing the development and introduction of products that address new applications or markets could cause our sales to decline and our operating loss to increase. Furthermore, we may make substantial investments in the research and development of new products that are then not accepted by the market. If we fail to address effectively the changing demands of customers and to develop the required enhancements to our products in order to keep pace with advances in technology, our business and revenues will be adversely affected. In addition, we cannot provide any assurance that we will be able to obtain certification, as required, for our existing or newly developed products by national regulators.
 
If we fail to manage our future growth effectively, we may not be able to market and sell our products and services successfully.
 
We have expanded our operations significantly since we began offering grid computing solutions in 2003 and anticipate that further expansion will be required. Our future operating results depend to a large extent on our management’s ability to plan and direct our expansion and growth successfully, including training our sales personnel to become productive and generate revenue, forecasting revenue, controlling expenses, implementing and enhancing infrastructure, addressing new markets and expanding international operations in addition to maintaining and expanding our research and development efforts. A failure to manage our growth effectively could materially and adversely affect our ability to market and sell our products and services.
 
In addition, in order to accommodate our growth, our contract manufacturers may need to increase their manufacturing capacity. If our contract manufacturers are unable to maintain the required manufacturing capacity to meet our requirements, the demand for our products may exceed their capacity, which could result in a backlog of orders and harm our ability to meet our customers’ timing demands.
 
Fluctuations in our revenues and operating results on a quarterly and annual basis could cause the market price of our ordinary shares to decline.
 
Our quarterly and annual revenues and operating results are difficult to predict and have fluctuated in the past, and may fluctuate in the future, from quarter-to-quarter and year-to-year. It is possible that our operating results in some quarters and years will be below market expectations. This may cause the market price of our ordinary shares to decline. Our quarterly and annual operating results are affected by a number of factors, many of which are outside of our control. In particular, we have limited exposure to end customer demand upon which we predict future sales of our solutions. Our OEM customers derive a substantial portion of their revenues from sales to a small number of end customers. If a small number of end customers defer delivery or installation of our products for even a short period of time, recognition of a significant amount of revenues may be delayed. In limited circumstances, we do not recognize revenue upon a sale to an OEM customer because the sale by the OEM customer to the end customer is subject to performance of an acceptance test by the end customer. As a result, we may experience quarterly fluctuations in revenues if OEM products incorporating our solutions do not meet the technical specifications required by the end customers.


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Additional factors that may affect our quarterly and annual operating results include:
 
  •  the loss of one or more of our OEM customers, or a significant reduction or postponement of orders from our customers;
 
  •  our customers’ sales outlooks, purchasing patterns and inventory levels based on end-customer demands and general economic conditions;
 
  •  our ability to successfully develop, introduce and sell new or enhanced products in a timely manner;
 
  •  product obsolescence and our ability to manage product transitions;
 
  •  changes in the relative sales mix of our products;
 
  •  changes in our cost of finished products;
 
  •  the potential loss of key manufacturer and supplier relationships; and
 
  •  the availability, pricing and timeliness of delivery of other components used in our OEM customers’ products.
 
The international nature of our business exposes us to financial and regulatory risks and we may have difficulty protecting our intellectual property in some foreign countries.
 
To date, we have derived a significant portion of our revenues from OEM customers located outside the United States, principally in Europe, which accounted for 23.6% of our revenues in 2006 and 31.0% of our revenues in the three months ended March 31, 2007, and the Asia-Pacific region and Japan, which accounted for 13.0% of our revenues in 2006 and 24.1% of our revenues in the three months ended March 31, 2007. The international nature of our business subjects us to a number of risks, including the following:
 
  •  the difficulty of managing and staffing multiple offices, which we currently maintain in North America, Europe, the Middle East and Asia-Pacific, and the increased travel, infrastructure and legal compliance costs associated with multiple international locations;
 
  •  difficulties in enforcing contracts and implementing our accounts receivable function, which is currently centralized and introduces translation, proximity and cultural challenges;
 
  •  political and economic instability, particularly in markets such as Latin America, Asia and other emerging markets;
 
  •  reduced protection for intellectual property rights in some countries where we may seek to expand our sales in the future, such as China and the Russian Federation;
 
  •  changes in regulatory requirements, such as the regulations recently adopted by the European Union regarding recycling of, and prohibition of hazardous substances in, electrical and electronic equipment;
 
  •  laws and business practices favoring local companies; and
 
  •  imposition of or increases in tariffs.
 
As we expand our business globally, our success will depend, in large part, on our ability to anticipate and effectively manage these risks. Our failure to manage any of these risks successfully could harm our international operations and reduce our international sales, adversely affecting our business, operating results and financial condition.
 
If we are unable to successfully protect our technology through the issuance and enforcement of patents and other means of protection, our business could be harmed significantly.
 
Our ability to prevent competitors from gaining access to our technology is essential to our success. If we fail to protect our intellectual property rights adequately, we may lose an important advantage in the markets in which we compete. Trademark, patent, copyright and trade secret laws in the United States and other jurisdictions, as well as our internal confidentiality procedures and contractual provisions, are at the core of


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our efforts to protect our proprietary technology and our brand. As of June 30, 2007, we had one issued U.S. patent and five pending U.S. patent applications. We also have four pending counterpart applications outside of the United States, filed pursuant to the Patent Cooperation Treaty. While we plan to protect our intellectual property with, among other things, patent protection, there can be no assurance that:
 
  •  current or future U.S. or foreign patents applications will be approved;
 
  •  our issued patents will protect our intellectual property and not be held invalid or unenforceable if challenged by third parties via litigation or administrative proceeding;
 
  •  we will obtain a favorable outcome if we assert our intellectual property rights against third parties;
 
  •  we will succeed in protecting our technology adequately in all key jurisdictions in which we or our competitors operate;
 
  •  the patents of others will not have an adverse effect on our ability to do business; or
 
  •  others will not independently develop similar or competing products or methods or design around any patents that may be issued to us.
 
In addition, our intellectual property is also used in a large number of foreign countries. Effective intellectual property enforcement may be unavailable or limited in some foreign countries, such as China and the Russian Federation. As a result, it may be difficult for us to protect our intellectual property from misuses or infringement by other companies in these countries. We expect this to become a greater problem for us as our OEM customers increase their manufacturing presence in countries that provide less protection for intellectual property.
 
Litigation and administrative proceedings are inherently uncertain and divert resources that could be directed towards other business priorities. We may not be able to obtain positive results and may spend considerable resources in our efforts to defend and protect our intellectual property. Furthermore, legal standards relating to the validity, enforceability, and scope of protection of intellectual property rights are uncertain. Effective patent, trademark, copyright and trade secret protection vary from one jurisdiction to another and may not be attainable in every country in which our products are available. Our failure to obtain patents, including with claims of a scope necessary to cover our technology, or the invalidation of our patents, may weaken our competitive position and may adversely affect our revenues and profitability.
 
In addition to patent protection, we customarily require our employees and subcontractors to execute confidentiality agreements or agree to confidentiality undertakings when their relationship with us begins. Typically, our employment contracts also include assignment of intellectual property rights for inventions developed by employees, and non-disclosure of confidential information and non-compete clauses for twelve months following termination of an employee’s employment with us. We cannot provide any assurance that the terms of these agreements are being observed and will be observed in the future. Because our product designs and software are stored electronically and thus are highly portable, we attempt to reduce the portability of our designs and software by physically protecting our servers through the use of closed networks, which prevent external access to our servers. We cannot be certain, however, that such protection will adequately deter individuals or groups from wrongful access to our technology. We cannot be certain that the steps we have taken to protect our proprietary information will be sufficient. In addition, to protect our intellectual property, we may become involved in litigation, which could result in substantial expenses, divert the attention of management, cause significant delays, materially disrupt the conduct of our business or adversely affect our revenue, financial condition and results of operations.
 
Our use of open source and third-party software could impose unanticipated conditions or restrictions on our ability to commercialize our solutions.
 
We incorporate open source software into our switch chassis, GridVision Enterprise software, IP Router, Fibre Channel Gateway, ISER initiator, GridStack software and GridBoot software. Open source software is accessible, usable and modifiable by anyone, provided that users and modifiers abide by certain licensing requirements. The original developers of the open source code provide no warranties on such code. For


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example, our products incorporate open source code such as an embedded Linux-based operating system. The Linux-based operating system has been developed under a license (known as a General Public License), which permits it to be liberally copied, modified and distributed.
 
Under certain conditions, the use of some open source code to create derivative code may obligate us to make the resulting derivative code available to others at no cost. The circumstances under which our use of open source code would compel us to offer derivative code at no cost are subject to varying interpretations. While we monitor our use of open source code in an effort to avoid situations that would require us to make parts of our core proprietary technology freely available as open source code, we cannot guarantee that such circumstances will not occur or that a court would not conclude that, under a different interpretation of an open source license, certain of our core technology must be made available as open source code. The use of such open source code may also ultimately require us to take remedial action, such as replacing certain code used in our products, paying a royalty to use some open source code, making certain proprietary source code available to others or discontinuing certain products, that may divert resources away from our development efforts.
 
The license under which we licensed the embedded Linux-based operating system is currently the subject of litigation in the case of The SCO Group, Inc. v. International Business Machines Corp., pending in the United States District Court for the District of Utah. SCO filed its complaint in 2003. According to the current trial schedule, the parties are briefing certain issues for summary judgment and other issues are already being argued. The trial date was postponed indefinitely. SCO has alleged that certain versions of the Linux operating system contributed by IBM contain unauthorized UNIX code or derivative works of UNIX code, which SCO claims it owns. If the court were to rule in SCO’s favor and find, for example, that Linux-based products, or significant portions of them, may not be liberally copied, modified or distributed, we may have to modify our products and/or seek a license to use the code in question, which may or may not be available on commercially reasonable terms, and this could materially adversely affect our business. Regardless of the merit of SCO’s allegations, uncertainty concerning SCO’s allegations could adversely affect our products and customer relationships.
 
We may also find that we need to incorporate certain proprietary third-party technologies, including software programs, into our products in the future. Licenses to relevant third-party technology may not be available to us on commercially reasonable terms, or at all. Therefore, we could face delays in product releases until equivalent technology can be identified, licensed or developed and integrated into our current products. Such delays could materially adversely affect our business, operating results and financial conditions.
 
We may be subject to claims of intellectual property infringement by third parties that, regardless of merit, could result in litigation and our business, operating results or financial condition could be materially adversely affected.
 
There can be no assurance that third parties will not assert that our products and other intellectual property infringe, or may infringe their proprietary rights. For example, Crossroads Systems, Inc., a U.S. developer of storage routing devices, has contacted us regarding a potential license for some of its patents consisting of the following as of November 2006: U.S. Patent Nos. 5,941,972; 6,425,035; 6,421,753; 6,763,419; 6,738,854; 6,789,152 and 7,051,147. We are currently in discussions with Crossroads to determine whether a license is necessary or appropriate. We believe that the only potentially relevant product is our Fibre Channel Router. Between 2004 and 2006, our total sales of Fibre Channel Routers were approximately $232,000. Some of these patents have been the subject of prior and ongoing litigation. See Crossroads Systems (Texas), Inc. v. Chaparral Network Storage, Inc., Case No. A-00-CA-217-SS (W.D. Tex.); Crossroads Systems (Texas), Inc. v. Pathlight Technology, Inc., Case No. A-00-CA-248-SS (W.D. Tex.); and Crossroads Systems (Texas), Inc. v. Dot Hill Systems Corporation, Case No. A-03-CA-754-SS (W.D. Tex.); EqualLogic, Inc. v. Crossroads Systems, Inc. et al., Case No. 06 CA 11478 EFH (D. Mass.) Some of these patents have also successfully passed reexamination proceedings before the U.S. Patent and Trademark Office.
 
We are not currently subject to any proceedings for infringement of patents or other intellectual property rights and are not aware of any parties that intend to pursue such claims against us. Any such claims,


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regardless of merit, could result in litigation, which could result in substantial expenses, divert the attention of management, cause significant delays and materially disrupt the conduct of our business and have a material adverse effect on our financial condition and results of operations. As a consequence of such claims, we could be required to pay a substantial damage award, develop non-infringing technology, enter into royalty-bearing licensing agreements, stop selling our products or re-brand our products. If it appears necessary, we may seek to license intellectual property that we are alleged to infringe. Such licensing agreements may not be available on terms acceptable to us or at all. Litigation is inherently uncertain and any adverse decision could result in a loss of our proprietary rights, subject us to significant liabilities, require us to seek licenses from others and otherwise negatively affect our business. In the event of a successful claim of infringement against us and our failure or inability to develop non-infringing technology or license the infringed or similar technology, our business, operating results or financial condition could be materially adversely affected.
 
If we fail to retain our executive officers and attract and retain other skilled employees, we may not be able to timely develop, sell or support our products.
 
Our success depends in large part on the continued contribution of our research and development and sales and marketing teams, as well as our management. In particular, we depend on the continued service of Miron (Ronnie) Kenneth, our Chief Executive Officer and Chairman, for whom we carry key man life insurance in an amount in shekels that currently represents approximately $2.0 million. We have entered into employment agreements with all of our executive officers, including Mr. Kenneth. Our employment agreements do not specify a minimum employment term, nor do they guarantee the continued service of our executive officers with us. In addition, the enforceability of covenants not to compete in Israel and the United States is subject to limitations and may not be enforceable at all.
 
If our business continues to grow, we will need to add to our research and development and sales and marketing teams, as well as to members of management in order to manage our growth. The process of hiring, training and successfully integrating qualified personnel into our operation is a lengthy and expensive one. The market for qualified personnel is very competitive because of the limited number of people available with the necessary technical skills, sales skills and understanding of our products and technology. This is particularly true in Israel where competition for qualified personnel is intense due to the density of technology companies. Our failure to hire and retain qualified personnel could cause our revenues to decline and impair our ability to meet our research and development and sales objectives.
 
Our business is subject to increasingly complex environmental legislation that may increase our costs and the risk of noncompliance.
 
We face increasing complexity in our product design and procurement operations as we adjust to new and upcoming requirements relating to the material composition of many of our products. For instance, the European Union has adopted certain directives to facilitate the recycling of electrical and electronic equipment sold in the European Union, including the Restriction of the Use of Certain Hazardous Substances in Electrical and Electronic Equipment that restricts the use of lead, mercury and certain other substances in electrical and electronic products placed on the market in the European Union after July 1, 2006. The European Union has also approved a directive on Waste Electrical and Electronic Equipment, which requires that all electrical and electronic equipment placed for sale in the European Union be appropriately labeled regarding waste disposal and contains other obligations regarding the collection and recycling of waste electrical and electronic equipment. In connection with our compliance with these and other environmental laws and regulations, we could incur substantial costs, including research and development costs and costs associated with assuring the supply of compliant components from our suppliers. Similar laws and regulations have been proposed or may be enacted in other regions in which we do business. Other environmental regulation may require us to reengineer our solutions to utilize components that are compatible with these regulations. Such reengineering and component substitution may result in additional costs to us or disrupt our operations or logistics.


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Our international operations expose us to the risk of fluctuation in currency exchange rates.
 
In 2006, we derived the majority of our revenues in U.S. dollars. Although almost all of our revenues were denominated in U.S. dollars, a significant portion of our expenses were denominated in Israeli shekels and to a significantly lesser extent in euros. Our shekel-denominated expenses consist principally of salaries, building leases and related personnel expenses. We anticipate that a material portion of our expenses will continue to be denominated in shekels. If the U.S. dollar weakens against the shekel, there will be a negative impact on our profit margins. We currently do not hedge our currency exposure through financial instruments. In addition, if we wish to maintain the dollar-denominated value of our products in non-U.S. markets, devaluation in the local currencies of our customers relative to the U.S. dollar could cause our customers to cancel or decrease orders or default on payment.
 
We may engage in future acquisitions that could disrupt our business, cause dilution to our shareholders, reduce our financial resources and result in increased expenditures.
 
In the future, we may acquire other businesses, products or technologies. We have not made any acquisitions to date and our ability to make acquisitions is therefore unproven. We may not be able to find suitable acquisition candidates, and we may not be able to complete acquisitions on favorable terms, if at all. If we do complete acquisitions, we may not strengthen our competitive position or achieve our goals, or these acquisitions may be viewed negatively by customers, financial markets or investors. In addition, any acquisitions that we make could pose challenges in integrating personnel, technologies and operations from the acquired businesses and in retaining and motivating key personnel from such businesses. Acquisitions may also disrupt our ongoing operations, divert management from day-to-day responsibilities, increase our expense and adversely impact our business.
 
Under current U.S. and Israeli law, we may not be able to enforce employees’ covenants not to compete and therefore may be unable to prevent our competitors from benefiting from the expertise of some of our former employees.
 
It is our practice to have our employees and subcontractors sign non-compete agreements. These agreements prohibit our employees, if they cease working for us, from competing directly with us or working for our competitors for a period, typically limited to twelve months following the end of employment. Under current U.S. and Israeli law, we may be unable to enforce these agreements and it may be difficult for us to restrict our competitors from acquiring the expertise our former employees acquired while working for us. If we cannot enforce our employees’ non-compete agreements, we may be unable to prevent our competitors from benefiting from the expertise of our former employees.
 
We have not yet evaluated our internal controls over financial reporting in compliance with Section 404 of the Sarbanes-Oxley Act.
 
We are required to comply with the internal control evaluation and certification requirements of Section 404 of the Sarbanes-Oxley Act in our annual report on Form 20-F for the year ending December 31, 2008. We are in the process of determining whether our existing internal controls over financial reporting systems are compliant with Section 404. This process may divert internal resources and will take a significant amount of time and effort to complete. In particular, we have experienced rapid growth during the last three years and may continue to do so in the future. As a result, certain elements of our internal controls have been strained and may need to be enhanced and additional controls and functions implemented. Irrespective of compliance with Section 404, any failure of our internal controls could have a material adverse effect on our stated results of operations and harm our reputation. As a result, we may experience higher than anticipated operating expenses, as well as higher independent auditor fees during the implementation of these changes and thereafter. Further, we may need to hire additional qualified personnel in order for us to comply with Section 404. If we are unable to implement these changes effectively or efficiently, it could harm our operations, financial reporting or financial results and could result in an adverse opinion on internal controls from our independent auditors.


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Risks Related to this Offering
 
There has been no prior market for our ordinary shares and our share price may be volatile.
 
Prior to this offering there has been no public market for our ordinary shares. We cannot predict the extent to which investor interest will lead to the development of an active trading market in our ordinary shares or whether such a market will be sustained. The market price of our ordinary shares may be volatile and could fluctuate substantially due to many factors, including:
 
  •  announcements or introductions of technological innovations or new products, or product enhancements or pricing policies by us or our competitors;
 
  •  disputes or other developments with respect to our or our competitors’ intellectual property rights;
 
  •  announcements of strategic partnerships, joint ventures or other agreements by us or our competitors;
 
  •  recruitment or departure of key personnel;
 
  •  regulatory developments in the markets in which we sell our product;
 
  •  our sale of ordinary shares or other securities in the future;
 
  •  changes in the estimation of the future size and growth of our markets; and
 
  •  market conditions in our industry, the industries of our customers and the economy as a whole.
 
Share price fluctuations may be exaggerated if the trading volume of our ordinary shares is too low. The lack of a trading market may result in the loss of research coverage by securities analysts. Moreover, we cannot assure you that any securities analysts will initiate or maintain research coverage of our company and our ordinary shares. If our future quarterly operating results are below the expectations of securities analysts or investors, the price of our ordinary shares may decline. Securities class action litigation has often been brought against companies following periods of volatility. Any securities litigation claims brought against us could result in substantial expense and divert management’s attention from our business.
 
A total of 12,648,167 or 61.8% of our outstanding ordinary shares following this offering are restricted from immediate resale, but may be sold into the market in the near future. This could cause the market price of our ordinary shares to drop significantly, even if our business is profitable.
 
After this offering, we will have 20,480,554 ordinary shares outstanding. This includes the 7,693,000 ordinary shares we and certain of our shareholders are selling in this offering, which may be resold in the public market immediately after this offering. We expect that the remaining 12,787,554 ordinary shares, representing 62.4% of our total outstanding ordinary shares following this offering, will become available for resale in the public market as shown in the chart below. Our directors and officers, and substantially all of our shareholders, have signed lock-up agreements for a period of 180 days following the date of this prospectus, subject to extension in the case of an earnings release or material news or a material event relating to us. J.P. Morgan Securities Inc. and Merrill Lynch, Pierce, Fenner & Smith Incorporated may, in their sole discretion and without notice, release all or any portion of the ordinary shares subject to lock-up agreements. As restrictions on resale end, the market price of our ordinary shares could drop significantly if the holders of these restricted shares sell them or are perceived by the market as intending to sell them. These factors could also make it more difficult for us to raise additional funds through future offerings of our ordinary shares or other securities.
 
         
Number of Shares/
   
Percentage of Total
   
Outstanding
 
Date of Availability for Resale into the Public Market
 
  139,387 /0.7%   Upon the closing of this offering.
  11,439,924 /55.9%   Up to and including 180 days after the date of this prospectus of which 8,334,640, or 40.7%, are subject to volume limitations under Rule 144.
  1,208,243 /5.9%   More than 180 days after the date of this prospectus.


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After 180 days following this offering, subject to the lock-up agreements described above, holders of 8,334,640 of our ordinary shares will be entitled to request that we register their shares for resale and certain other shareholders have the right to include their shares in any such registration statement or in a registration statement for any public offering we undertake in the future. After this offering we also intend to register on Form S-8 all of the ordinary shares that we may issue under our stock option plans. Once the Form S-8 becomes effective, these may be freely sold in the public market, subject to the lock-up agreements described above. The registration or sale of any of these shares could cause the market price of our ordinary shares to drop significantly. See “Certain Relationships and Related Party Transactions—Registration Rights.”
 
The ownership of our ordinary shares will continue to be highly concentrated, and your interests may conflict with the interests of our existing shareholders.
 
Our executive officers and directors and their affiliates, together with our current significant shareholders, will beneficially own approximately 49.0% of our outstanding ordinary shares upon completion of this offering. Moreover, three of our shareholders, BCF II Belgium Holding SPRL, Pitango Venture Capital and Vertex Venture Capital will beneficially own approximately 40.2% of our outstanding ordinary shares upon completion of this offering. In addition, individual partners of these shareholders serve on our board of directors. Accordingly, these shareholders, acting as a group, could exercise a controlling influence on us and, even if they do not act as a group, will continue to have significant influence over the outcome of corporate actions requiring shareholder approval, including the election of directors, amending our articles of association, raising future capital, any merger, consolidation or sale of all or substantially all of our assets or any other significant corporate transaction. These shareholders could delay or prevent a change of control of our company, even if such a change of control would benefit our other shareholders. The significant concentration of share ownership may adversely affect the trading price of our ordinary shares due to investors’ perception that conflicts of interest may exist or arise.
 
Our U.S. shareholders may suffer adverse tax consequences if we are characterized as a Passive Foreign Investment Company.
 
Generally, if for any taxable year 75% or more of our gross income is passive income, or at least 50% of our assets are held for the production of, or produce, passive income, we would be characterized as a passive foreign investment company for U.S. federal income tax purposes. To determine if at least 50% of our assets are held for the production of, or produce, passive income we may use the market capitalization method for certain periods. Under the market capitalization method, the total asset value of a company would be considered to equal the fair market value of its outstanding shares plus outstanding indebtedness on a relevant testing date. Because the market price of our ordinary shares is likely to fluctuate after this offering, the market price of the shares of technology companies has been especially volatile, and the market price may affect the determination of whether we will be considered a passive foreign investment company, there can be no assurance that we will not be considered a passive foreign investment company for any taxable year. If we are characterized as a passive foreign investment company, our U.S. shareholders may suffer adverse tax consequences, including having gains realized on the sale of our ordinary shares treated as ordinary income, rather than capital gain, the loss of the preferential rate applicable to dividends received on our ordinary shares by individuals who are U.S. holders, and having potentially punitive interest charges apply to the proceeds of share sales. See “Taxation and Government Programs—United States Federal Income Taxation—Passive Foreign Investment Company Considerations.”
 
You will experience immediate and substantial dilution in the net tangible book value of the ordinary shares you purchase in this offering.
 
The initial public offering price of our ordinary shares is expected to exceed substantially the net tangible book value per share of our ordinary shares immediately after this offering. Therefore, based on an assumed initial public offering price of $13.00 per share, if you purchase our ordinary shares in this offering, you will suffer, as of March 31, 2007, immediate dilution of $8.97 per share or $8.64 if the underwriters exercise their option to purchase additional ordinary shares. As a result of this dilution, as of March 31, 2007, investors


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purchasing ordinary shares from us in this offering will have contributed 50.0% of the total amount of our total gross funding to date but will only own 28.3% of our equity. If outstanding options and warrants to purchase our ordinary shares are exercised in the future, you will experience additional dilution.
 
Our management will have broad discretion over the use of proceeds from this offering and may not obtain a favorable return on the use of these proceeds.
 
Our management will have broad discretion in determining how to spend the net proceeds from this offering and may spend the proceeds in a manner that our shareholders may not deem desirable. We currently intend to use the net proceeds from this offering to fund our research and development activities, expand our business development and marketing activities, repay existing debt, and other general corporate purposes and working capital. We may also use a portion of the net proceeds to acquire or invest in complementary companies, products or technologies. We cannot assure you that these uses or any other use of the net proceeds of this offering will yield favorable returns or results.
 
If you hold 10.0% or more of our shares, you may be subject to adverse United States federal income tax consequences if we are classified as a Controlled Foreign Corporation.
 
Each “Ten Percent Shareholder” in a non-U.S. corporation that is classified as a “controlled foreign corporation,” or a CFC, for United States federal income tax purposes in any taxable year is required to include in income for U.S. federal tax purposes such “Ten Percent Shareholder’s” pro rata share of the CFC’s “Subpart F income” and investment of earnings in U.S. property, even if the CFC has made no distributions to its shareholders. A non-U.S. corporation will be classified as a CFC for United States federal income tax purposes in any taxable year in which “Ten Percent Shareholders” own, directly or indirectly, more than 50.0% of either the total combined voting power of all classes of stock of such corporation entitled to vote or of the total value of the stock entitled to vote of such corporation. A “Ten Percent Shareholder” is a United States person (as defined by the U.S. Internal Revenue Code of 1986, as amended (the “Code”)) who owns or is considered to own, on any day during such taxable year, 10.0% or more of the total combined voting power of all classes of stock entitled to vote of such corporation.
 
Although we may have been a CFC in the beginning of the 2007 tax year, we expect that, because of the anticipated dispersion of our share ownership as a result of this offering, we will not be classified as a CFC after the offering. It is possible, however, that a shareholder treated as a United States person for United States federal income tax purposes will acquire, directly or indirectly, enough shares to be treated as a Ten Percent Shareholder after application of the constructive ownership rules and, together with any other Ten Percent Shareholders of the Company, cause the Company to be treated as a CFC for United States federal income tax purposes. Holders should consult their own tax advisors with respect to the potential adverse U.S. tax consequences of becoming a Ten Percent Shareholder in a CFC.
 
We may need to raise additional capital in the future and may be unable to do so on acceptable terms.
 
We believe that the net proceeds from this offering, together with our existing cash balances and cash generated from operations, will be sufficient to meet our anticipated cash needs for working capital and capital expenditures for at least the next twelve months. If our estimates of revenues, expenses or capital or liquidity requirements change or are inaccurate or if cash generated from operations is insufficient to satisfy our liquidity requirements, we may seek to sell additional equity or arrange additional debt financing. We cannot be certain that we will be able to sell additional equity or arrange additional debt financing on commercially reasonable terms or at all, which could limit our ability to grow and carry out our business plan, or that any such additional financing, if raised through the issuance of equity securities, will not be dilutive to our existing shareholders.


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Risks Relating to our Location in Israel
 
Conditions in Israel could adversely affect our business.
 
We are incorporated under Israeli law and our principal offices, and research and development facilities are located in Israel. Accordingly, political, economic and military conditions in Israel directly affect our business. Since the State of Israel was established in 1948, a number of armed conflicts have occurred between Israel and its Arab neighbors. Although Israel has entered into various agreements with Egypt, Jordan and the Palestinian Authority, there has been an increase in unrest and terrorist activity, which began in September 2000 and has continued with varying levels of severity into 2007. In mid-2006, a war took place between Israel and Hezbollah in Lebanon, resulting in thousands of rockets being fired from Lebanon up to approximately 50 miles into Israel. Furthermore, several countries, principally in the Middle East, still restrict doing business with Israel and Israeli companies, and additional countries may impose restrictions on doing business with Israel and Israeli companies if hostilities in Israel continue or increase. These restrictions may limit materially our ability to sell our solutions to companies in these countries. Any hostilities involving Israel or the interruption or curtailment of trade between Israel and its present trading partners, or a significant downturn in the economic or financial condition of Israel, could adversely affect our operations and product development, cause our revenues to decrease and adversely affect the share price of publicly traded companies having operations in Israel, such as us. Additionally, any hostilities involving Israel may have a material adverse effect on our facilities or on the facilities of our local suppliers and manufacturers in which event, all or a portion of our inventory may be damaged, and our ability to deliver products to customers may be materially adversely affected.
 
Our operations may be disrupted by the obligations of personnel to perform military service.
 
As of March 31, 2007, we had 150 employees of whom 125 were based in Israel. Our employees in Israel, including executive officers, may be called upon to perform up to 31 days (in some cases more) of annual military reserve duty until they reach age 49 and, in emergency circumstances, could be called to active duty. In response to increased tension and hostilities, there have been since September 2000 occasional call-ups of military reservists, including in connection with the mid-2006 war in Lebanon, and it is possible that there will be additional call-ups in the future. Our operations could be disrupted by the absence of a significant number of our employees related to military service or the absence for extended periods of one or more of our key employees for military service. Such disruption could materially adversely affect our business and results of operations. Additionally, the absence of a significant number of the employees of our suppliers and contract manufacturers related to military service or the absence for extended periods of one or more of their key employees for military service may disrupt their operations in which event our ability to deliver products to customers may be materially adversely affected.
 
Our operations may be affected by negative economic conditions or labor unrest in Israel.
 
General strikes or work stoppages, occasionally carried out or threatened by Israeli trade unions due to labor disputes may have an adverse effect on the Israeli economy and on our business, including our ability to deliver products to our customers and to receive raw materials from our suppliers in a timely manner. These general strikes or work stoppages may prevent us from shipping our assembled products from Israel to our OEM customers, which could have a material adverse affect on our results of operations.
 
The tax benefits that are available to us require us to meet several conditions and may be terminated or reduced in the future, which would increase our costs and taxes.
 
Our investment program in equipment at our facility in Herzeliya Pituach, Israel has been granted approved enterprise status and we are therefore eligible for tax benefits under the Israeli Law for the Encouragement of Capital Investments, 1959, referred to as the Investment Law. We expect to utilize these tax benefits after we utilize our net operating loss carry forwards. As of December 31, 2006, the end of our last fiscal year, our net operating loss carry forwards for Israeli tax purposes amounted to approximately $43 million. To remain eligible for these tax benefits, we must continue to meet certain conditions stipulated


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in the Investment Law and its regulations and the criteria set forth in the specific certificate of approval. If we do not meet these requirements, the tax benefits would be canceled and we could be required to refund any tax benefits that we have received. These tax benefits may not be continued in the future at their current levels or at any level.
 
Effective April 1, 2005, the Israeli Law for the Encouragement of Capital Investments was amended. As a result, the criteria for new investments qualified to receive tax benefits were revised. No assurance can be given that we will, in the future, be eligible to receive additional tax benefits under this law. The termination or reduction of these tax benefits would increase our tax liability in the future, which would reduce our profits or increase our losses. Additionally, if we increase our activities outside of Israel, for example, by future acquisitions, our increased activities might not be eligible for inclusion in Israeli tax benefit programs.
 
See “Taxation and Government Programs—Israeli Tax Considerations and Government Programs—Law for the Encouragement of Capital Investments, 1959.”
 
The government grants we have received for research and development expenditures restrict our ability to manufacture products and transfer technologies outside of Israel and require us to satisfy specified conditions. If we fail to comply with such restrictions or these conditions, we may be required to refund grants previously received together with interest and penalties, and may be subject to criminal charges.
 
We have received grants from the government of Israel through the Office of the Chief Scientist of the Ministry of Industry, Trade and Labor, for the financing of a portion of our research and development expenditures in Israel, pursuant to the provisions of The Encouragement of Industrial Research and Development Law, 1984, referred to as the Research and Development Law. Under Israeli law and the approved plans, royalties on the revenues derived from sales of all of our products are payable to the Israeli government, generally at the rate of 3.5%, up to the amount of the received grants as adjusted for fluctuation in the U.S. dollar/shekel exchange rate. The amounts received after January 1, 1999, bear interest equal to the 12-month London Interbank Offered Rate applicable to dollar deposits that is published on the first business day of each calendar year. Royalties are paid on our consolidated revenues. We did not apply for or receive grants in 2006, although we did receive grants totaling $5.6 million through December 31, 2005. As of March 31, 2007, the royalty amount payable to the Office of the Chief Scientist was approximately $4.4 million, including accrued interest.
 
The terms of the grants prohibit us from manufacturing products outside of Israel or transferring intellectual property rights in technologies developed using these grants inside or outside of Israel without special approvals. Even if we receive approval to manufacture our products outside of Israel, we may be required to pay an increased total amount of royalties, which may be up to 300% of the grant amount plus interest, depending on the manufacturing volume that is performed outside of Israel. This restriction may impair our ability to outsource manufacturing or engage in similar arrangements for those products or technologies. Know-how developed under an approved research and development program may not be transferred to any third parties, except in certain circumstances and subject to prior approval. In addition, if we fail to comply with any of the conditions and restrictions imposed by the Research and Development Law or by the specific terms under which we received the grants, we may be required to refund any grants previously received together with interest and penalties, and may be subject to criminal charges. In recent years, the government of Israel has accelerated the rate of repayment of the Office of Chief Scientist grants and may further accelerate them in the future.
 
It may be difficult to enforce a U.S. judgment against us, our officers and directors and the Israeli experts named in this prospectus in Israel or the United States, or to assert U.S. securities laws claims in Israel or serve process on our officers and directors and these experts.
 
We are incorporated in Israel. The majority of our executive officers and directors and the Israeli experts named in this prospectus are not residents of the United States, and the majority of our assets and the assets of these persons are located outside the United States. Therefore, it may be difficult for an investor, or any other person or entity, to enforce a U.S. court judgment based upon the civil liability provisions of the U.S. federal


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securities laws against us or any of these persons in a U.S. or Israeli court, or to effect service of process upon these persons in the United States. Additionally, it may be difficult for an investor, or any other person or entity, to assert U.S. securities law claims in original actions instituted in Israel. Israeli courts may refuse to hear a claim based on a violation of U.S. securities laws on the grounds that Israel is not the most appropriate forum in which to bring such a claim. Even if an Israeli court agrees to hear a claim, it may determine that Israeli law and not U.S. law is applicable to the claim. If U.S. law is found to be applicable, the content of applicable U.S. law must be proved as a fact which can be a time-consuming and costly process. Certain matters of procedure will also be governed by Israeli law. There is little binding case law in Israel addressing the matters described above. See “Enforceability of Civil Liabilities.”
 
Your rights and responsibilities as a shareholder will be governed by Israeli law and differ in some respects from those under Delaware law.
 
Since we are an Israeli company, the rights and responsibilities of our shareholders are governed by our articles of association and by Israeli law. These rights and responsibilities differ in some respects from the rights and responsibilities of shareholders in a Delaware corporation. In particular, a shareholder of an Israeli company has a duty to act in good faith towards the company and other shareholders and to refrain from abusing his, her or its power in the company, including, among other things, in voting at the general meeting of shareholders on certain matters. In addition, a shareholder who knows that it possesses the power to determine the outcome of a shareholders’ vote or to appoint or prevent the appointment of a director or executive officer in the company has a duty of fairness towards the company. However, Israeli law does not define the substance of this duty of fairness. Because Israeli corporate law has undergone extensive revisions in recent years, there is little case law available to assist in understanding the implications of these provisions that govern shareholder behavior.
 
Provisions of Israeli law and our articles of association may delay, prevent or make undesirable an acquisition of all or a significant portion of our shares or assets.
 
Our articles of association contain certain provisions that may delay or prevent a change of control. These provisions include a classified board of directors and supermajority provisions to amend certain provisions of our articles of association. In addition, Israeli corporate law regulates acquisitions of shares through tender offers and mergers, requires special approvals for transactions involving significant shareholders and regulates other matters that may be relevant to these types of transactions. These provisions of Israeli law could have the effect of delaying or preventing a change in control and may make it more difficult for a third party to acquire us, even if doing so would be beneficial to our shareholders, and may limit the price that investors may be willing to pay in the future for our ordinary shares. Furthermore, Israeli tax considerations may make potential transactions undesirable to us or to some of our shareholders. See “Description of Share Capital—Anti-Takeover Measures” and “Acquisitions under Israeli Law.”


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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
 
This prospectus contains forward-looking statements. We have based these forward-looking statements on our current expectations and projections about future events. These statements include but are not limited to:
 
  •  statements regarding the expected growth of the grid computing interconnect market;
 
  •  statements regarding our new or enhanced products, including the DDR chipset;
 
  •  statements regarding the amount and timing of the recognition of deferred revenues;
 
  •  statements regarding our dependence on a few OEM customers and expectations as to any increase in the amount and proportion of our revenues derived from OEM customers;
 
  •  expectation as to the market opportunities for our products, as well as our ability to take advantage of those opportunities;
 
  •  statements as to our ability to protect our intellectual property and avoid infringing upon others’ intellectual property;
 
  •  statements regarding our estimates of future performance, sales, gross margin, expenses (including stock-based compensation expenses) and cost of revenue;
 
  •  statements as to our ability to meet anticipated cash needs based on our current business plan;
 
  •  statements as to our expected treatment under Israeli and U.S. federal tax legislation and the impact that Israeli tax and corporate legislation may have on our operations; and
 
  •  our intended uses of the proceeds from this offering.
 
These statements may be found in the sections of this prospectus entitled “Prospectus Summary,” “Risk Factors,” “Use of Proceeds,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business” and in this prospectus generally, including the section of this prospectus entitled “Business—Overview” and “Business—Industry Background,” which contains information obtained from independent industry sources. Actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including all the risks discussed in “Risk Factors” and elsewhere in this prospectus.
 
In addition, statements that use the terms “believe,” “expect,” “plan,” “intend,” “estimate,” “anticipate” and similar expressions are intended to identify forward-looking statements. All forward-looking statements in this prospectus reflect our current views about future events and are based on assumptions and are subject to risks and uncertainties that could cause our actual results to differ materially from future results expressed or implied by the forward-looking statements. Many of these factors are beyond our ability to control or predict. You should not put undue reliance on any forward-looking statements. Unless we are required to do so under U.S. federal securities laws or other applicable laws, we do not intend to update or revise any forward-looking statements.
 
The forward looking statements contained in this prospectus are excluded from the safe harbor protection provided by the Private Securities Litigation Reform Act of 1995 and Section 27A of the Securities Act of 1933, as amended.


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USE OF PROCEEDS
 
Assuming an initial public offering price of $13.00 per share, the midpoint of the estimated initial public offering price range, we estimate that we will receive total net proceeds from this offering of $67.5 million, after deducting the underwriting discount and estimated offering expenses payable by us. A $1.00 increase (decrease) in the assumed initial public offering price of $13.00 per share would increase (decrease) the net proceeds from this offering by $5.4 million, assuming the number of shares offered, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discount and estimated offering expenses payable by us.
 
We intend to use the net proceeds of this offering for research and development activities, expand our business development and marketing activities, and for general corporate purposes and working capital. We also intend to use a portion of the net proceeds to repay in full a loan with an outstanding principal amount of $5.0 million, which is required to be repaid in 24 equal monthly installments of principal and accrued interest commencing January 1, 2008. The loan bears interest at the Wall Street Journal prime-lending rate plus 4.00%, which totaled 12.25% as of March 31, 2007. We may also use a portion of the net proceeds to acquire or invest in complementary companies, products or technologies, although we currently do not have any acquisitions or investments planned.
 
We will have broad discretion in the way that we use the net proceeds of this offering. The amounts that we actually spend for the purposes described above may vary significantly and will depend, in part, on the timing and amount of our future revenues.
 
Pending use of the net proceeds as described above, we intend to invest the net proceeds in interest-bearing, investment-grade instruments with maturities of less than one year or deposit the net proceeds in bank accounts in Israel or outside of Israel.
 
We will not receive any of the proceeds from the sale of shares by the selling shareholders.
 
DIVIDEND POLICY
 
We have never declared or paid any cash dividends on our ordinary shares and we do not anticipate paying any cash dividends on our ordinary shares in the future. We currently intend to retain all future earnings to finance our operations and to expand our business. Any future determination relating to our dividend policy will be made at the discretion of our board of directors and will depend on a number of factors, including future earnings, capital requirements, the provisions of applicable Israeli law, financial condition and future prospects and other factors our board of directors may deem relevant.


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CAPITALIZATION
 
The following table presents our capitalization as of March 31, 2007:
 
  •  on an actual basis;
 
  •  on a pro forma basis to give effect to the conversion of all of our issued and outstanding preferred shares into 13,946,624 ordinary shares on a one-for-one basis; and
 
  •  on a pro forma as adjusted basis to give effect to the sale by us of 5,770,000 ordinary shares in this offering at the initial public offering price and the receipt by us of the estimated net proceeds of $62.5 million, after deducting the underwriting discount and estimated offering expenses payable by us, and the application of a portion of such net proceeds to repay a loan with an outstanding principal amount of $5.0 million as described under “Use of Proceeds.”
 
You should read this table in conjunction with “Selected Consolidated Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this prospectus.
 
                         
    As of March 31, 2007  
                Pro Forma
 
    Actual     Pro Forma     As Adjusted  
    (unaudited)
 
    (in thousands)  
 
Long-term loan
  $ 5,000     $ 5,000     $  
                         
Warrant on redeemable convertible preferred shares
    921              
Temporary equity:
                       
Series C through E2 preferred shares; 14,183,326 shares authorized, actual and zero shares authorized, pro forma and pro forma as adjusted; 13,946,624 shares issued and outstanding, actual; zero issued and outstanding, pro forma and pro forma as adjusted
    76,167              
Shareholders’ equity (capital deficiency):
                       
Ordinary shares: 18,297,721 shares authorized, actual, 32,481,047 authorized, pro forma, and 200,000,000 shares authorized, pro forma as adjusted; 677,465 shares issued and outstanding, actual; 14,624,089 shares issued and outstanding, pro forma; 20,394,089 shares issued and outstanding, pro forma as adjusted
    2,413       53,160       53,174  
Junior liquidation securities: 180,000 securities authorized, 179,998 actual, none authorized pro forma
    1,800              
Additional paid-in capital
          28,141       95,627  
Accumulated deficit
    (66,285 )     (66,285 )     (66,285 )
                         
Total shareholders’ equity (capital deficiency)
    (62,072 )     15,016       82,516  
                         
Total capitalization
  $ 20,016     $ 20,016     $ 82,516  
                         
 
A $1.00 increase (decrease) in the assumed initial public offering price of $13.00 would increase (decrease) each of additional paid-in capital and total stockholders’ equity by $5.4 million, assuming the number of ordinary shares offered by us, as set forth on the cover of this prospectus, remains the same and after deducting the estimated underwriting discount and offering expenses payable by us.
 
The preceding table excludes as of March 31, 2007:
 
  •  3,604,976 ordinary shares reserved for issuance under our share option plans, of which options to purchase 2,977,803 ordinary shares at a weighted average exercise price of $1.26 per share and options to purchase 6,127 ordinary shares at an exercise price of $320.00 per share have been granted; and
 
  •  140,625 ordinary shares issuable upon the exercise of warrants to purchase Series E preferred shares granted to an entity that made a loan to us at an exercise price of $4.00 per share and 357 ordinary shares issuable upon the exercise of warrants to purchase ordinary shares granted to an Israeli bank and to an Israeli non-profit organization at a weighted average exercise price of $1260.70 per share.


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DILUTION
 
Our pro forma consolidated net tangible book value as of March 31, 2007 was $14.7 million, or $1.01 per ordinary share. Pro forma consolidated net tangible book value per share represents consolidated tangible assets less consolidated liabilities divided by the number of ordinary shares outstanding on a pro forma basis after giving effect to the conversion of all our issued and outstanding preferred shares into ordinary shares. Our pro forma as adjusted consolidated net tangible book value as of March 31, 2007 would have been $82.2 million or $4.03 per ordinary share after giving effect to:
 
  •  the conversion of all of our issued and outstanding preferred shares into 13,946,624 ordinary shares on a one-for-one basis; and
 
  •  the sale by us of 5,770,000 ordinary shares in this offering at the initial public offering price and the receipt by us of the estimated net proceeds of $67.5 million, after deducting the underwriting discount and estimated offering expenses payable by us.
 
This represents an immediate increase in pro forma consolidated net tangible book value of $3.02 per ordinary share to existing shareholders and an immediate dilution of $8.97 per ordinary share to new investors purchasing ordinary shares in this offering. Dilution per share represents the difference between the price per share to be paid by new investors for the ordinary shares sold in this offering and the pro forma consolidated net tangible book value per share immediately after this offering. The following table illustrates this per share dilution:
 
                 
Assumed initial public offering price per share
          $ 13.00  
Pro forma consolidated net tangible book value per share as of March 31, 2007
  $ 1.01          
Increase in pro forma consolidated net tangible book value per share attributable to new investors in this offering
    3.02          
                 
Pro forma consolidated net tangible book value per share after this offering
            4.03  
                 
Dilution per share to new investors
          $ 8.97  
                 
 
A $1.00 increase (decrease) in the assumed initial public offering price of $13.00 per share would increase (decrease) the net tangible book value by $5.4 million, the net tangible book value per share after this offering by $0.26 per share and the dilution in net tangible book value per share to investors in this offering by $0.74 per share, assuming that the number of ordinary shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discount and offering expenses payable by us.
 
The following table presents the differences between the total consideration paid to us and the average price per share paid by existing shareholders and by new investors purchasing ordinary shares in this offering, before deducting the underwriting discount and estimated offering expenses payable by us:
 
                                         
                            Average
 
    Ordinary Shares Purchased     Total Consideration     Price
 
    Number     Percent     Amount     Percent     per Share  
 
Existing shareholders
    14,624,089       71.7 %   $ 75,061,379       50.0 %   $ 5.13  
New investors
    5,770,000       28.3       75,010,000       50.0       13.00  
                                         
Total
    20,394,089       100.0 %   $ 150,071,379       100.0 %        
                                         
 
The preceding table excludes as of March 31, 2007:
 
  •  3,604,976 ordinary shares reserved for issuance under our share option plans, of which options to purchase 2,977,803 ordinary shares at a weighted average exercise price of $1.26 per share and options to purchase 6,127 ordinary shares at an exercise price of $320.00 per share have been granted; and
 
  •  140,625 ordinary shares issuable upon the exercise of warrants to purchase Series E preferred shares granted to an entity that made a loan to us at an exercise price of $4.00 per share and 357 ordinary shares issuable upon the exercise of warrants to purchase ordinary shares granted to an Israeli bank and to an Israeli non-profit organization at a weighted average exercise price of $1260.70 per share.


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SELECTED CONSOLIDATED FINANCIAL DATA
 
You should read the following selected consolidated financial data in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes included elsewhere in this prospectus. The consolidated statements of operations data for the years ended December 31, 2004, 2005 and 2006 and the consolidated balance sheet data as of December 31, 2005 and 2006 are derived from our audited consolidated financial statements included elsewhere in this prospectus, which have been prepared in accordance with generally accepted accounting principles in the United States. The consolidated statements of operations for the years ended December 31, 2002 and 2003 and the consolidated balance sheet data as of December 31, 2002, 2003 and 2004 have been derived from our audited consolidated financial statements which are not included in this prospectus. The consolidated statements of operations data for the three months ended March 31, 2006 and 2007 and the consolidated balance sheet data as of March 31, 2007 are derived from our unaudited consolidated financial statements that are included elsewhere in this prospectus. In the opinion of management, these unaudited interim consolidated financial statements include all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of our financial position and operating results for these periods. Results for interim periods are not necessarily indicative of the results that may be expected for the entire year.
 
                                                             
          Three Months Ended
     
    Year Ended December 31,     March 31,      
    2002     2003     2004     2005     2006     2006     2007      
                                  (unaudited)      
    (in thousands, except share and per share data)      
 
Consolidated statements of operations data:
                                                           
Revenues
  $ 60     $ 1,179     $ 4,916     $ 15,366     $ 30,427     $ 4,389     $ 8,580      
Cost of revenues
    21       854       3,565       10,830       19,223       2,846       5,391      
                                                             
Gross profit
    39       325       1,351       4,536       11,204       1,543       3,189      
Operating expenses:
                                                           
Research and development, gross(1)
    3,763       4,612       6,658       6,538       7,694       2,003       2,714      
Less royalty-bearing participation
    819       1,325       700       621                        
                                                             
Research and development, net
    2,944       3,287       5,958       5,917       7,694       2,003       2,714      
                                                             
Sales and marketing(1)
    1,413       1,703       4,327       6,045       8,281       1,604       2,106      
General and administrative(1)
    1,132       1,419       2,271       2,681       3,534       711       979      
                                                             
Total operating expenses
    5,489       6,409       12,556       14,643       19,509       4,318       5,799      
                                                             
Loss from operations
    (5,450 )     (6,084 )     (11,205 )     (10,107 )     (8,305 )     (2,775 )     (2,610 )    
Financial income (expenses), net
    664       230       144       191       (460 )     102       (355 )    
                                                             
Loss before income tax expenses
    (4,786 )     (5,854 )     (11,061 )     (9,916 )     (8,765 )     (2,673 )     (2,965 )    
Income tax expenses
                      (111 )     (84 )           (35 )    
                                                             
Net loss
    (4,786 )     (5,854 )     (11,061 )     (10,027 )     (8,849 )     (2,673 )     (3,000 )    
                                                             
Accretion of redeemable convertible preferred shares(2)
    (1,762 )     (1,977 )     (2,144 )     (2,959 )     (3,573 )     (893 )     (1,054 )    
                                                             
Benefit to Series A, B and B1 shareholders
                (1,800 )                            
                                                             
Charge for beneficial conversion feature of Series D and D2 redeemable convertible preferred shares
                (362 )     (482 )     (535 )     (134 )     (149 )    
                                                             
Net loss attributable to ordinary shareholders
  $ (6,548 )   $ (7,831 )   $ (15,367 )   $ (13,468 )   $ (12,957 )   $ (3,700 )   $ (4,203 )    
                                                             


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          Three Months Ended
     
    Year Ended December 31,     March 31,      
    2002     2003     2004     2005     2006     2006     2007      
                                  (unaudited)      
    (in thousands, except share and per share data)      
 
Net loss per share attributable to ordinary shareholders — basic and diluted
  $ (15,553 )   $ (18,600 )   $ (29.67 )   $ (21.16 )   $ (19.92 )   $ (5.73 )   $ (6.30 )    
                                                             
Weighted average number of ordinary shares used in computing net loss per share attributable to ordinary shareholders — basic and diluted
    421       421       517,926       636,536       650,476       645,419       667,631      
                                                             
Pro forma net loss per share attributable to ordinary shareholders — basic and diluted (unaudited)(3)
                                  $ (0.69 )           $ (0.22 )    
                                                             
Weighted average number of ordinary shares used in computing pro forma net loss per share attributable to ordinary shareholders — basic and (unaudited)(3)
                                    12,794,446               13,776,282      
                                                             
 
                                                 
    As of December 31,     As of March 31,
 
    2002     2003     2004     2005     2006     2007  
                                  (unaudited)  
    (in thousands)  
 
Consolidated balance sheet data:
                                               
Cash and cash equivalents
  $ 3,554     $ 3,977     $ 5,582     $ 11,846     $ 10,237     $ 17,221  
Restricted deposit
                251       256       267       269  
Working capital
    9,230       2,517       6,437       13,642       11,328       19,733  
Total assets
    10,693       6,687       11,583       20,548       30,403       41,789  
Long-term loan
                            5,000       5,000  
Total liabilities
    3,028       4,841       4,085       6,215       24,591       27,694  
Redeemable convertible preferred shares
    22,780       24,757       39,266       59,482       63,590       76,167  
Accumulated deficit
    (22,899 )     (28,753 )     (39,814 )     (49,841 )     (61,943 )     (66,285 )
Total shareholders’ equity (capital deficiency)
    (15,115 )     (22,911 )     (31,768 )     (45,149 )     (57,778 )     (62,072 )
 
 
(1) Includes share-based compensation expense related to options granted to employees and others as follows:
 
                                                         
          Three Months Ended
 
    Year Ended December 31,     March 31,  
    2002     2003     2004     2005     2006     2006     2007  
                                  (unaudited)  
    (in thousands)  
 
Research and development, net
  $  —     $  —     $     $ 9     $ 59     $ 14     $ 18  
Sales and marketing
                            90       21       26  
General and administrative
          35       382       65       161       33       73  
                                                         
Total
  $     $ 35     $ 382     $ 74     $ 310     $ 68     $ 117  
                                                         
 
 
(2) Accretion of redeemable convertible preferred shares represents the original purchase price plus accrued dividends calculated using the interest method. Certain holders of our preferred shares have the option, after March 7, 2009, to require us to redeem all of the preferred shares for an amount equal to the greater

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of (i) the original purchase price plus accrued dividends (and, with respect to the Series D preferred shares, plus certain interest payments) and (ii) the then current fair market value of such shares. The redemption option and the related accretion of the preferred shares will terminate upon conversion of the preferred shares into ordinary shares upon the closing of this offering.
 
(3) In connection with the sale of our Series E preferred shares in 2004, our Series A, Series B and Series B1 preferred shares were converted into ordinary shares. At the time of this conversion, we issued junior liquidation securities to the holders of such shares, which entitle the holders to an aggregate payment of $1.8 million, following payment of certain required amounts to the holders of our Series C, D, E and E2 preferred shares, if we complete a merger transaction or are acquired or liquidated. The junior liquidation securities do not have voting rights and will be cancelled upon the closing of this offering for no consideration.
 
(4) Pro forma basic and diluted loss per ordinary share give effect to the conversion upon the closing of this offering, assuming such closing occurred on December 31, 2006, of all of our issued and outstanding preferred shares into ordinary shares. See Note 2w to our consolidated financial statements for an explanation of the number of shares used in computing per share data.


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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
The following management’s discussion and analysis of financial condition and results of operations contains forward-looking statements which involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth under “Risk Factors” and elsewhere in this prospectus. We assume no obligation to update forward-looking statements or the risk factors. You should read the following discussion in conjunction with our consolidated financial statements and related notes included elsewhere in this prospectus.
 
Overview
 
We design and develop server and storage switching and software solutions that enable high-performance grid computing within the data center. Our solutions allow one or more discrete computing clusters to be linked together as a single unified computing resource, or fabric. We create this unified fabric by integrating high-performance switching with dynamic management and provisioning software. We refer to our server and storage switching and software solutions as the Voltaire Grid Backbonetm.
 
We were incorporated and commenced operations in 1997. Between 1997 and 2001, we developed, manufactured and sold data security products. In 2001, we shifted our business plan to focus on developing grid computing switches and software for the data center, primarily based on the InfiniBand grid computing interconnect architecture. Between 2001 and 2003, we continued to develop our technology and in 2003 we made our first commercial shipments of our Internet Protocol routers and first generation InfiniBand Switch Router, or ISR, 6000 and ISR 9600 switches, host channel adapters and GridStacktm software. In 2004, we introduced our Grid Directortm director-class switches, in 2005 we introduced our Grid Switchtm edge switches, and in 2006 we began developing solutions for 20 Gigabit server switching, 10 Gigabit Ethernet routing and enterprise software for grid infrastructure management. Throughout our history, we have been funded through a combination of issuances of preferred shares, redeemable preferred shares, venture loans and cash flow from operations.
 
Our solutions are based on the InfiniBand grid computing interconnect architecture, which competes with other grid computing architectures, such as Ethernet, Fibre Channel and other proprietary technologies. Historically, more than half of our end customers have been governmental, educational and research institutions. More recently, we have expanded into enterprise markets, including oil and gas, manufacturing, life sciences, entertainment and financial services. Enterprise customers have traditionally used products based on the Ethernet architecture and must therefore switch to an InfiniBand-based architecture to adopt our server and storage switching and software solutions. A key component of our growth strategy is to collaborate with independent software vendors, or ISVs, that have expertise in key vertical markets, such as financial services and manufacturing, and work together to design solutions that meet the needs of end customers in these vertical markets. We seek to leverage our relationships with our OEM customers and ISVs to achieve greater penetration across certain key vertical markets.
 
We sell our products primarily through server original equipment manufacturers, or OEMs, which incorporate our products into their solutions, as well as through value-added resellers and systems integrators. Sales to our OEM customers are made on the basis of purchase orders that are issued pursuant to product purchase agreements or statements of work. Due to the nature of our OEM strategy, we derive the majority of our revenues from sales to a limited number of large customers. Sales to three OEM customers accounted for 58% of our revenues in 2005, 63% of our revenues in 2006 and 67% of our revenues in the three months ended March 31, 2007. We believe that our revenues will continue to be highly concentrated among a relatively small number of OEM customers for the foreseeable future.
 
Our OEM customers generally do not carry any, or any significant, inventory of our products. We have experienced significant changes in the percentage of total annual sales represented by each of our OEM customers. These fluctuations were due to significant sales by one OEM customer to a particular end customer during a particular year. As a result, in addition to the impact on our results of operations of seasonal fluctuations in revenues, our quarterly results of operations also are impacted by the sales cycles of our OEM


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customers with respect to their end customers. In particular, large purchases by a small number of end customers are a significant contributor to our revenues from our OEM customers. For example, based on our internal tracking data we believe that approximately 35% of our revenues were derived from sales by our OEM customers to two end customers in 2006. If a significant order by an end customer of one of our OEM customers is deferred until a subsequent quarter, we may experience significant fluctuations in our quarterly results of operations. We expect this concentration of our sales among end customers to decrease in the future, although we expect to continue to have significant revenue concentration among our OEM customers.
 
Our current statement of work with IBM expires on November 19, 2007. The initial term of our agreement with Hewlett-Packard Company, or HP, expired on October 8, 2006 upon which it automatically renewed for successive one year periods. The agreement can be terminated at will by us upon 60 days’ notice and by HP upon 90 days’ notice. Additionally, in the event of a breach, the non-breaching party may terminate this agreement if the other party fails to cure such breach within 45 days after receiving notice of such breach by the non-breaching party. To date, we have made all of our sales to Sun Microsystems pursuant to purchase orders that are not governed by the terms of a master supply agreement. In November 2006, we signed a master supply agreement with Sun Microsystems which, at Sun Microsystems’ election, may govern any purchase orders issued by it. The initial term of the agreement expires in 2009 after which it will automatically renew for successive one-year terms unless terminated by either party upon 180 days notice. We cannot predict with certainty what impact, if any, an expiration or termination of any of these agreements would have on our results of operations since none of our OEM agreements contain minimum purchase requirements and because we cannot predict which OEM will receive a design win from an end-customer. Nevertheless, the termination or expiration of an agreement with a large OEM customer could have a material adverse impact on our revenues and operating results.
 
We currently rely on Mellanox Technologies Ltd. as our sole-source supplier for the InfiniBand switching application-specific integrated circuit, or ASIC, the main component used in our Grid Director director-class switches and Grid Switch edge switches. The ASICs constitute a significant portion of our cost of revenues. If Mellanox is unable to supply the switch chip on a timely basis or in the quantities that we require, we would likely be unable to manufacture our switching products without adopting a different industry standard solution in place of InfiniBand. This would require significant changes to our products that would take time to complete if we are able to do so successfully. In addition, our cost of revenues may be impacted negatively by any disruption in the supply of this component, including as a result of higher-priced alternative components we may be forced to purchase in connection with product reconfigurations.
 
We subcontract the manufacturing, assembly and testing for our products to two contract manufacturers, Sanmina-SCI Corporation and Zicon Ltd. As a result, our business has relatively low capital requirements. We currently have offices in North America, Europe, the Middle East and Asia-Pacific. We will seek to extend our geographic reach by adding to our sales and marketing and support and services teams in order to expand sales of our Grid Backbone.
 
Key Business Metrics
 
We consider the following metrics to be important in analyzing our results of operations:
 
Revenues.  We closely monitor our quarterly and annual revenues as a measure of our business performance. We derive our revenues from sales of, and to a lesser extent provisions of service for, our server and storage switching and software solutions. Our revenues are affected by seasonal fluctuations and by the sales cycles of our OEM customers with respect to their end customers. We expect that our quarterly results may fluctuate from period to period and may not always be fully reflective of our overall business and prospects. As a result, we believe that reviewing both quarterly and annual results together may provide a better overall measure of our business than reviewing any individual quarter or consecutive series of quarters in isolation.


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Gross margins.  A key component of our growth objectives is to maintain and improve our gross margins. Our gross margins have increased from 27% in 2004 to 30% in 2005 and 37% in 2006 and in the three months ended March 31, 2007. We analyze the following two metrics which impact our gross margins:
 
  •  Economies of scale.  Our historical gross margins improved primarily due to reductions in costs of materials and manufacturing overhead due to higher production volumes. We expect to continue to reduce these costs as a percentage of revenues if we maintain similar sales growth. We plan to continue to seek opportunities to reduce our cost of revenues in the future by taking advantage of economies of scale arising from increased manufacturing volume, which will allow us to negotiate lower costs of materials and manufacturing uplifts.
 
  •  Product mix.  The mix of products that we sell directly impacts our gross margins. Our ability to increase sales of our higher margin products while reducing sales of lower-margin products as a percentage of revenue is an important element of implementing our growth strategy. We will seek to increase our gross margins in the future by increasing sales of our Grid Director ISR 9288 and ISR 9096 director-class switches and Grid Switch edge switches as a percentage of revenues, while reducing sales of lower-margin host adapter cards as a percentage of revenues. To implement this strategy, we have included gross margin targets as a component of our sales personnel’s sales plans and we will evaluate future sales of host adapter cards on a non-premium basis if we believe it will negatively impact our gross margins. We expect to continue selling host adapter cards in order to compete effectively where an end customer seeks a complete solution, notwithstanding the potential for it to reduce our blended gross margins.
 
Our cost of revenues includes an expense equal to 3.5% of revenues on account of royalty payments to the Government of Israel for repayment of grants received by the Office of the Chief Scientist.
 
Net income.  We monitor our operating expenses closely as we grow our business and are working towards generating positive net income. To date, we have incurred net losses in each fiscal year since we commenced operations in 1997. Upon generating positive net income, we believe that net income would become a more important metric for us to track as an indication of our performance.
 
Results of Operations
 
Revenues
 
Our revenues have grown rapidly since we began commercial shipment of our solutions in late 2003. We generate the majority of our revenues from sales of our Grid Director director-class and Grid Switch edge switches and sales of our host channel adapters and cables. We grant a one-year hardware warranty and a three-month software warranty on our products. Based on our historical experience, we record a reserve on account of possible warranty claims, which increases our cost of revenues. In addition, we provide a variety of fee-based support and extended warranty packages.
 
We recognize revenues from product sales in accordance with Statement of Position 97-2, “Software Revenue Recognition,” and EITF Issue No. 03-5, “Applicability of AICPA Statement of Position 97-2 to Non-Software Deliverables in an Arrangement Containing More than Incidental Software.” We recognize revenues from the sale of our products when persuasive evidence of an agreement exists, delivery of the product has occurred, the fee is fixed or determinable and collection is probable. We typically defer recognition of revenue until each of these standards has been satisfied. Delivery occurs when title is transferred under the applicable international commerce terms, or IncoTerms, to our customer, including an OEM customer, value added reseller or systems integrator. We do not provide rights of return and generally do not provide for acceptance tests by end-customers. In a limited number of circumstances, however, we have deviated from our standard policy by agreeing to arrangements with OEM, value added reseller or system integrator customers which provide for acceptance tests. These arrangements have clear milestones and acceptance tests before the purchase price is considered non-cancelable. In these instances, we do not recognize revenue until all obligations, milestones and acceptance tests have been satisfied. Until such time, we account for this as deferred revenue.


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We recognize revenues from warranty and support services on a straight-line basis over the term of the warranty and support agreement. See “Critical Accounting Policies and Estimates — Revenue Recognition.”
 
Geographical breakdown
 
We classify our revenue geographically based on the location of our customer, regardless of the location of the end customer. The following table sets forth the geographic breakdown of our total revenues for the periods indicated:
 
                                 
    Year Ended December 31,     Three Months Ended
 
    2004     2005     2006     March 31, 2007  
 
North America
    81 %     86 %     63 %     45 %
EMEA
    16       13       24       31  
Asia-Pacific and Japan
    3       1       13       24  
                                 
Total
    100 %     100 %     100 %     100 %
 
Cost of revenues
 
Our cost of revenues consists primarily of cost of product components and materials, fees paid to our contract manufacturers and personnel cost associated with production management. In addition, to a lesser extent our cost of revenues includes expenses for inventory obsolescence, costs for providing customer service and support, warranty obligations, general overhead and royalties paid to the Office of the Chief Scientist of the Israeli Ministry of Industry, Trade and Labor, or the Office of the Chief Scientist. Generally, our cost of revenues as a percentage of sales revenues has decreased over time, primarily due to unit manufacturing cost reductions given economies of scale from higher manufacturing volumes. In the future, we expect overall cost of revenues to increase in absolute terms as product sales increase, but to decrease as a percentage of revenues due to continued economies of scale, expected increased sales of higher-margin products and absorption of fixed operating costs as a gross percentage of sales.
 
Operating expenses
 
Operating expenses consist of research and development, sales and marketing and general and administrative expenses. We have invested significant resources to develop our OEM relationships. Operating costs associated with the development of our OEM relationships involve a significant initial investment by us in order to satisfy OEM performance requirements, develop professional relationships within the OEM organization, and provide education and training to each OEM customer. These initial costs typically decrease once our OEM customers have approved our solutions for inclusion in their products and begun generating sales. The largest component of our operating expenses is personnel costs. Personnel costs consist of salaries and benefits for our employees, including commissions for sales personnel and share-based compensation for all employees. We grew from 93 employees as of December 31, 2004 to 117 employees as of December 31, 2005 and to 141 employees as of December 31, 2006 and 150 employees as of March 31, 2007. We expect to continue to hire additional employees to support our growth. The timing of these additional hires could materially affect our operating expenses in any particular period, both in absolute terms and as a percentage of revenues.
 
Research and development.  Our research and development expenses consist primarily of salaries and related personnel costs, as well as costs for subcontractor services and costs of materials consumed in connection with the design and development of our products. We expense all of our research and development costs as incurred. Through 2005, our research and development expenses were partially offset by financing through royalty-bearing grants from the Office of the Chief Scientist. We recognized such participation grants at the time at which we were entitled to such grants on the basis of the costs incurred and included these grants as a deduction from research and development expenses (see “—Government Grants”). We do not anticipate receiving additional grants in the future. We intend to continue to invest significantly in our research and development efforts and believe these areas are essential to maintaining our competitive position. We


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expect that in future periods our research and development expenses will increase in absolute terms and decrease as a percentage of revenues.
 
Sales and marketing.  Our sales and marketing expenses consist primarily of salaries and related personnel costs, sales commissions, travel expenses, marketing programs and facilities costs. We intend to continue to invest heavily in sales and marketing, including further developing our relationships with our OEM customers, hiring additional sales and marketing personnel, extending brand awareness and sponsoring marketing events. We expect that our sales and marketing expenses will increase in absolute terms and decrease as a percentage of revenues.
 
General and administrative.  Our general and administrative expenses consist primarily of salaries and related personnel costs, travel, and facilities expenses related to our executive, finance, human resource and information technology teams and other fees for professional services provided by subcontractors. In addition, in accordance with EITF Issue No. 00-10 “Accounting for Shipping and Handling Fees and Costs,” we account for our product shipping costs as general and administrative expense. Professional services consist of outside legal, audit and tax services and information technology consulting costs. We expect these expenses to increase on an absolute basis following this offering as we incur additional costs related to the growth of our business, including accounting and legal expenses related to compliance with the Sarbanes-Oxley Act of 2002 and the rules and regulations implemented by the U.S. Securities and Exchange Commission, as well as additional insurance, investor relations and other costs associated with being a public company.
 
Amortization of deferred share-based compensation.  We have granted options to purchase our ordinary shares to our employees and consultants at prices below the fair market value of the underlying ordinary shares on the grant date. These options were considered compensatory because the deemed fair market value of the underlying ordinary shares was greater than the exercise prices determined by our board of directors on the option grant date. The determination of the fair market value of the underlying ordinary shares prior to this offering involved subjective judgment, third-party valuations and the consideration by our board of directors of various factors. Because there has been no public market for our ordinary shares prior to this offering, the amount of the compensation charge was not based on an objective measure, such as the trading price of our ordinary shares. We discuss in detail the factors affecting our determination of the deemed fair value of the underlying ordinary shares below in “Critical Accounting Policies and Estimates — Accounting for Share-Based Compensation.” As of January 1, 2006, we adopted Statement of Financial Accounting Standards No. 123(R) “Share Based Payment”, or SFAS No. 123(R), which requires us to expense the fair value of employee share options. We adopted the fair value recognition provisions of SFAS No. 123(R), using the modified prospective method for grants that were measured using the fair value method for either recognition or pro forma disclosures and adopted SFAS No. 123(R) using the prospective-transition method. The fair value of share-based awards granted after January 1, 2006, was estimated using the Black-Scholes valuation model. As a result of adopting SFAS No. 123(R) on January 1, 2006, our net loss increased by $0.3 million in 2006 and $0.1 million in the three months ended March 31, 2007.
 
In connection with the grant of options, we recorded total share-based compensation expenses of $0.4 million in 2004, $74,000 in 2005, $0.3 million in 2006 and $0.1 million for the three months ended March 31, 2007. In the future, stock-based compensation expense may increase as we issue additional equity-based awards to continue to attract and retain key employees. As of March 31, 2007, we had an aggregate of $1.5 million of deferred unrecognized share-based compensation remaining to be recognized. We estimate that this deferred unrecognized share-based compensation balance will be amortized as follows: approximately $0.5 million in 2007, approximately $0.5 million in 2008 and approximately $0.5 million in 2009 and thereafter.
 
Financial income (expenses), net
 
Financial income consists primarily of interest earned on our cash balances and other financial investments and foreign currency exchange gains. Financing expenses consist primarily of outstanding interest to be paid on a $5.0 million loan from Lighthouse Capital Partners V (Israel), LLC, bank fees, foreign currency exchange losses, as well as charges to record outstanding preferred share warrants at fair value.


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Corporate tax
 
Israeli companies are generally subject to corporate tax at the rate of 29% of their taxable income in 2007. The rate is scheduled to decline to 27% in 2008, 26% in 2009 and 25% in 2010 and thereafter. However, the effective tax rate payable by a company that derives income from an “Approved Enterprise” designated as set forth under the Law for the Encouragement of Capital Investments, 1959, or the Investment Law, may be considerably less. Our investment programs in equipment at our facilities in Herzeliya, Israel have been granted “Approved Enterprise” status under the Investment Law and enjoy certain tax benefits. We expect to utilize these tax benefits after we utilize our net operating loss carry forwards. As of December 31, 2006, the end of our last fiscal year, our net operating loss carry forwards for Israeli tax purposes amounted to approximately $43.0 million. Income derived from other sources, other than the “Approved Enterprise,” during the benefit period will be subject to tax at the regular corporate tax rate. For more information about the tax benefits available to us as an Approved Enterprise see “Taxation and Government Programs—Law for the Encouragement of Capital Investments, 1959.”
 
Government Grants
 
Our research and development efforts have been financed, in part, through grants from the Office of the Chief Scientist under our approved plans in accordance with the Israeli Law for Encouragement of Research and Development in the Industry, 1984, or the R&D Law. Through December 31, 2005, we had applied and received approval for grants totaling $5.6 million from the Office of the Chief Scientist. We did not apply for or receive any grants in 2006 or in the three months ended March 31, 2007. Under Israeli law and the approved plans, royalties on the revenues derived from sales of all of our products are payable to the Israeli government, generally at the rate of 3.5%, up to the amount of the received grants as adjusted for fluctuation in the U.S. dollar/shekel exchange rate. The amounts received after January 1, 1999, bear interest equal to the 12-month London Interbank Offered Rate applicable to dollar deposits that is published on the first business day of each calendar year. Royalties are paid on our consolidated revenues.
 
The government of Israel does not own proprietary rights in know-how developed using its funding and there is no restriction related to such funding on the export of products manufactured using the know-how. The know-how is, however, subject to other legal restrictions, including the obligation to manufacture the product based on the know-how in Israel and to obtain the Office of the Chief Scientist’s consent to transfer the know-how to a third party, whether in or outside Israel. These restrictions may impair our ability to outsource manufacturing or enter into similar arrangements for those products or technologies and they continue to apply even after we have paid the full amount of royalties payable for the grants.
 
If the Office of the Chief Scientist consents to the manufacture of the products outside Israel, the regulations allow the Office of the Chief Scientist to require the payment of increased royalties, ranging from 120% to 300% of the amount of the grant plus interest, depending on the percentage of foreign manufacture. If the manufacturing is performed outside of Israel by us, the rate of royalties payable by us on revenues from the sale of products manufactured outside of Israel will increase by 1% over the regular rates. If the manufacturing is performed outside of Israel by a third party, the rate of royalties payable by us on those revenues will be a percentage equal to the percentage of our total investment in our products that was funded by grants. The R&D Law further permits the Office of the Chief Scientist, among other things, to approve the transfer of manufacturing or manufacturing rights outside Israel in exchange for an import of certain manufacturing or manufacturing rights into Israel as a substitute, in lieu of the increased royalties.
 
The R&D Law provides that the consent of the Office of the Chief Scientist for the transfer outside of Israel of know-how derived out of an approved plan may only be granted under special circumstances and subject to fulfillment of certain conditions specified in the R&D Law as follows: (1) the grant recipient pays to the Office of the Chief Scientist a portion of the sale price paid in consideration for such Office of the Chief Scientist-funded know-how (according to certain formulas), except if the grantee receives from the transferee of the know-how an exclusive, irrevocable, perpetual unlimited license to fully utilize the know-how and all related rights; (2) the grant recipient receives know-how from a third party in exchange for its Office


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of the Chief Scientist-funded know-how; or (3) such transfer of Office of the Chief Scientist-funded know-how arises in connection with certain types of cooperation in research and development activities.
 
As of March 31, 2007, the royalty amount payable to the Office of the Chief Scientist was approximately $4.4 million, including accrued interest.
 
Comparison of Period to Period Results of Operations
 
The following table sets forth our results of operations as a percentage of revenues for the periods indicated:
 
                                         
          Three Months Ended
 
    Year Ended December 31,     March 31,  
    2004     2005     2006     2006     2007  
 
Revenues
    100.0 %     100.0 %     100.0 %     100.0 %     100.0 %
Cost of revenues
    72.5       70.5       63.2       64.8       62.8  
                                         
Gross profit
    27.5       29.5       36.8       35.2       37.2  
Operating expenses:
                                       
Research and development, gross
    135.4       42.5       25.3       45.6       31.6  
Less royalty-bearing participation
    14.2       4.0                    
                                         
Research and development, net
    121.2       38.5       25.3       45.6       31.6  
                                         
Sales and marketing
    88.0       39.3       27.2       36.5       24.5  
General and administrative
    46.2       17.4       11.6       16.2       11.4  
                                         
Total operating expenses
    255.4       95.3       64.1       98.4       67.6  
                                         
Loss from operations
    (227.9 )     (65.8 )     (27.3 )     (63.2 )     (30.4 )
Financial income (expenses), net
    2.9       1.2       (1.5 )     2.3       (4.1 )
                                         
Net loss before income tax expense
    (225.0 )     (64.5 )     (28.8 )     (60.9 )     (34.6 )
Income tax expenses
          (0.7 )     (0.3 )           (0.4 )
                                         
Net loss
    (225.0 )     (65.3 )     (29.1 )     (60.9 )     (35.0 )
 
Three Months Ended March 31, 2007 to Three Months Ended March 31, 2006
 
Revenues
 
Revenues increased by $4.2 million, or 95.5%, to $8.6 million in the three months ended March 31, 2007 from $4.4 million in the three months ended March 31, 2006. The increase in revenues resulted primarily from increased sales to our three largest OEM customers from $3.2 million to $5.8 million, as well as an increase in sales from $1.2 million to $2.8 million to our other customers during the period. Sales to IBM in the three months ended March 31, 2007 totaled $3.0 million representing an increase of $2.9 million over sales in the three months ended March 31, 2006, and sales to HP totaled $1.9 million in the three months ended March 31, 2007, representing an increase of $1.1 million over sales in the three months ended March 31, 2006. The increased sales reflect the continued development of our relationships with IBM and HP. The increased sales were partially offset by a decrease in sales to Sun Microsystems, which totaled $0.9 million in the three months ended March 31, 2007. This represented a decrease of $1.4 million compared to sales in the three months ended March 31, 2006, which period had included a large sale to Sun Microsystems.
 
Our increased sales included sales to two first-time reseller customers comprising $1.1 million of our revenues during this period. In addition, sales of our Grid Director director-class switches and Grid Switch edge switches increased to $5.7 million in the three months ended March 31, 2007 from $2.0 million in the three months ended March 31, 2006, while sales of our HCAs increased to $2.8 million in the three months ended March 31, 2007 from $2.0 million in the three months ended March 31, 2006. We believe that the growth in our sales reflected the overall growth in market demand by end customers for grid computing


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products, greater acceptance of the InfiniBand-based architecture and the continued development of our relationships with existing and new customers.
 
As of March 31, 2007, our consolidated balance sheet reflects an aggregate amount of $7.3 million of deferred revenues and $3.2 million of deferred direct costs relating to sales of our initial DDR Grid Director director-class switches. The shipments of these DDR products occurred during the third quarter of 2006 through the first quarter of 2007. We sold the DDR products to our regular customers under the same standard terms and conditions as we sold the remainder of our products, with the exception of one reseller customer that requested and contracted for acceptance testing. In October 2006, after the DDR product had been installed in a number of large configurations, a design flaw was identified which limited the full capabilities of the DDR feature in certain customer environments. Upon analysis of the design flaw during the fourth quarter of 2006, we determined that the delivery criterion for revenue recognition purposes would not be met until the DDR product delivered met all of the product’s specifications and functionality. As a result, we determined that revenue from these sales should not be recognized until a redesigned DDR product was completed and delivered to customers. We anticipate completion of the redesigned DDR equipment, release for general availability and, accordingly, satisfaction of revenue recognition criteria, in the second and third quarters of 2007.
 
Cost of revenues and gross margin
 
Cost of revenues increased by $2.6 million, or 89.4%, to $5.4 million in the three months ended March 31, 2007 from $2.8 million in the three months ended March 31, 2006. This increase resulted primarily from increased products sold. Gross margin increased from 35.2% in the three months ended March 31, 2006 to 37.2% in the three months ended March 31, 2007. This increase resulted from reduced costs for the ASIC, the principal component used in our Grid Director director-class switches and Grid Switch edge switches, and for other secondary components, such as circuit boards and chassis, as well as improved mix of product sold. The increase in gross margin was partially offset by increases in fixed operating costs from salary-related expenses relative to sales as we prepared to support anticipated growth with additional headcount in our operations group. We expect that our variable costs will continue to decline as a percentage of revenues if we maintain similar sales growth. In addition, the increase in gross margins was partially offset in the three months ended March 31, 2007 by a $65,000 charge for inventory made obsolete to comply to regulatory changes. We seek to increase our gross margin by increasing sales of our Grid Director ISR 9288 and ISR 9096 director-class switches and Grid Switch edge switches as a percentage of revenues. We also plan to reduce sales of existing lower-margin host adapter cards as a percentage of revenues and introduce new higher-margin adapter cards.
 
Operating expenses
 
Research and development.  Gross research and development expenses increased by $0.7 million, or 35.5% to $2.7 million in the three months ended March 31, 2007 from $2.0 million in the three months ended March 31, 2006. This increase resulted primarily from an increase in salary-related expenses to $1.4 million in the three months ended March 31, 2007 from $1.1 million in the three months ended March 31, 2006 due to a slight increase in headcount and yearly salary increases effective January 1, 2007. In addition, we experienced an increase of $0.1 million in material and manufacturing expenditures related to the development of prototypes for our redesigned DDR product, an increase of $0.1 million related to the use of subcontractors rather than internal research and development personnel for certain new development products and an increase of $0.1 million in infrastructure expenses, in each case, compared to the comparable period in 2006. Gross research and development expenses as a percentage of revenues decreased to 31.6% in the three months ended March 31, 2007 from 45.6% in the three months ended March 31, 2006.
 
Research and development expenses, net of received and accrued royalty-bearing grants from the Office of the Chief Scientist increased by $0.7 million, or 35.5%, to $2.7 million in the three months ended March 31, 2007 from $2.0 million in the three months ended March 31, 2006. We did not apply for nor receive any grants from the Office of the Chief Scientist in 2006 or 2007. The last grants we applied for and received were in the amount of $0.6 million in 2005.


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Sales and marketing.  Sales and marketing expenses increased by $0.5 million, or 31.3%, to $2.1 million in the three months ended March 31, 2007 from $1.6 million in the three months ended March 31, 2006. This increase resulted from an increase of $0.4 million in salary- and commission-related expenses to $1.5 million in the three months ended March 31, 2007 from $1.1 million in the three months ended March 31, 2006, primarily due to an increase in headcount and the payment of sales commissions.
 
General and administrative.  General and administrative expenses increased by $0.3 million, or 37.7%, to $1.0 million in the three months ended March 31, 2007 from $0.7 million in the three months ended March 31, 2006. This increase was due to a combination of increased shipping costs, salary-related expenses due to a slight increase in headcount and salary adjustments effective January 1, 2007, as well as increased expenses related to employee recruiting, training and development costs. General and administrative expenses as a percentage of revenues decreased to 11.4% in the three months ended March 31, 2007 from 16.2% in the three months ended March 31, 2006.
 
Financial and other income (expenses), net
 
Financial and other income (expenses) changed to a loss of $0.4 million in the three months ended March 31, 2007 from income of $0.1 million in the three months ended March 31, 2006. The decrease in financial income resulted from $0.2 million of interest expense paid on our outstanding $5.0 million loan with Lighthouse Capital Partners in the three months ended March 31, 2007 and a charge of $0.2 million for the associated warrants granted to Lighthouse Capital Partners as part of the underlying loan agreement, both of which were incurred after the three months ended March 31, 2006.
 
Income tax benefit (expense)
 
Income tax expense related to our wholly-owned U.S. subsidiary increased to $35,000 in the three months ended March 31, 2007 from no income tax expense in the three months ended March 31, 2006.
 
Year Ended December 31, 2006 Compared to Year Ended December 31, 2005
 
Revenues
 
Revenues increased by $15.0 million, or 98.0%, to $30.4 million in 2006 from $15.4 million in 2005. Sales to IBM in 2006 totaled $11.6 million representing an increase of $10.3 million over sales in 2005, and sales to Sun Microsystems totaled $4.0 million in 2006, representing an increase of $3.6 million over sales in 2005. Sales to HP decreased by $3.7 million to $3.7 million in 2006 from $7.4 million in 2005. We believe that the decrease was due to increased sales to IBM during 2006 as a result of demand from end customers that may otherwise have purchased solutions from HP. We also experienced an increase of $1.4 million in sales to other OEMs, value added resellers and systems integrators from 2005.
 
The increase in sales resulted primarily from an increase of $8.0 million, or 180.5%, in sales of our HCAs from $4.5 million in 2005 to $12.5 million in 2006, including a single $2.0 million sale of our fiber adapters. The growth in HCAs is attributable to continued demand from customers for full grid computing solutions from a single supplier. In addition, sales of our Grid Director ISR 9288 and ISR 9096 director-class switches and Grid Switch ISR 9024 edge switches grew by $7.1 million, or 74.7%, from $9.5 million in 2005 to $16.6 million in 2006. This growth resulted from an increase in the number of HCAs, director class switches and edge switches sold to both new and existing end customers, and reflected increased penetration of new vertical markets, such as oil and gas, manufacturing and financial services. Our revenue growth in 2006 was impacted by the deferral of $5.3 million of revenues which we had expected to recognize in 2006 from sales of our DDR switches sold to HP and a second systems integrator for two large end customer installations as well as several smaller installations. We deferred recognition of revenue from these sales because these switches did not perform as expected in the field under certain high stress environments. We currently expect to recognize this revenue during the second and third quarters of 2007 when all of the revenue recognition criteria are met.


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Cost of revenues and gross margin
 
Cost of revenues increased by $8.4 million, or 77.5%, to $19.2 million in 2006 from $10.8 million in 2005. This increase resulted primarily from increased products sold. Gross margin increased from 29.5% in 2005 to 36.8% in 2006. This increase resulted from reductions in costs of materials and manufacturing overhead due to higher production volumes in 2006, partially offset by increases in fixed costs relative to sales as we continued to build our operations group to manage the needs of our OEM customers. In addition, the increase in gross margins was partially offset by an increase as a percentage of revenues of lower margin host adapter cards compared to higher margin Grid Director ISR 9288 and ISR 9096 director-class switches and Grid Switch edge switches. We derived 61.7% of our revenues from sales of switches in 2005 compared to 54.4% in 2006, and we derived 29.0% of our revenues from sales of host adapter cards in 2005 compared to 41.0% in 2006.
 
Operating expenses
 
Research and development.  Gross research and development expenses increased by $1.2 million, or 17.7%, to $7.7 million in 2006 from $6.5 million in 2005. This increase resulted from the use of subcontractors rather than internal research and development personnel for certain new development projects resulting in subcontractor expenses of $1.1 million in 2006 compared to $0.6 million in 2005. In addition, there was a significant increase in material and manufacturing expenditures for our new Grid Director director-class switches to $0.9 million in 2006 from $0.3 million in 2005. Salary-related expenses increased slightly to $3.9 million in 2006 from $3.6 million in 2005 due to a slight increase in headcount. Gross research and development expenses as a percentage of revenues decreased to 25.3% in 2006 from 42.5% in 2005.
 
Research and development expenses, net of received and accrued royalty-bearing grants from the Office of the Chief Scientist increased by $1.8 million, or 30.0%, to $7.7 million in 2006 from $5.9 million in 2005. We did not apply for nor receive any grants from the Office of the Chief Scientist in 2006 or 2007.
 
Sales and marketing.  Sales and marketing expenses increased by $2.2 million, or 37.0%, to $8.3 million in 2006 from $6.0 million in 2005. This increase resulted from an increase of $1.3 million in salary- and commission-related expenses to $5.4 million in 2006 from $4.1 million in 2005, primarily due to an increase in headcount and the payment of sales commissions. We also increased our marketing expenses by $0.6 million primarily due to expenses related to OEM product trials, expansion of new vertical and geographical markets, and public relations. Sales and marketing expenses as a percentage of revenues decreased to 27.2% in 2006 from 39.3% in 2005.
 
General and administrative.  General and administrative expenses increased by $0.8 million, or 31.8%, to $3.5 million in 2006 from $2.7 million in 2005. This increase was primarily due to an increase in professional fees to $0.6 million in 2006 from $0.3 million in 2005. These fees included significant outside legal counsel fees for negotiating new OEM agreements, IT management expenses and fees related to tax and other financial management services. In addition, other general and administrative expenses from shipping costs and travel expenses grew to $0.9 million in 2006 from $0.5 million in 2005 as a result of increased import of raw materials and shipping volume to our customers, increased travel by management and personnel, as well as recruiting fees. General and administrative expenses as a percentage of revenues decreased to 11.6% in 2006 from 17.4% in 2005.
 
Financial and other income (expenses), net
 
Financial and other income (expenses) changed to a loss of $0.5 million in 2006 from income of $0.2 million in 2005. The decease in financial income resulted from $0.3 million of interest expense paid on our outstanding $5.0 million loan with Lighthouse Capital Partners, and a charge of $0.4 million for the associated warrants granted to Lighthouse Capital Partners as part of the underlying loan agreement.
 
Income tax benefit (expense)
 
Income tax expense related to our wholly-owned U.S. subsidiary decreased to $84,000 in 2006 from $0.1 million in 2005.


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Year Ended December 31, 2005 Compared to Year Ended December 31, 2004
 
Revenues
 
Revenues increased by $10.5 million, or 212.6%, to $15.4 million in 2005 from $4.9 million in 2004. This increase was due in part to sales of additional units of our HCAs, director class switches and edge switches during 2005, resulting from the first full-year of our OEM relationships with HP and IBM, which we had formalized in 2004. In addition, this growth was due to sales of our switch products including our newly-released director-class and edge switches which increased to $9.5 million in 2005 from $2.2 million in 2004. Sales of our HCAs also increased to $4.5 million in 2005 from $2.6 million in 2004. In 2005, we also began negotiations and initial sales with an additional OEM customer.
 
Cost of revenues and gross margin
 
Cost of revenues increased by $7.3 million, or 203.8%, to $10.8 million in 2005 from $3.6 million in 2004. This increase resulted primarily from increased products sold. Gross margins increased to 29.5% in 2005 from 27.5% in 2004. This increase in gross margin resulted primarily from lower costs of raw materials and contract manufacturing fees relative to sales, partially offset by an increase in fixed costs relative to sales as we began building our global operations infrastructure. In addition, gross margins increased due to an increase in sales of our higher margin Grid Director ISR 9288 and ISR 9096 director-class switches and Grid Switch edge switches compared to lower margin host adapter cards. We derived 44.8% of our revenues from sales of switches in 2004 compared to 61.7% in 2005, and we derived 52.2% of our revenues from sales of host adapter cards in 2004 compared to 29.0% in 2005.
 
Operating expenses
 
Research and development.  Gross research and development expenses decreased by $0.2 million, or 1.8%, to $6.5 million in 2005 from $6.7 million in 2004. This decrease resulted from significant subcontractor costs related to the release of new Grid Director director-class switches in 2004, which we did not incur in 2005. Subcontractor costs decreased to $0.6 million in 2005 from $0.9 million in 2004. Gross research and development expenses as a percentage of revenues decreased to 42.5% in 2005 from 135.4% in 2004.
 
Research and development expenses, net of received and accrued royalty-bearing grants from the Office of the Chief Scientist decreased by $0.1 million, or 0.7%, to $5.9 million in 2005 from $6.0 million in 2004. Grants totaled $0.6 million in 2005 compared to $0.7 million in 2004.
 
Sales and marketing.  Sales and marketing expenses increased by $1.7 million in 2005, or 39.7%, to $6.0 million in 2005 from $4.3 million in 2004. This increase resulted almost entirely from an increase in salary-related costs to $4.1 million in 2005 from $2.3 million in 2004, as a result of our headcount growth of 36% in 2005. Sales and marketing expenses as a percentage of revenues decreased to 39.3% in 2005 from 88.0% in 2004.
 
General and administrative.  General and administrative expenses increased by $0.4 million, or 18.1%, to $2.7 million in 2005 from $2.3 million in 2004. This increase resulted from a growth in salary-related expenses of $0.7 million in 2005 due to an increase in headcount, offset by a reduction in expenses to $0.1 million in 2005 from $0.4 million in 2004, related to expenses for option grants and warrants issued in 2004. General and administrative expenses as a percentage of revenues decreased to 17.4% in 2005 from 46.2% in 2004.
 
Financial and other income, net
 
Financial and other income, net increased to $0.2 million in 2005 compared to financial and other income, net of $0.1 million in 2004. The increase in financial and other income resulted from interest income of $0.3 million in 2005 compared to $0.1 million in 2004, offset by a foreign exchange loss of $0.1 million in 2005 from $40,000 in 2004.


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Income tax expenses
 
Income tax expenses related to our wholly-owned U.S. subsidiary increased to $0.1 million in 2005 from no expense in 2004.
 
Quarterly Results of Operations
 
The table below sets forth unaudited consolidated statements of operations data in dollars for each of the nine consecutive quarters ended March 31, 2007. In management’s opinion, the unaudited consolidated financial statements have been prepared on the same basis as our audited consolidated financial statements contained elsewhere in this prospectus and include all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of such financial information. This information should be read in conjunction with the audited consolidated financial statements and notes thereto appearing elsewhere in this prospectus.
 
                                                                         
    Three Months Ended,  
    March 31,
    June 30,
    Sept. 30,
    Dec. 31,
    March 31,
    June 30,
    Sept. 30,
    Dec. 31,
    March 31,
 
    2005     2005     2005     2005     2006     2006     2006     2006     2007  
    (unaudited)  
    (in thousands)  
 
Statements of operations data:
                                                                       
Revenues
  $ 2,423     $ 3,625     $ 5,151     $ 4,167     $ 4,389     $ 3,963     $ 8,263     $ 13,812     $ 8,580  
Cost of revenues
    1,848       2,569       3,600       2,813       2,846       2,479       5,422       8,476       5,391  
                                                                         
Gross profit
    575       1,056       1,551       1,354       1,543       1,484       2,841       5,336       3,189  
                                                                         
Operating expenses:
                                                                       
Research and development, net
    1,632       1,295       1,305       1,685       2,003       2,065       1,697       1,929       2,714  
Sales and marketing
    1,130       1,409       1,596       1,910       1,604       1,841       2,359       2,477       2,106  
General and administrative
    534       659       708       780       711       824       918       1,081       979  
                                                                         
Total operating expenses
    3,296       3,363       3,609       4,375       4,318       4,730       4,974       5,487       5,799  
                                                                         
Loss from operations
    (2,721 )     (2,307 )     (2,058 )     (3,021 )     (2,775 )     (3,246 )     (2,133 )     (151 )     (2,610 )
Financial income(expense) net
    (24 )     (255 )     344       126       102       (23 )     (120 )     (419 )     (355 )
Income tax expense
                      (111 )                       (84 )     (35 )
                                                                         
Loss for the quarter
    (2,745 )     (2,562 )     (1,714 )     (3,006 )     (2,673 )     (3,269 )     (2,253 )     (654 )     (3,000 )
Select statements of operations data as a percentage of revenues:
                                                                       
Gross profit
    23.7 %     29.1 %     30.1 %     32.5 %     35.2 %     37.4 %     34.4 %     38.6 %     37.2 %
Operating expenses
    136.0       92.8       70.1       105.0       98.4       119.3       60.2       39.7       67.6  
Operating loss
    (112.3 )     (63.6 )     (40.0 )     (72.5 )     (63.2 )     (81.9 )     (25.8 )     (1.1 )     (30.4 )
Select statements of operations data as a percentage of full year results:
                                                                       
Revenues as a percentage of full year results
    15.8 %     23.6 %     33.5 %     27.1 %     14.4 %     13.0 %     27.2 %     45.4 %     n/a  
Gross profit as a percentage of full year results
    12.7       23.3       34.2       29.8       13.8       13.2       25.4       47.6       n/a  
Operating expenses as a percentage of full year results
    22.5       23.0       24.6       29.9       22.2       24.2       25.5       28.1       n/a  
Operating loss as a percentage of full year results
    26.9       22.8       20.4       29.9       33.4       39.1       25.7       1.8       n/a  


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Our quarterly results of operations have varied in the past and are likely to do so again in the future. As such, we believe that period-to-period comparisons of our operating results should not be relied upon as an indication of future performance. In future periods, the market price of our ordinary shares could decline if our revenue and results of operations are below the expectations of analysts or investors.
 
Generally, our revenues are lower in the first and second quarters while our third and fourth quarters tend to exhibit higher revenues. We believe these quarterly fluctuations are the result of the budgeting processes of many of our end customers who typically make expenditures at their fiscal year end. In particular, governmental, research and educational institutions typically place orders and expect delivery during their fiscal year end in the third quarter, while enterprise customers typically place orders and require delivery during their fiscal year end in the fourth quarter. Our revenues in the third and fourth quarter of 2006 were impacted positively by this seasonality effect. As of March 31, 2007, we had not yet completed the internal testing requirements of our redesigned DDR product and continued to defer recognition of $7.3 million of revenue related to the DDR products that we sold as of that date.
 
Gross margins have fluctuated from quarter to quarter primarily due to the mix of product sales during a particular quarter between switch products and HCAs, improved pricing for component costs and the relative rate of fixed operational costs to sales revenue. Our operating expenses have generally increased sequentially due to the growth of our business. Our operating loss in the fourth quarter of 2006 was significantly lower than in prior quarters due to the significant increase in sales generated, and increased gross margins while not resulting in increased operating expenses. However, due to the seasonality of our business as well as increased operating expenses relating to our continued business growth, we had an operating loss of $2.6 million in the first quarter of 2007 compared to an operating loss of $0.2 million in the fourth quarter of 2006.
 
Liquidity and Capital Resources
 
Since inception, we have been funded through a combination of issuances of preferred shares, redeemable preferred shares, venture loans and cash flow from operations. Through March 31, 2007, sales of our equity securities resulted in net proceeds to us of approximately $76.3 million. As of March 31, 2007, we had $17.2 million in cash and cash equivalents and a long-term loan of $5.0 million. As of March 31, 2007, our working capital, which we calculate by subtracting our current liabilities from our current assets, was $19.7 million.
 
We minimize our working capital requirements by subcontracting our manufacturing and component supply chain activities to third-party subcontractors. Based on our current business plan, we believe that the net proceeds from this offering, together with our existing cash balances and any cash generated from operations, will be sufficient to meet our anticipated cash needs for working capital and capital expenditures for at least the next 12 months. If our estimates of revenues, expenses or capital or liquidity requirements change or are inaccurate or if cash generated from operations is insufficient to satisfy our liquidity requirements, we may seek to sell additional shares or arrange additional debt financing. Further, we may seek to sell shares or arrange debt financing to give us financial flexibility to pursue attractive acquisition or investment opportunities that may arise in the future, although we currently do not have any acquisitions or investments planned.
 
Operating activities.  Our business has grown significantly since 2004 when we first introduced our Grid Director director-class switches. During this period, our cash balances have been materially affected on both a quarterly and annual basis by changes in our working capital and losses from operations. In particular, our rapid sales growth has created negative cash flows due to increased non-cash working capital caused by the lead times needed to build inventory. Conversely, seasonal fluctuations in revenues have generated improved cash flows where outflows for manufacturing are reduced during slower periods and offset by higher collections from previous sales periods.
 
Net cash used by operating activities in the three months ended March 31, 2007 was $3.9 million, and was generated primarily by our net loss of $3.0 million, together with an increase in inventory of $2.1 million and an increase in accounts receivable of $2.0 million, which was offset by an increase in accounts payable of $2.5 million. The increase in accounts receivable was due to an increase in our non-trade account receivables


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during the three months ended March 31, 2007 of $1.2 million resulting from VAT receivables owed by the Israeli government and not paid until April 2007 coupled with an increase of $0.8 million in deferred revenues cost related mainly to deferred sales of our DDR product. Despite the decrease in sales from the fourth quarter of 2006 to the first quarter of 2007, trade receivables remain flat due to delayed trade collections of approximately $2.1 million related to deferred sales of our DDR product in addition to $1.1 million related to late customer payments settled during the second quarter of 2007. The increase in accounts payable was due to the increase of deferred revenues and the increase in inventory and operating expense during the period.
 
Net cash used by operating activities in 2006 was $5.3 million, and was generated primarily by our net loss of $8.8 million, together with an increase of accounts receivable of $9.9 million, which was offset by an increase of accounts payable of $12.3 million. The increase in accounts receivable was due to significant growth in revenues during the fourth quarter of 2006 to $13.8 million compared to $4.2 million during the fourth quarter of 2005 and from the increase in deferred cost of $2.5 million related mainly to deferred sales of our DDR product. Similarly, the significant increase in accounts payable resulted from increased manufacturing expenses during the fourth quarter of 2006 compared to manufacturing expenses during the fourth quarter of 2005 and from the increase in deferred revenues. Net cash used in operating activities in 2005 was $9.8 million, and was generated primarily from our operating loss of $10.0 million, together with increases of account receivables and inventories of $1.4 million and $1.1 million, respectively, which were partially offset by $1.7 million of increased account payables. Both the increased accounts receivable and accounts payable balances are directly related to the increased sales during the fourth quarter of 2005 compared with the fourth quarter of 2004. Net cash used in operating activities in 2004 was $11.1 million and resulted primarily from our loss of $11.1 million, a net increase in inventories of $1.9 million which was offset by an increase in account payables of $1.7 million. Inventory increased in 2004 compared to 2003 as a result of expected growth in our business in 2005.
 
Most of our sales contracts are denominated in United States dollars and as such, the increase in our revenues derived from customers located outside of the United States has not affected our cash flows from operations. As we fund our international operations, our cash and cash equivalents are affected by fluctuations in exchange rates.
 
Investing activities.  Net cash used in investing activities in the three months ended March 31, 2007 was $0.5 million, primarily due to the investment of fixed assets for networking and computer infrastructure equipment as well as research and development equipment. In addition, we invested approximately $0.1 million in leasehold improvements as a result of acquiring additional office space during the period.
 
Net cash used in investing activities in 2006 was $1.3 million, primarily due to the purchase of fixed assets for $1.0 million. Net cash used in investing activities in 2005 was $0.7 million and consisted primarily of the purchase of fixed assets for $0.6 million. Net cash used in investing activities in 2004 was $1.0 million and consisted primarily of the purchase of fixed assets for $0.6 million and increased long term deposits of $0.3 million.
 
We expect that our capital expenditures will total approximately $1.4 million in 2007. We anticipate that these capital expenditures will be primarily related to expenditures for computer, networking and test equipment, general infrastructure and investment in software and hardware for our research and development personnel.
 
Financing activities.  Net cash provided by financing activities in the three months ended March 31, 2007 was $11.4 million and was generated almost entirely from the sale of our Series E2 redeemable convertible preferred shares. All but $1.0 million of this financing was from our existing investors.
 
Net cash provided by financing activities in 2006 was $5.0 million and was generated by borrowing $5.0 million under a loan agreement with Lighthouse Capital Partners secured by a floating charge on our assets and a fixed charge on our intellectual property. We intend to repay this loan with proceeds from this offering. Net cash provided in financing activities in 2005 was $16.8 million and consisted primarily of the sale of $17.0 million of preferred shares. Net cash provided by financing activities in 2004 was $13.8 million generated by the sale of $15.0 million of preferred shares and partially offset by the repayment of a $1.0 million loan, which matured during 2004.


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Off Balance Sheet Arrangement
 
We are not a party to any material off-balance sheet arrangements. In addition, we have no unconsolidated special purpose financing or partnership entities that are likely to create material contingent obligations.
 
Quantitative and Qualitative Disclosures about Market Risk
 
Market risk is the risk of loss related to changes in market prices, including interest rates and foreign exchange rates, of financial instruments that may adversely impact our consolidated financial position, results of operations or cash flows.
 
Risk of Interest Rate Fluctuation
 
Following this offering, we intend to repay our outstanding $5.0 million loan from Lighthouse Capital Partners and do not anticipate undertaking any significant long-term borrowings. Our investments consist primarily of cash and cash equivalents. Following this offering, our investments may also consist of marketable securities including money market funds, commercial paper, governmental and agency debt securities and corporate debt securities.
 
Foreign Currency Exchange Risk
 
Our foreign currency exposures give rise to market risk associated with exchange rate movements of the U.S. dollar, our functional and reporting currency, mainly against the shekel and the euro. We are exposed to the risk of fluctuation in the U.S. dollar/shekel exchange rate. In 2006, we derived the majority of our revenues in U.S. dollars and to a significantly lesser extent in euros and shekels. Although a majority of our expenses were denominated in U.S. dollars, a portion of our expenses were denominated in shekels and to a significantly lesser extent in euros. Our shekel-denominated expenses consist principally of facilities-related and salaries and benefit-related expenses of our Israeli operations. We anticipate that a material portion of our expenses will continue to be denominated in shekels. Similarly, although the majority of our receivables are denominated in U.S. dollars, a portion are denominated in shekels to mitigate the affect of foreign currency fluctuations. During 2005, we carried shekel receivables from the Office of the Chief Scientist as well as value-added tax receivables. In 2006, we carried only value-added tax receivables in shekels. If the U.S. dollar weakens against the shekel, there will be a negative impact on our profit margins. To date, fluctuations in the exchange rates between either the U.S. dollar and the shekel or the U.S. dollar and any other currency have not materially affected our results of operations or financial condition for the periods under review. We currently do not hedge our currency exposure through financial instruments. In the future, we may undertake hedging or other similar transactions or invest in market risk sensitive instruments if we determine that it is advisable to offset these risks.
 
Contractual and Other Commitments
 
The following table of our material contractual and other obligations known to us as of December 31, 2006, summarizes the aggregate effect that these obligations are expected to have on our cash flows in the periods indicated:
 
                                                 
                                  After
 
Contractual and Other Obligations
  Total     2007     2008     2009     2010     2010  
                (in thousands)              
 
Operating leases(1)
  $ 3,381     $ 965     $ 827     $ 672     $ 500     $ 417  
Purchase Commitments(2)
    12,658       12,658                                  
Long-term loan(3)
    6,274       624       2,981       2,669              
                                                 
Total
  $ 22,313     $ 14,247     $ 3,808     $ 3,341     $ 500     $ 417  
 
 
(1) Consists primarily of an operating lease for our facilities in Herzeliya, Israel and our U.S. subsidiary’s facilities in Billerica, Massachusetts, as well as operating leases for vehicles.


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(2) Consists of commitments to purchase goods or services pursuant to agreements that are enforceable and legally binding and that specify all significant terms, including: (i) fixed or minimum quantities to be purchased, (ii) fixed, minimum or variable price provisions, and (iii) the approximate timing of the transaction. This relates primarily to our standard purchase orders with our vendors for the current manufacturing requirements which are filled by vendors in relatively short timeframes.
 
(3) Consists of a loan in an outstanding principal amount of $5.0 million as of December 31, 2006 from Lighthouse Capital Partners and is required to be repaid in 24 equal monthly installments of principal and accrued interest commencing January 1, 2008. The loan bore interest at the Wall Street Journal prime-lending rate plus 4.00%, which totaled 12.25% as of December 31, 2006. Currently, we make monthly interest payments of approximately $52,000, which are reflected in the above table. The loan is anticipated to be repaid using proceeds from this offering.
 
Critical Accounting Policies and Estimates
 
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and disclosure of contingent assets and liabilities at the date of the financial statements. These estimates and judgments are subject to an inherent degree of uncertainty and actual results may differ. Our significant accounting policies are more fully described in Note 2 to our consolidated financial statements included elsewhere in this prospectus. Certain of our accounting policies are particularly important to the portrayal of our financial position and results of operations. In applying these critical accounting policies, our management uses its judgment to determine the appropriate assumptions to be used in making certain estimates. Those estimates are based on our historical experience, the terms of existing contracts, our observance of trends in our industry, information provided by our customers and information available from other outside sources, as appropriate. With respect to our policies on revenue recognition and warranty costs, our historical experience is based principally on our operations since we commenced selling our products in 2003. Our estimates are guided by observing the following critical accounting policies:
 
Revenue recognition.  We derive revenue primarily from the sale of hardware and software products and the provision of warranty and support contracts. The software components of our products are more than incidental to our products as a whole. As a result, we recognize revenues from sales of our products in accordance with the American Institute of Certified Public Accountants’ Statement of Position, or SOP 97-2, “Software Revenue Recognition,” as modified by SOP 98-9, “Modification of SOP 97-2, Software Revenue Recognition, with Respect to Certain Transactions,” or SOP 98-9.
 
In particular, we recognize revenues from sales of our products when the following four criteria are met:
 
  •  Persuasive evidence of an arrangement exists.  We generally require a purchase order with a customer specifying the terms and conditions of the products or services to be delivered. Such purchase orders are generally issued pursuant to a master agreement with the customer. In limited circumstances, we have entered into a specific agreement with respect to a particular sale and rely on that as evidence of an agreement.
 
  •  Delivery has occurred.  For our hardware appliances and software licenses, delivery occurs when title is transferred under the applicable IncoTerms to our customer. Our standard delivery terms are freight on board, or FOB, shipping point. We use this measure of delivery for all customers, including OEM customers, value-added resellers and systems integrators. For services, delivery takes place as the services are provided.
 
  •  The price is fixed and determinable.  Prices are fixed and determinable if they are not subject to a refund or cancellation. Our standard arrangement with our customers does not include any right of return or customer acceptance provisions. In a very limited number of arrangements we have deviated from our standard terms by accepting purchase order arrangements from customers that included certain acceptance tests with milestones after delivery. In such cases, we do not recognize revenue until all the achievement of all milestones has been certified by the customer.


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  •  Collection is probable.  Probability of collection is assessed on a customer-by-customer basis based on a number of factors including credit-worthiness and our past transaction history with the customer. Customers are subject to a credit review process that evaluates the customers’ financial position and ultimately their ability to pay. In the limited circumstances where we may have a customer not deemed creditworthy, we defer net revenues from the arrangement until payment is received and all other revenue recognition criteria have been met. The instances in which we have had to defer revenue due to concern about a customer’s creditworthiness have to date been immaterial to our business.
 
A significant portion of our product sales include multiple elements. Such elements typically include several or all of the following: hardware, software, extended hardware warranties and support services. Through March 31, 2007, in virtually all of our contracts, the only elements that remained undelivered at the time of delivery of a product were extended hardware warranties and support services. When the undelivered element is the extended hardware warranties or support services, that portion of the revenue is recognized ratably over the term of the extended warranty or support arrangements. SOP 97-2 generally requires revenue earned on software arrangements involving multiple elements to be allocated to each element based on the relative specific objective fair value of the elements. Support revenue included in multiple element arrangements is deferred and recognized on a straight-line basis over the term of the applicable support agreement.
 
In accordance with SFAS No. 5, “Accounting for Contingencies” we provide for potential warranty liability costs in the same period as the related revenues are recorded. This estimate is based on past experience of historical warranty claims and other known factors. We grant a one-year hardware warranty and a three-month software warranty on all of our products. In cases where the customer wishes to extend the warranty for more than one year, we charge an additional fee. This amount is recorded as deferred revenue and recognized over the period that the extended warranty is provided and the related performance obligation is satisfied. We have established VSOE of the fair value for our extended warranties and support services based upon our normal renewal rates charged for such services.
 
Accounting for share-based compensation.  We maintain performance incentive plans under which incentive and non-qualified share options are granted to employees and non-employee consultants. Prior to January 1, 2006, we accounted for employee share options using the intrinsic value method in accordance with Accounting Principles Board, or APB, Opinion No. 25, Accounting for Stock Issued to Employees, or APB No. 25, and Financial Accounting Standards Board Interpretation, or FASB, No. 44, Accounting for Certain Transactions Involving Stock Compensation, an Interpretation of APB No. 25., or FASB No. 44. We had also adopted the disclosure only provisions of Statement of Financial Accounting Standards, or SFAS, No. 123, Accounting for Stock-Based Compensation, or SFAS No. 123 and SFAS No. 148, Accounting for Stock-Based Compensation — Transition and Disclosure, or SFAS No. 148.
 
In accordance with APB No. 25, share-based compensation expense, which is a non-cash charge, resulted from option grants at exercise prices that, for financial reporting purposes, were deemed to be less than the estimated fair market value of the underlying ordinary share on the date of grant. In 2005, we granted options to employees to purchase a total of 574,648 ordinary shares at an exercise price of $1.00 per share.
 
During this period, we did not obtain contemporaneous valuations from an independent valuation expert. We only sought valuations after adopting on January 1, 2006 the provisions of the FASB SFAS No. 123(R), Share-Based Payments, or SFAS No. 123(R). Prior to that time, with approval from our board of directors, we relied on the determinations of our management, the members of which have extensive experience in the grid computing market, to determine a reasonable estimate of the then current value of our ordinary shares. Given the absence of an active market for our ordinary shares, our management determined and our board of directors approved the estimated fair value of our ordinary shares on the date of grant based on a number of factors, including:
 
  •  the grants involved private company securities that were illiquid;
 
  •  the liquidation preference and other rights of our preferred shares;
 
  •  the price paid in recent transactions for our preferred shares; and
 
  •  our stage of development and commercial business strategy.


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In connection with the preparation of our financial statements for the year ended December 31, 2005, we assessed the estimated fair value of our ordinary shares and engaged BDO Ziv Haft Consulting & Management Ltd., or BDO, an independent valuation firm. We engaged BDO to perform an independent valuation of our ordinary shares to determine their fair value on various dates during the year ended December 31, 2005. BDO provided us with a valuation report in May 2006. In making its assessment of the fair value of our ordinary shares, BDO reviewed recent purchases of our shares by third parties. Between April and August 2005, we issued 4,249,997 Series E preferred shares in consideration for an aggregate investment of $17.0 million, representing a price per preferred share of $4.00. BDO concluded that this transaction served as a basis for estimating the value of our ordinary shares for purposes of the option grants made during 2005. In accordance with the AICPA’s Practice Aid, Valuation of Privately-Held-Company Equity Securities Issued as Compensation, or the Practice Aid, BDO used the option-pricing method to allocate our total company value of $46.0 million between our preferred and common shares. The option-pricing method involves making estimates of the anticipated timing of a potential liquidity event such as a sale of our company or an initial public offering, and estimates of the volatility of our equity securities. The anticipated timing is based on the plans of our board and management. Estimating the volatility of the share price of a privately held company is complex because there is no readily available market for the shares. We estimated the volatility of our stock based on available information on volatility of stocks of publicly traded companies in our industry. Had we used different estimates of volatility, the allocations between preferred and common shares would have been different. Based on the option pricing method, BDO determined that the fair value of our ordinary shares was in the range of $1.00 to $1.28 per share. In its report, BDO noted that there had been no material changes in our revenues or net loss during 2005 and they accordingly determined that our valuation did not change during this period. We used $1.14, the midpoint of the range determined by BDO, as the fair value of our ordinary shares for options granted in 2005.
 
Effective January 1, 2006, we adopted the provisions of SFAS No. 123(R), which supersedes APB No. 25. Under SFAS No. 123(R), share-based compensation expense is measured at the grant date, based on the estimated fair value of the award at that date, and is recognized as expense over the employee’s requisite service period, which is generally over the vesting period, on a straight-line basis. We adopted SFAS No. 123(R) using the prospective transition method, which requires us to apply the provisions of SFAS No. 123(R) only to new awards granted, and to awards modified, repurchased or cancelled, after the effective date. Under the transition method, non-vested option awards outstanding at January 1, 2006 continue to be accounted for under the intrinsic value method under APB No. 25.
 
During the year ended December 31, 2006, we granted options to employees to purchase a total of 383,172 ordinary shares at exercise prices ranging from $1.00 to $1.20 per share. The fair market value of our ordinary shares on the dates these options were granted ranged from $1.12 to $3.60 per share. Accordingly, we recorded a compensation expense of approximately $0.3 million for the year ended December 31, 2006. During the first quarter of 2007, we granted options to employees to purchase a total of 223,232 ordinary shares at an exercise price of $4.40 per share. The fair market value of our ordinary shares on the dates these options were granted was $4.40 per share. Accordingly, we recorded a compensation expense of approximately $0.1 million for the three month period ended March 31, 2007. During the second quarter of 2007, we granted options to employees to purchase a total of 589,024 ordinary shares at an exercise price of $8.00 per share. The fair market value of our ordinary shares on the dates these options were granted was $7.96 per share.


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Information on employee stock options granted since January 1, 2006 is set forth in the following table:
 
                         
                Fair
 
    Options
    Exercise
    Market
 
Grant Date
  Granted     Price/Share     Value  
 
January 31, 2006
    184,172     $ 1.00     $ 1.14  
February 28, 2006
    15,000       1.00       1.14  
April 6, 2006
    86,250       1.00       1.14  
October 19, 2006
    76,250       1.20       1.20  
December 14, 2006
    21,500       1.20       3.60  
February 22, 2007
    27,101       4.40       4.40  
March 6, 2007
    18,875       4.40       4.40  
March 23, 2007
    88,628       4.40       4.40  
March 26, 2007
    88,628       4.40       4.40  
April 25, 2007
    33,725       8.00       7.96  
May 21, 2007
    555,299       8.00       7.96  
 
Based on an expected initial public offering price of $13.00, the midpoint of the range set forth on the cover of this prospectus, the fair value of the options outstanding at March 31, 2007, was $36.5 million, of which $24.7 million related to vested options and $11.8 million related to unvested options.
 
Significant factors, assumptions and methodologies used in determining fair value
 
During the first and second quarters of 2006, our management determined that our overall value had not changed since the previous valuation of our ordinary shares as of the year ended December 31, 2005, and accordingly there was no need to obtain an updated independent valuation for our ordinary shares. It was management’s belief that the estimated fair value of our ordinary shares during the period remained constant based on our projected results of operations compared to actual results. In particular, we had not experienced a significant change in our research and development, sales and marketing or overall financial performance during this period. Our revenues increased by only $0.2 million, or 5.3%, from the fourth quarter of 2005 to the first quarter of 2006 and decreased by $0.4 million, or 9.7%, from the first to the second quarter of 2006. This contrasts with an increase in revenues of $1.2 million, or 49.6% from the first quarter to the second quarter of 2005. Additionally, our net loss increased by $0.6 million, of 22.3%, from the first to the second quarter of 2006, which contrasts with a decrease in net loss of $183,000, or 6.7%, from the first to the second quarter of 2005. Management had concerns at this time about our ability to meet our business plan for 2006 and our board of directors lowered our revenue goals for 2006 and reduced our budget for 2006 due to these concerns. As a result, based on the determination of management, our board of directors continued to use $1.14 as the fair value of our ordinary shares for the option grants made on January 31, 2006, February 28, 2006 and April 6, 2006.
 
In October 2006, we obtained from BDO a valuation report regarding the fair value of our ordinary shares as of September 30, 2006. We consider this valuation report to have been contemporaneous with our October 19, 2006 option grants. In estimating the fair value of our ordinary shares, BDO considered that we were in the fourth stage of development as set forth in the Practice Aid, characterized by key product development milestones and revenue generation. We had also completed several rounds of financing. Given this stage of development, BDO used the income approach to determine that our total company value was $52.5 million as of September 30, 2006. The income approach involves applying appropriate discount rates to estimated cash flows that are based on forecasts of revenue and costs. Our revenue forecasts assumed an annual growth rate that was initially consistent with the increase in revenues experienced between the third quarter of 2005 and the third quarter of 2006, and assumed that such growth rate would decline over time. Our forecasts also assumed that we would continue to make improvements to our gross margins. These forecasts were not prepared with a view to public disclosure and are inherently uncertain. The assumptions underlying the forecasts were consistent with our business plan. The risks associated with achieving our forecasts were assessed in selecting the discount rate of 25.2%. If a different discount rate had been used, the valuation would


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have been different. Based on our total company value, BDO used the option-pricing method to estimate that the fair value of our ordinary shares was $1.20 per share. Based on the opinion provided in BDO’s valuation report, we used $1.20 as the fair value of our ordinary shares for the option grants made on October 19, 2006.
 
In March 2007, we obtained from BDO an updated valuation report regarding the fair value of our ordinary shares as of December 31, 2006. We did not obtain a contemporaneous valuation report for December 31, 2006 because we did not consider that there had been any material change in our business. We started contemplating the possibility of an initial public offering in December 2006 and, following commencement of the initial public offering process in February 2007, we determined that the increased possibility of such an offering or other liquidity event meant that our business had advanced and that it was appropriate to reassess our valuation as of December 31, 2006. In estimating the fair value of our ordinary shares as of that date, BDO considered that we had been progressing from the fourth to the fifth stage of development as set forth in the Practice Aid, typically characterized by revenue generation and measures of financial success such as operating profitability. Given this stage of development and because the range of our future outcomes could be reasonably estimated, BDO used the probability weighted expected return approach based on four possible future scenarios: initial public offering, merger or sale, dissolution or remaining a private company. Based on our assessment of our business and prospects, BDO assigned a probability of 20% to an initial public offering, 40% to a merger or sale, 15% to a dissolution and 25% to remaining a private company. The probability of an IPO at this time remained relatively low since we had not commenced substantive discussions with underwriters and had received only one indicative valuation, which was provided by an investment bank on December 14, 2006 in connection with a proposal to act as underwriter for an initial public offering. Following this analysis, BDO discounted to present value the weighted company values of each scenario to determine our total value using a discount rate of 25.0%. BDO then determined the value of our ordinary shares, based on the economic impact of the conversion rights and liquidation preferences of our preferred shares. Based on the weighted values of these scenarios, BDO estimated that our present value as of December 31, 2006 was $89.9 million. BDO therefore determined that the fair value of our ordinary shares was $3.60 per share as of December 31, 2006. We used this as the fair value of our ordinary shares for the option grants made on December 14, 2006. We believe that this increased valuation was supported by the strong revenue growth that we experienced in the third quarter of 2006, which was reinforced by continued strong revenue growth in the fourth quarter of 2006. In addition, we achieved a number of business milestones during the later part of the fourth quarter of 2006. These milestones included success in our efforts to penetrate the financial service industry and the signing of an agreement formalizing our OEM relationship with Sun. The two quarters of strong revenue growth and the milestones achieved in the fourth quarter were not known to us when the September 30, 2006 valuation was prepared.
 
In March 2007, we also obtained from BDO an updated valuation report regarding the fair value of our ordinary shares as of February 1, 2007. Based on the development of our business, BDO again used the probability weighted expected return approach. Based on our assessment of our business and prospects as of February 1, 2007, and prospective valuations provided by investment banks in connection with our proposed initial public offering, BDO assigned an increased probability of 30% to the initial public offering scenario and probabilities of 30% to a merger or sale, 10% to a dissolution and 30% to remaining a private company. Following this analysis, BDO discounted to present value the weighted company values of each scenario to determine our total value using a discount rate of 25.2%. BDO then determined the weighted values of our ordinary shares, based on the economic impact of the conversion rights and liquidation preferences of our preferred shares. Based on the weighted values of these scenarios, BDO estimated that our present value as of February 1, 2007 was $113.4 million. The increase in present value compared to December 31, 2006 resulted primarily from the increase in the probability of an IPO and was also impacted to a lesser extent by an increase in our projected company value in the IPO scenario. BDO determined that the fair value of our ordinary shares was $4.40 per share as of February 1, 2007. We used this as the fair value of our ordinary shares for the option grants made on February 22, 2007, March 6, 2007, March 23, 2007 and March 26, 2007.
 
On April 25, 2007, we received an updated valuation report from BDO regarding the fair value of our ordinary shares as of that date. Given the stage of our development and because the range of our future outcomes could be reasonably estimated, BDO continued to use the probability weighted expected return


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approach. Based on a presentation by the underwriters and the increased likelihood of an initial public offering occurring in the United States, BDO assigned an increased probability of 50% to the initial public offering scenario and probabilities of 30% to a merger or sale, 5% to a dissolution and 15% to remaining a private company. Following this analysis, BDO discounted to present value the weighted company values of each scenario to determine our total value using a discount rate of 25.0%. Based on the weighted values of these scenarios, BDO estimated that our value as of April 25, 2007 was $166 million. The increase in present value compared to February 1, 2007 resulted primarily from the increase in the probability of an IPO and was also impacted to a lesser extent by an increase in our projected company value in the IPO scenario. BDO opined that the fair value of our ordinary shares was $7.96 per share by dividing our weighted value by the number of shares outstanding after subtracting the estimated value of the employee stock options. We used this fair value as the exercise price for the option grants made on April 25, 2007 and May 21, 2007.
 
On May 2, 2007, our compensation committee approved the grant of options to purchase 555,299 shares to our employees as part of an employee retention and incentivization measure with respect to the IPO. The approval of our board of directors was required under Israeli law to formalize this grant and this was received by written consent on May 21, 2007. Due to the close proximity of the May 2, 2007 meeting of the compensation committee to the April 25, 2007 valuation report from BDO, the compensation committee, and subsequently the board, use the $7.96 share price contained in the April 25, 2007 BDO valuation report.
 
On May 22, 2007, we, in consultation with the managing underwriters, determined our estimated offering price range to be between $9.56 and $12.00 per share. The estimated offering price range was based on current market conditions and updated comparable company market data and was contingent on our continuing to execute our business. It also assumed that the earliest date of the offering would be in July 2007. The midpoint of the price range reflected a company value of $188 million representing a small increase over our valuation as of April 25, 2007. The bottom of the range corresponded with a company value approximately equal to the value determined by our board of directors on April 25, 2007. We believe that the most significant factors contributing to the increase in the fair value of our ordinary shares as determined by our board of directors and the midpoint of currently estimated initial public offering price were:
 
  •  the fact that the offering was assumed by the underwriters to take place in June or July 2007, resulting in a company value that was approximately $8 to 10 million less than $188 million when discounted to April 2007;
 
  •  a discount for lack of a public market for our common stock was not included in determining the estimated initial public offering price, whereas such a discount was included in the merger and sale and the private company scenarios considered by BDO;
 
  •  the valuation firm utilized market and income approaches in their valuations while only a market comparable approach was applied by the managing underwriters in determining the estimated initial public offering price; and
 
  •  under the probability weighted expected return approach, the valuation firm considered the possibility that a merger or sale event may occur, which resulted in a higher proportion of our value being allocated to preferred shareholders than in the scenario of an initial public offering.
 
On June 25, 2007, the managing underwriters provided an updated estimate of our estimated offering price range to be between $12.00 and $14.00 per share. The estimated offering price range was based on current market conditions and updated comparable company market data and was contingent on our continuing to execute our business. It also assumed that the earliest date of the offering would be in June or July 2007. The midpoint of the price range reflected a firm value of $222 million. The most significant factor contributing to the increase in the fair value of our ordinary shares from the prior estimated offering price range as of May 22, 2007, was the application of higher trading multiples due to improved performance of our comparable companies.
 
We believe that BDO used reasonable methodologies, approaches and assumptions consistent with the Practice Guide to determine the fair value of our ordinary shares. Nevertheless, determining the fair value of our ordinary shares requires making complex and subjective judgments. The approach to valuation based on a


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discounted future cash flow approach uses estimates of revenue, earnings, assumed market growth rates, estimated costs and net income. These estimates are consistent with the plans and estimates that we use to manage our business. There is inherent uncertainty in making these estimates. Although it is reasonable to expect that the completion of our initial public offering will add value to our ordinary shares because they will have increased liquidity and marketability, the amount of additional value cannot be measured with absolute precision or certainty.
 
Inventories.  Inventories consist of finished goods and raw materials. We value our inventories at the lower of cost or market value, cost being determined on a “first-in, first-out” basis. Inventory valuation reserves for potentially excess and obsolete inventory are established and inventory that is obsolete or in excess of our forecasted consumption is written down to estimated realizable value based on historical usage and expected demand. Inherent in our estimates of market value in determining inventory valuation reserves are estimates related to economic trends, future demand for our products and technological obsolescence of our products. If future demand or market conditions are less favorable than our projections, additional inventory valuation reserves could be required and would be reflected in cost of product revenue in the period in which the reserves are taken. Inventory write-offs are reflected as a cost of revenues and were zero in 2004, $26,000 in 2005, $0.1 million in 2006 and $0.1 million in the three months ended March 31, 2007.
 
Redeemable convertible preferred shares.  We have issued various classes of preferred shares, consisting of our Series C, D, D2, E and E2 preferred shares. Certain holders of our preferred shares have the option after March 7, 2009, to require us to redeem all of the preferred shares for an amount equal to the greater of (1) the original purchase price plus accrued dividends (and, with respect to Series D preferred shares, plus certain interest payments), and (2) the then current fair market value of such shares as determined by an independent investment bank to be selected by the board of directors. As a result, the carrying value of the preferred shares has been increased by an accretion each period so that the carrying amounts equal the defined redemption value for the Series C, D, D2, E and E2 preferred shares. The accreted amounts are recorded to accumulated deficit. The preferred shares will be converted into ordinary shares upon the closing of this offering. Accordingly, the put option and the related accretion of the preferred shares will terminate.
 
Estimation of fair value of warrants to purchase redeemable convertible preferred shares.  Our outstanding warrants to purchase shares of our Series E redeemable convertible preferred shares are subject to the requirements of FSP 150-5, which requires us to classify these warrants as long-term liabilities and to adjust the value of these warrants to their fair value at the end of each reporting period. We estimated the fair value of these warrants at the respective balance sheet dates using the Black-Scholes option-pricing model, based on the estimated market value of the underlying redeemable convertible preferred shares at the valuation measurement date, the remaining contractual term of the warrant, risk-free interest rates and expected dividends on and expected volatility of the price of the underlying redeemable convertible preferred stock. These estimates, especially the market value of the underlying redeemable convertible preferred stock and the expected volatility, are highly judgmental and could differ materially in the future. In particular, to estimate the fair value of the underlying redeemable convertible preferred shares as of December 31, 2006, we looked to the price paid as part of the sale of preferred shares during February and March 2007. This share price reflected an increase of 58% over the previous sale of preferred shares completed in August 2005. The fair value of the warrants amounted to approximately $0.4 million on the date of grant, approximately $0.7 million as of December 31, 2006 and $0.9 million as of March 31, 2007, in each case using the Black-Scholes option-pricing model based on the above assumptions.
 
Upon the closing of this offering, all outstanding warrants to purchase Series E redeemable convertible preferred shares will become warrants to purchase our ordinary shares and, as a result, will no longer be subject to FSP 150-5. The then-current aggregate fair value of these warrants will be reclassified from liabilities to additional paid-in capital, a component of stockholder’s equity, and we will cease to record any related periodic fair value adjustments.
 
Accounting for income taxes.  As part of the process of preparing our consolidated financial statements we are required to estimate our taxes in each of the jurisdictions in which we operate. We estimate actual current tax exposure together with assessing temporary differences resulting from differing treatment of items,


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such as accruals and allowances not currently deductible for tax purposes. These differences result in deferred tax assets and liabilities, which are included in our consolidated balance sheets. We must assess the likelihood that our deferred tax assets will be recovered from future taxable income and to the extent we believe that recovery is not likely, we must establish a valuation allowance.
 
Management’s judgment is required in determining our provision for income taxes, our deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets. As of March 31, 2007, we recorded a full valuation allowance against our net deferred tax assets, based on the available evidence, we believed at that time it was more likely than not that we would not be able to utilize all of these deferred tax assets in the future. We intend to maintain the full valuation allowances until sufficient evidence exists to support the reversal of the valuation allowances. We make estimates and judgments about our future taxable income that are based on assumptions that are consistent with our plans and estimates. Should the actual amounts differ from our estimates, the amount of our valuation allowance could be materially impacted. If we determine in the future that these deferred tax assets are more-likely-than-not to be realized, a release of all or a portion of the related valuation allowance would increase income in the period in which that determination is made.
 
In June 2006, FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes,” or FIN 48. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes,” or SFAS 109. This interpretation prescribes a minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. FIN 48 also provides guidance on derecognition of tax positions, classification on the balance sheet, interest and penalties, accounting in interim periods, disclosure and transition. We adopted FIN 48 effective January 1, 2007. FIN 48 requires significant judgment in determining what constitutes an individual tax position as well as assessing the outcome of each tax position. Changes in judgment as to recognition or measurement of tax positions can materially affect the estimate of the effective tax rate and consequently, affect the operating results of the company.
 
We have decided to classify any interest and penalties as a component of tax expenses. Our policy for interest and penalties related to income tax exposures was not impacted as a result of the adoption of the recognition and measurement provisions of FIN 48. We had no unrecognized tax benefits as of January 1, 2007. As a result of the implementation of FIN 48, we recognized a $0.2 million increase in liability for unrecognized tax benefits, which was accounted for as an increase to the January 1, 2007 balance of retained earnings. As of January 1, 2007, we are subject to Israeli income tax examinations and to U.S. Federal income tax examinations for the tax years of 2003 through 2006. During the three months ended March 31, 2007, we recorded an increase of unrecognized tax benefits of approximately $35,000.
 
Recent Accounting Pronouncements
 
In June 2006, the FASB ratified Emerging Issues Task Force, or EITF, Issue 06-3, “How Sales Taxes Collected From Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement.” EITF 06-3 requires a company to disclose its accounting policy regarding the presentation of taxes within the scope of EITF 06-3. If taxes are significant, a company should disclose the amount of such taxes for each period for which an income statement is presented. The guidance is effective for periods beginning after December 15, 2006. We are currently evaluating the effect that the adoption of EITF 06-3 will have on our financial position and results of operations.
 
In September 2006, the SEC issued Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Current Year Misstatements”, or SAB No. 108. SAB No. 108 requires analysis of misstatements using both an income statement, or ’rollover,’ approach and a balance sheet, or ’iron curtain,’ approach in assessing materiality and provides for a one-time cumulative effect transition adjustment. SAB No. 108 is effective for fiscal years ending after November 15, 2006. We adopted SAB No. 108 and accordingly, follow SAB No. 108 requirements when quantifying financial statement misstatements. The adoption of SAB No. 108 did not result in corrections of our financial statements.


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In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements”, or SFAS No. 157, which defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS No. 157 does not require any new fair value measurements, but provides guidance on how to measure fair value by providing a fair value hierarchy used to classify the source of the information. SFAS No. 157 is effective for us as of January 1, 2008. We are currently evaluating the potential impact of adopting SFAS No. 157 and have not yet determined the impact on our consolidated results of operations or financial condition.
 
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities,” or SFAS 159, which permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. SFAS 159 will be effective for us on January 1, 2008. We are currently evaluating the potential impact of adopting SFAS 159 and have not yet determined the impact on our consolidated results of operations or financial condition.


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BUSINESS
 
Overview
 
We design and develop server and storage switching and software solutions that enable high-performance grid computing within the data center. As the computing requirements of enterprises and institutions continue to expand, the demand for data center solutions that can efficiently and cost-effectively scale and manage computing resources is dramatically increasing. Our solutions allow one or more discrete computing clusters to be linked together as a single unified computing resource, or fabric. We create this unified fabric by integrating high-performance switching with dynamic management and provisioning software. We refer to our server and storage switching and software solutions as the Voltaire Grid Backbonetm. Our Grid Backbone provides a scalable and cost-effective way for customers to manage the growth of their data center computing requirements.
 
We have significant expertise in developing switching and routing platforms based on the InfiniBand architecture as well as grid management software. InfiniBand is an industry-standard architecture that provides specifications for high-performance interconnects. We offer 24 to 288 port server and storage switches that benefit from the high performance and low latency characteristics of the InfiniBand architecture, and also integrate with Ethernet and Fibre Channel architectures. Our management software solutions provide fabric management, performance monitoring, application acceleration and grid provisioning functionality.
 
We sell our products primarily through server original equipment manufacturers, or OEMs, which incorporate our products into their solutions, as well as through value-added resellers and systems integrators. We currently have OEM relationships with International Business Machines Corporation, or IBM, Hewlett-Packard Company, or HP, Silicon Graphics, Inc., Sun Microsystems, Inc. and NEC Corporation, five of the top ten global server vendors. To date, our solutions have been implemented in the data centers of over 250 end customers across a wide range of vertical markets and geographies.
 
Our principal executive offices are located in Herzeliya, Israel. We also have offices in North America, Europe and Asia-Pacific. We outsource the manufacture of our products to two contract manufacturers. We had revenues of $4.9 million in 2004, $15.4 million in 2005, $30.4 million in 2006 and $8.6 million in the three months ended March 31, 2007.
 
Industry Background
 
Shift from mainframe computers to clusters
 
The performance requirements for critical computing applications are dramatically increasing as enterprises and institutions use the information that is created, stored and accessed by these applications to enhance their competitiveness. This dependence on information for fundamental business processes is causing enterprises and institutions to seek higher-performance data center information technology, or IT, resources. IT personnel must balance the increasing demand for high-performance computing, while at the same time managing the cost and complexity of these environments. Traditionally, enterprises and institutions have met their high-performance computing and capacity requirements by adding monolithic systems, such as mainframe computers and high-end servers. These systems require large up-front investments, have long order lead times, are challenging to integrate into broader data center architectures and are typically built around proprietary architectures. These factors result in low initial levels of efficiency, an inability to scale-out quickly in response to expanding computing needs and reduced data center management flexibility.
 
As a result of these limitations, enterprises and institutions are increasingly seeking computing solutions that provide improved performance in a cost-effective manner by adopting more modular and open computing solutions commonly referred to as server and storage clusters. These clusters consist of off-the-shelf industry-standard server and storage systems organized in racks and connected through specialized switches. Through the use of cluster configurations, enterprises and institutions seek to achieve computing performance that is similar to, or better than that of mainframe computers or high-end servers, but at lower costs. Such cluster configurations have become the preferred solution for meeting high-performance computing needs due to their


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lower up-front costs and their ability to support the scaling of capacity incrementally. These cluster configurations, however, remain limited by the following:
 
  •  Constrained utilization.  Cluster configurations are generally organized to run a predefined set of applications. As enterprises and institutions grow and the number of critical applications continues to expand, the ability to optimize and rapidly reallocate computing resources efficiently becomes increasingly important. Cluster configurations do not provide the dynamic flexibility needed to address these growing demands.
 
  •  Performance bottlenecks.  To enhance the performance of cluster configurations, enterprises and institutions have adopted multi-core processors and server virtualization technologies. Multi-core processors, which incorporate multiple processors on a single silicon chip, have significantly increased server processing power. Server virtualization technologies allow multiple operating systems to run simultaneously on a single server, offering the potential for dramatically higher server efficiency. However, together these technologies require increased total server and storage input/output, or I/O, bandwidth beyond the capabilities of current technologies, resulting in reduced overall performance.
 
  •  Configuration complexity.  Server and storage clusters must be configured using multiple cables and adapters that connect to multiple network, server and storage switches. Clusters are configured such that an increase in performance requires a proportionate or greater increase in the number of servers, switches, cables and adapters in the cluster. This proliferation of hardware presents significant initial and ongoing management challenges, and makes it costly and labor-intensive to alter the configuration of the data center as application requirements change.
 
  •  Management of multiple network architectures.  Most traditional server and storage cluster configurations rely on Fibre Channel and Ethernet interconnect architectures, each of which addresses distinct functions. Fibre Channel is the prevailing architecture for storage switching in most data centers, while Ethernet is used primarily for switching and transport functions. The use of these two different architectures in cluster configurations increases the complexity and cost of managing the data center.
 
These limitations of cluster configurations reduce overall data center efficiency, including response time, and result in high capital investment and operating costs including power, cooling, space and human resource expenditures.
 
Shift from cluster configurations to grids
 
In order to address the limitations of clusters, enterprises and institutions are increasingly adopting grid computing solutions, or grids. Grids allow one or more discrete clusters to be linked together as a single fabric to address different data center applications and eliminate performance bottlenecks. Grids also provide the ability to dynamically manage disparate underlying server and storage units and deliver computing services with higher levels of performance, availability, reliability, scalability and utilization than clusters. In order to achieve these benefits, grids must be built upon high-performance grid computing interconnect solutions.
 
We provide server and storage switching and software solutions to enable grid computing in the data center. We leverage the InfiniBand protocol to provide high performance solutions to our clients. IDC, an independent research company, estimates that the switch ports will grow from $95 million in 2006 to $468 million in 2010 and that the market for InfiniBand host channel adapters will grow from $62 million in 2006 to $181 million in 2010. Based on these estimates, we believe that the market for InfiniBand-based products will grow from $157 million in 2006 to $649 million in 2010.
 
In addition to the market for InfiniBand-based products, we believe that the overall market for grid computing interconnect solutions includes storage switching, 10 Gigabit Ethernet switching markets, and their associated management and messaging software. Storage switching refers to interconnects used in storage networks and is estimated by IDC to grow from $1.5 billion in 2006 to $1.8 billion in 2010. 10 Gigabit Ethernet switching refers to 10 Gigabit Ethernet switch deployments in enterprise data centers and is estimated by IDC to grow from $1.2 billion in 2006 to $2.8 billion in 2010. Management software refers to the software used to provision and monitor the grid and is estimated by IDC to grow from $355 million in 2006 to


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$758 million in 2010. Messaging software optimizes specific application types to maximize performance and is estimated by IDC to grow from $679 million in 2006 to $793 million in 2010. Based on these estimates we believe that the overall grid computing market will grow from $3.9 billion in 2006 to $6.9 billion by 2010. Our solutions address the high performance segments of this market, which we believe currently represent a small and growing portion of this market.
 
Existing grid computing interconnect architectures
 
Following the shift towards the adoption of grids, a number of grid computing interconnect architectures have been deployed to address the connectivity demands of the data center. These architectures include:
 
Ethernet.  Ethernet is an industry-standard interconnect architecture that was initially designed to enable basic connectivity between computers in local area networks or over a wide area network. Ethernet was designed to provide an interconnect architecture in an environment where latency, connection reliability and performance requirements were not essential. Nevertheless, Ethernet has become the predominant technology for networking and has more recently been applied to grid computing. As a grid computing solution, Ethernet faces significant challenges because its low overall efficiency, high power consumption, non-linear scalability and low available bandwidth are insufficient for high-performance computing environments. Ethernet-based solutions also increase configuration complexity, requiring multiple network cables, adapters and switches in each server to enable high-performance connectivity.
 
Myrinet and other proprietary solutions.  A number of proprietary solutions have been designed to address the connectivity requirements of the data center. These proprietary solutions support low latency and provide increased reliability. The number of deployments of Myrinet, the most popular proprietary solution, in high-performance computing environments has been declining due to the availability of industry standards-based interconnects that offer superior price and performance, a lack of compatible storage systems and the required use of proprietary software solutions.
 
Fibre Channel.  Fibre Channel was developed as an industry-standard architecture used exclusively to address storage applications, and was not designed to function as a server interconnect architecture.
 
InfiniBand.  InfiniBand is an industry-standard architecture that provides specifications for high performance server and storage interconnects. InfiniBand offers higher bandwidth and scalability, lower latency, reduced complexity, higher efficiency and superior price and performance economics compared to other grid computing interconnect architectures. InfiniBand eliminates the need for multiple network cables and adapters for each server in the grid and dramatically increases overall processor efficiencies.
 
Our Solution
 
We provide server and storage switching and software solutions that enable high-performance grid computing within the data center. Our Grid Backbone allows one or more discrete computing clusters to be linked together as a unified fabric. We create this fabric by integrating high-performance interconnects with dynamic management and provisioning software. As a result, our server and storage switching and software solutions provide a scalable and cost-effective way for customers to manage the growth of data center computing requirements. We leverage the performance, scalability and latency benefits of InfiniBand and provide leading interconnect functionality for data center environments that rely on industry-standard server and storage units. In addition to InfiniBand, our multi-protocol switches also support Fibre Channel and Ethernet. We have also developed software solutions that virtualize hardware elements, such as interconnect backplanes and I/O interfaces and provide hardware resource management software.
 
Our solutions offer the following key benefits:
 
  •  Lower latency for acceleration of information delivery.  Based on published product specifications, our InfiniBand-based solutions provide significantly lower end-to-end latency than other existing based solutions. Through our relationships with independent software vendors, or ISVs, in our targeted vertical markets, we are able to further reduce end-to-end latency and deliver greater application acceleration benefits to our end customers. The following table compares the latency of our InfiniBand-


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  based solutions to 1 Gigabit and 10 Gigabit Ethernet-based solutions, as well as Myrinet and Fibre Channel-based solutions:
 
                     
    Ethernet
  Ethernet
      Fibre
   
    (1 Gb/s)   (10 Gb/s)   Myrinet   Channel   InfiniBand
 
Lowest Latency —
                   
Switch Port to Switch Port
  6,000
nanoseconds
  250 — 2000
nanoseconds
  500
nanoseconds
  400
nanoseconds
  160
nanoseconds
Lowest Latency — Host to Host
  30-60
microseconds
  7
microseconds
  3
microseconds
  No data
available
  2.25
microseconds
 
  •  Higher bandwidth for improved resource utilization.  In high-performance computing environments, customers require optimal bandwidth to address and eliminate performance bottlenecks. Based on published product specifications, our InfiniBand-based solutions provide significantly higher bandwidth than existing Ethernet- and Fibre Channel-based solutions. The following table compares the bandwidth of our InfiniBand-based solutions to Ethernet-based solutions, as well as Myrinet and Fibre Channel-based solutions:
 
                 
    Ethernet   Myrinet   Fibre Channel   InfiniBand
 
Supported bandwidth of available solutions
  1 Gb/s-10 Gb/s   2 Gb/s-10 Gb/s   2 Gb/s-4 Gb/s   10 Gb/s — 20 Gb/s
server-to-server
30 Gb/s — 60 Gb/s
switch-to-switch
Highest bandwidth supported by specification
  10 Gb/s   10 Gb/s   8 Gb/s   120 Gb/s
 
  •  Greater scalability to grow with customers’ demands.  Our server and storage switching solutions enable linear scalability by off-loading communication processing to allow servers to run applications more efficiently. Our switches scale up to 288 InfiniBand-based ports, 132 Ethernet-based ports and 132 Fibre Channel-based ports. We offer the ability to configure a switch with a combination of these technologies and provide high-speed switching between them. This combination of increased server efficiency and high-density switching improves overall application efficiency, thereby reducing data center capital investment requirements and operating costs.
 
  •  Simplified data center infrastructure.  Our solutions eliminate the need for multiple adapters and related cables for each grid computing interconnect architecture. Using our solutions, end customers require only a single adapter and cable to connect each server and storage device to the grid. Because we are able to reduce the number of required adapters and cables to multiple networks, our solutions reduce the complexity of the data center.
 
  •  Improved grid performance, manageability and provisioning through enhanced software.  Our software solutions are designed to maximize grid performance and efficiency. Our GridVision fabric management software creates an environment that dynamically routes traffic across a fabric to avoid congestion and maximize available bandwidth. The software is embedded in our switches and does not require external configuration. Our GridVision Enterprise software further enhances manageability by automating the process of fabric resource allocation to improve the response time for grid provisioning and allow better and faster alignment to the requirements of the customer. We also offer our GridStack software, which enables applications to take full advantage of the low latency of our solutions by facilitating communication between the server and the switch.
 
We believe that our Grid Backbone allows our customers to accelerate application performance, improve utilization and enable lower overall total cost of ownership compared to other high-performance grid


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computing interconnect solutions because of our platform architecture, proven scalability, reliability and manageability.
 
Our Strengths
 
We apply our strengths to enhance our position as a provider of server and storage switching and software solutions. We consider our key strengths to be the following:
 
  •  Singular focus on switching and software solutions for grid computing.  We have extensive experience in designing and delivering server and storage switching solutions that integrate hardware components and software features to enable grid computing within the data center. We believe that our solutions have been deployed in over 50 of the world’s Top 500 high-performance computing environments. We have leveraged this experience to develop strong core competencies in high bandwidth and low latency switch design to enable high-performance grid computing.
 
  •  Market leader in InfiniBand-based solutions.  We believe that our knowledge of the InfiniBand grid computing interconnect architecture and its implementation in server and storage switching products enables us to develop solutions that are innovative and address the needs of high-performance data center environments. Our InfiniBand-based solutions provide industry-leading port density, high bandwidth and low latency for server and storage switching.
 
  •  OEM relationships with industry-leading OEM server and storage providers.  We have established relationships with leading server and storage OEMs. We have OEM relationships with IBM, HP, Silicon Graphics, Sun Microsystems and NEC Corporation, five of the top ten global server vendors. Our solutions are incorporated into the individual product offerings of our OEM customers and we work closely with them to design solutions that meet the needs of end customers. We believe that these relationships have accelerated the adoption of our solutions into some of the highest performance data center environments globally and that these relationships will allow us to continue to extend our market position.
 
  •  Expertise in application acceleration.  We have designed our solutions to accelerate end-to-end application performance. We work closely with ISVs to optimize the performance of their applications through a combination of our hardware and software, thereby providing low latency and high bandwidth solutions. We believe this application-centric approach allows us to deliver significant benefits to our end customers.
 
  •  Leading customer service and support.  We have a team of system and support engineers who provide customer service to our OEM customers and to end customers. Our service team operates as an extension of our OEM customers to deliver seamless support to end customers. In addition, our service team works closely with our research and development department to ensure responsive and comprehensive levels of service and support. We believe our ability to meet the service demands of our OEM customers and end customers accelerates the adoption of our solutions.
 
Our Strategy
 
Our goal is to be the leading provider of server and storage switching and software solutions that enable high-performance grid computing within the data center. Key elements of our strategy include:
 
  •  Continue to develop leading high-performance grid computing interconnect solutions.  We intend to continue to extend our market position, technical expertise and customer relationships to further develop high-performance grid computing interconnect solutions built upon unified fabric architectures. To broaden our market opportunity, we will continue to promote grid adoption and develop products that are compatible with other grid computing interconnect architectures such as 10 Gigabit Ethernet and 4 Gigabit Fibre Channel, while further expanding our InfiniBand-based solutions. We believe that this approach will position us as the leading high-performance grid interconnect solutions provider for server and storage infrastructure within the data center.


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  •  Extend our software offerings.  We intend to expand our portfolio of grid infrastructure software. We are primarily focused on enhancing our existing software offerings in the areas of performance monitoring and management, as well as fabric virtualization. We believe that by extending our software offerings we will be better positioned to address the needs of both our OEM customers and end customers.
 
  •  Leverage our OEM relationships to expand market position.  We believe that leading OEMs are influential drivers of high-performance grid computing interconnect solutions to end customers. Our OEM relationships allow us to leverage the worldwide market position and service capabilities of these industry-leading vendors. We intend to continue to expand our relationships with our existing server OEM customers, while establishing similar relationships with other server, storage and communication OEMs. We believe these relationships will help to accelerate the adoption of our high-performance grid computing interconnect solutions.
 
  •  Expand existing and new vertical and geographic markets.  We intend to further penetrate existing vertical markets and enter new vertical markets. We believe that our relationships with ISVs allow us to bring the benefits of our grid solutions to end customers across a broad range of vertical markets. In particular, we plan to continue working closely with end customers and ISVs to identify the unique technology and business requirements of each vertical market and develop high-performance grid computing interconnect solutions. We also plan to expand our sales and marketing efforts to new geographic markets to meet the needs of end customers in our various vertical markets.
 
Technology
 
Our grid computing interconnect solutions combine a modular hardware switching and routing platform with grid management software. Our hardware platforms combine high speed, low-latency switching and routing with advanced traffic management capabilities. Our software solutions are compatible with Windows, Linux and Unix, and include host, traffic management, provisioning and virtualization software. The modular nature of our solutions allows end customers to deploy new capabilities quickly and effectively to meet their high-performance grid computing requirements. In addition, we base our solutions on accepted industry standards to ensure interoperability and to allow customers to easily integrate third-party technology with our own.
 
Our Hardware
 
Our fixed-port and modular, director-class switches and routers are designed to provide high speed processing and switching of data signals. The proprietary chassis design of our director-class switches integrates InfiniBand-based switching and backplane technologies with management controller modules to provide high bandwidth and improve application and overall system performance. Our high-density 24-port line cards significantly increase the number of connections that can be made to our switches, and additional line cards can be added incrementally to increase the number of available ports in the switch. We accelerate the routing between InfiniBand and Ethernet architectures through the use of our InfiniBand-to-Ethernet field programmable gate array, or FPGA. We also leverage other industry-standard technology for Fibre Channel routing.
 
Our director-class switches also provide benefits by employing advanced power and cooling designs. Our switches are able to connect to the grid using either copper- or fiber optic-based cables. Our switches also conform with the form factors, quality and functionality requirements of our server OEM customers. In addition to our portfolio of switches, we offer third-party host channel adapters, or HCAs, which are supported by our host software.
 
Our Software
 
Our software solutions offer the following functionality:
 
  •  Host software.  Our host software allows servers to connect to our switches through our HCAs for improved overall performance and manageability of large, complex grids. Our host software leverages


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  random direct memory access, or RDMA, and uses extensions to standard protocols in Windows and Linux to provide increased performance for applications. RDMA dramatically improves performance by allowing applications and operating systems to access memory from remote hosts rather than copying information from server to server. RDMA is used in both Ethernet and InfiniBand environments.
 
  •  Traffic management, provisioning and virtualization software.  To further improve application performance and resource utilization our I/O virtualization capabilities allow us to emulate multiple storage and network adapters in a single server. In connection with application and operating system features, this technology enables segmentation and robust traffic management in the grid. We have also developed advanced routing software and firmware to optimize overall grid performance by dynamically adjusting the communication path among servers and storage devices. The firmware embedded in our Ethernet-to-InfiniBand and Fiber Channel-to-InfiniBand routers allows for high speed routing and advanced traffic management capabilities without degrading switch performance.
 
Our grid provisioning software, GridVision Enterprise, allows customers to allocate specific amounts of bandwidth to different virtual hosts, applications or network segments. This allocation can be done dynamically while the grid is operational. Our software also allows allocation to be performed dynamically based upon a predefined set of rules and policies. For example, to maintain a minimum quality of service for critical applications, GridVision Enterprise will automatically allocate resources as needed. These rules can either be defined directly within the application or synchronized with existing job scheduling tools.
 
We work with industry-leading server and storage virtualization solutions to extend resource allocation capabilities to virtual servers and virtual storage. Using a common information model database, our software can manage resources associated with large, heterogeneous grid environments by abstracting complex configurations into simple, easy to understand and manipulate icons or objects. Our software provides the capability to create virtual network segments within the same connection. These virtual segments can be defined to operate in isolation or to interact with each other, depending on customer requirements.
 
InfiniBand
 
Our solutions are largely based on the InfiniBand architecture. InfiniBand is an industry-standard, high-performance interconnect architecture that enables cost-effective, high-speed data communications at higher speeds and lower latency than existing interconnect architectures. The InfiniBand architecture was developed by the InfiniBand Trade Association, or IBTA, which was founded in 1999 and is composed of leading IT vendors and hardware and software solution providers. The IBTA tests and certifies vendor products and solutions for interoperability and compliance. Our products meet the specifications of the InfiniBand standard and have been tested and certified by the IBTA.
 
InfiniBand was designed as a server and storage architecture with both the switch and host adapter playing a role in maximizing performance. InfiniBand is simple and can be implemented in a fast silicon state machine, reducing silicon size and power consumption, while increasing performance. The InfiniBand architecture connects switches in a mesh topology to create a single, logical switching environment improving overall fabric scalability as compared to other topologies. It also leverages memory and buffering capabilities in the host adapter as well as employs operating system by-pass techniques to maximize overall fabric throughput and reduce latency. InfiniBand employs a centrally controlled fabric manager to connect multiple InfiniBand switches. This removes excessive processing by the switches themselves and results in improved bandwidth and lower latency.
 
Our Products
 
Our product offerings include director-class switches, multi-service switches, fixed-port configuration switches, Ethernet and Fibre Channel routers and standards-based driver and management software. For end customers who desire a complete solution, we also offer host channel adapters, and copper and fiber optic cables.


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Using our InfiniBand-based server and storage switching solutions, our customers can create unified fabrics to deliver high-performance grid computing within the data center. Our solutions enable grid computing based on an architecture that provides a method for connecting processing systems and storage and network I/O into a single easy-to-manage environment. Moreover, our solutions allow our end customers to virtualize and provision multiple networks across Ethernet, InfiniBand and Fibre Channel.
 
Grid Computing Switches
 
Our Grid Directortm director-class switches and Grid Switchtm edge switches are used to create low latency, high-bandwidth connections of up to 20 Gigabit/second to servers and storage devices. We offer high-performance, multi-service switches with InfiniBand, Ethernet and Fibre Channel capacity integrated into a single chassis that supports large grids. The server, storage and switching resources form a grid that can be leveraged to improve application performance at lower cost than traditional methods. Our largest installation includes more than 10,000 processors, and over 1,000 server and storage nodes. Our switch-related product offerings include our GridVision fabric management software, which provides key management and performance enhancing functionality.
 
We offer a range of switches that vary in the number of available ports and capabilities in order to address the specific needs of our customers, including scalability and integration with other data center technologies:
 
             
    Grid Switch
  Grid Director
  Grid Director
    ISR 9024   ISR 9096   ISR 9288
 
Number of slots
  N/A   4   12
Internal Switch Bandwidth
  960 Gb/sec   3.84 Tb/sec   11.52 Tb/sec
Maximum Switch-to-Host Bandwidth
  20 Gb/sec   20 Gb/sec   20 Gb/sec
Maximum Switch-to-Switch Bandwidth
  60 Gb/sec   60 Gb/sec   60 Gb/sec
Maximum IB Switching Ports
  24 fixed ports   96 (4X24 port line
cards)
  288 (12X24 port
line cards)
Maximum 1 Gigabit/sec Ethernet Switching Ports
  N/A   48   144
Maximum 10 Gigabit/sec Ethernet Switching Ports
  N/A   8   24
Maximum Fibre Channel Switching Ports
  N/A   48   144
 
Our Grid Switch edge switches offer the following features:
 
  •  options for 10 — 20 Gigabit/second performance for clusters and grids;
 
  •  ultra-low latency at under 140 nanoseconds;
 
  •  24 port 4x, single data rate, or SDR, ports and double data rate, or DDR, ports, supporting either copper or optical interfaces;
 
  •  redundant, hot-swappable power supplies to allow for the highest availability; and
 
  •  embedded or external grid management capabilities.
 
Our Grid Director director-class switches offer the same functionality as our Grid Switch edge switches, as well as the following features:
 
  •  redundant, hot-swappable fan and controller modules to allow for the highest availability;
 
  •  redundant synchronized management cards which allow a card failure to recover without management information loss or any disruption in port-to-port communication;


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  •  line card protocol flexibility to facilitate management of mixed InfiniBand, Ethernet and Fibre Channel environments; and
 
  •  component-level interoperability between director-class switches.
 
GridVision Management and Host Software
 
We offer a line of management tools that provide information on the topology of the grid, configuration of the individual switches within the grid and real-time monitoring of performance. Our GridVision fabric management software offers summary management reports at various levels, error correlation and alarms, fabric-wide performance monitoring and centralized port and virtual local area network configuration. These applications also provide all of the grid set-up routing algorithms and management utilities used in an InfiniBand-based computing environment.
 
Our GridVision Enterprise software is a grid provisioning solution, which offers customers a method of dynamically allocating resources based on pre-defined configurations. GridVision Enterprise software also delivers extensive automated monitoring and diagnostics for servers, which enable customers to perform corrective measures and/or to shift resources to meet changing demands. Our software leverages the capabilities of InfiniBand and interfaces with our switches, as well as third-party provisioning, management and virtualization applications.
 
Our GridStack software is a comprehensive set of host drivers and protocols that enable any application to utilize the performance of RDMA and high-performance storage connectivity. Based on an open-source standard, GridStack allows both Windows-and Linux-based applications to run in an InfiniBand environment. GridStack offers improved latency and performance. In addition, the Transmission Control Protocol/Internet Protocol, or TCP/IP, emulation software incorporated into our GridStack software allows InfiniBand to appear to the user as one or more standard Internet Protocol networks, making it easier to manage. Our GridBoot firmware extension enables diskless server nodes to operate over the fabric using remote storage, thereby leading to improved reliability.
 
Multi-Protocol Routers
 
Our routers enable customers to consolidate InfiniBand-, Fibre Channel- and Ethernet-based servers, network and storage connectivity into a single high-performing fabric. Currently, we offer the Internet Protocol Router, as well as the Fibre Channel Router.
 
Our Internet Protocol Router is based on our third-generation Ethernet-to-InfiniBand FPGA, and offers a range of intelligent layer 2 through 7 capabilities, which can be performed at high speed. These capabilities include packet classification, firewall services, filtering and in-depth traffic monitoring and analysis. Our TCP/IP offload capabilities also eliminate the processing burden on the switch processor and enable higher performance. In addition, our Internet Protocol router offers the following features:
 
  •  integrates into the Grid Director InfiniBand Switch Router, or ISR, 9288 and Grid Director ISR 9096 to connect to Ethernet networks;
 
  •  allows for up to four 1 Gigabit/second connections per router;
 
  •  provides for up to three routers per slot; and
 
  •  supports link aggregation.
 
Our Fibre Channel Router is an RDMA-capable Fibre Channel-to-InfiniBand router that can operate as a transparent Fibre Channel bridge and can be integrated with existing storage networks, as well as storage virtualization tools. Our Fibre Channel Router provides for easy installation and automatic discovery, full storage area network interoperability, port and module aggregation and integration with our GridVision Enterprise software and other third-party storage management and virtualization applications. In addition, our Fibre Channel Router offers the following features:
 
  •  integrates into the Grid Director ISR 9288 and Grid Director ISR 9096 to connect to Fibre Channel storage;
 
  •  provides for four interfaces;


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  •  allows for up to 400 MB per second per channel; and
 
  •  provides for up to three routers per slot.
 
Host Channel Adapters
 
Our host channel adapters, or HCAs, provide connectivity to high performance InfiniBand-based grids, storage and networking devices. Our HCAs offer dual or single-ports, remote booting capabilities, and use our GridStack software for a variety of high performance applications. We currently source our HCAs from a third-party vendor and then customize them.
 
Customers
 
We have a global, diversified end-customer base covering a wide range of industries. To date, more than half of our end customers have been governmental, research and educational organizations, such as government-funded research laboratories and post-secondary education institutions. The balance of our end customers have been enterprises in the manufacturing, oil and gas, entertainment, life sciences and financial services industries. The following table indicates the end customer that we believe represents the largest portion of our product orders for each specific industry for the period from July 1, 2006 through March 31, 2007, the period during which we have tracked such data:
 
             
•   Los Alamos National Laboratory
  (Government)  
•   Home Box Office, Inc.
  (Entertainment)
•   National Center for High Speed Computing
  (Education and research)  
•   National Institute of Health
  (Life sciences)
•   PSA Peugeot Citroen
  (Manufacturing)  
•   Global Electronic Trading Company
  (Financial services)
•   ExxonMobil
  (Oil and gas)        
 
End customers purchase our products primarily through server OEMs, which incorporate our products into their solutions, as well as through value-added resellers and systems integrators. Our OEM customers generally purchase our products from us upon receipt of purchase orders from end customers. These OEM customers are responsible for the installation of solutions incorporating our products, and initial and escalation level customer support to end customers. As of March 31, 2007, our OEM customers were IBM, HP, Silicon Graphics, Sun Microsystems and NEC Corporation.
 
Sales to our OEM customers are made on the basis of purchase orders rather than long-term purchase commitments. Our product purchase agreements with our OEM customers typically have an initial term of one to three years, and most of these agreements renew automatically for successive one-year terms unless terminated. These agreements are generally non-exclusive, provide for quarterly price adjustments for sales made after such adjustment if agreed to by both parties to the agreement, do not contain minimum purchase requirements and do not prohibit our OEM customers from offering products and services that compete with our products. Each OEM customer is generally treated as a “most favored customer,” entitled to the lowest prices and most favorable terms offered to any other customer purchasing the same product in comparable volumes and purchase commitments.
 
Our base agreement with IBM, which accounted for 38% of our revenues in 2006 and 35% of our revenues in the three months ended March 31, 2007, provides that IBM purchases our products and services pursuant to a related statement of work or work authorization. Pricing and payment terms for the products and services are determined by such statement of work or work authorization. The agreement can be terminated by either party provided that no statement of work or work authorization is outstanding. We currently have an executed statement of work, which will expire on November 19, 2007. We have also entered into a technical services agreement with IBM, which provides that IBM will assist us in developing products to incorporate into IBM’s solutions pursuant to a statement of work. The agreement expires on December 31, 2010 and can be terminated by either party upon 30 days’ prior written notice, provided that no statement of work is in effect. We currently have an executed statement of work pursuant to the technical services agreement that expires on December 9, 2007. In addition, in the event of a material breach of either the base agreement or the


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technical services agreement, the non-breaching party may terminate such agreement if the other party fails to cure such breach within 30 days after receiving notice from the non-breaching party.
 
Our agreement with HP, which accounted for 12% of our revenues in 2006 and 22% of our revenues in the three months ended March 31, 2007, requires competitive pricing and competitive product offerings. The initial two-year term of the agreement expired on October 8, 2006, but the agreement provides for successive one-year renewal terms unless terminated by either party. The agreement can be terminated at will by us upon 60 days’ notice and by HP upon 90 days’ notice. Additionally, in the event of a breach, the non-breaching party may terminate this agreement if the other party fails to cure such breach within 45 days after receiving notice of such breach from the non-breaching party.
 
Our sales to Sun Microsystems, Inc. accounted for 13% of our revenues in 2006 and 10% of our revenues in the three months ended March 31, 2007. To date, we have made all of these sales pursuant to purchase orders that are not governed by the terms of a master supply agreement. In November 2006, we signed a master supply agreement with Sun Microsystems. At Sun Microsystems’ election any sales made to Sun Microsystems or its affiliates may be governed by an award letter agreed between us and Sun Microsystems that contains pricing information agreed by the parties. The initial three-year term of the agreement expires on November 10, 2009. The agreement provides for successive one-year renewal terms unless terminated by either party upon 180 days notice prior to the anniversary of the expiration of the initial term or the renewal term. In addition, if a party fails to comply with any of the material provisions of the agreement and such condition is not remedied within 30 days, the adversely-affected party may terminate the agreement.
 
We invest significant resources to maintain our relationships with our OEM customers in the grid computing interconnect market, which typically require up to a year to develop from initial contact to shipment to end customers of OEM products integrating our solutions. We work closely with each of our OEM customers across various levels within such organization’s structure including with the product development, marketing, field sales and service and support teams. Together with our OEM customers, we develop integrated solutions to address end customers’ needs. We also develop joint go-to-market strategies with our OEM customers to create end-customer demand and promote our solutions. These go-to-market initiatives include joint marketing campaigns, bundled promotions to accelerate sales, training curriculums and engineering relationships for product development.
 
We also have relationships with over 30 value-added resellers and systems integrators. Approximately 30% of our sales to end customers were through our relationships with value-added resellers and system integrators in 2006 and approximately 25% of our sales in the three months ended March 31, 2007. These value-added resellers and systems integrators include second-tier server and storage OEM companies, as well as traditional systems integrators which do not manufacture products but which provide solutions to end customers.
 
Seasonality
 
Our business is impacted by seasonal factors. Generally, our revenues are lower in the first and second quarters while our third and fourth quarters tend to exhibit higher revenues. We believe these quarterly fluctuations are the result of the budgeting processes of many of our end customers who typically make expenditures at their fiscal year end. In particular, governmental, research and educational institutions typically place orders and expect delivery during their fiscal year end in the third quarter, while enterprise customers typically place orders and require delivery during their fiscal year end in the fourth quarter.
 
Sales and Marketing
 
As of March 31, 2007, our sales and marketing staff consisted of 28 employees, including 13 sales and support engineers that support end customers in pre- and post-sales activities. Our sales and marketing staff is located in Israel, the United States, Germany, China and Japan.
 
Our sales model is based upon a combination of developing our relationships with our OEM customers and creating end-customer demand for our solutions. Our global OEM team consists of account executives and systems engineers who are responsible for the development and ongoing support of our OEM relationships.


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The account executives typically work with an OEM customer to ensure seamless product supply, as well as coordinate customer forecasts, overall program management and product sell-through.
 
Our end-customer regional sales force drives demand directly with potential end customers and coordinates geographically-specific marketing and sales programs. Our regional sales force is divided into three geographical regions: North America, Europe/Middle East/Africa and Asia-Pacific. This regional sales force operates as a direct sales team to end customers, but without completing order fulfillment, which is instead satisfied by our OEM customers. We monitor the activities of our end-customer regional sales force on a global basis to maintain forecasts of potential sales to end customers.
 
Our marketing organization is responsible for product strategy and management, future product plans and positioning, pricing, product introduction and transitions, competitive analysis, and raising the overall visibility of our company and our products. The marketing team is also responsible for working with ISVs to identify vertical markets and vertical market solutions that may benefit from our product offerings. In addition, the marketing team develops and manages various OEM customer and end-customer generation programs including web-based lead development, trade shows and industry analyst relations.
 
Service and Technical Support
 
We consider our customer support and professional service capabilities to be a key element of our sales strategy. Our customer support and professional service teams enable our customers to optimize the reliability and performance of their grids.
 
First calls and second level escalation support to end customers are typically delivered by our server OEM customers, value-added resellers and systems integrators as a condition of contract. We provide third level and engineering support to these customers when necessary. We also sell annual support and extended warranty packages to our customers to provide a more comprehensive support offering. We have technical assistance centers, located in Herzeliya, Israel and Billerica, Massachusetts, which use a streamlined process and an on-line customer relationship management system to provide reliable support to our end customers.
 
End customers can also take advantage of our on-line resources: SupportWeb and eSupport. SupportWeb contains technical documentation allowing our end customers to quickly research and resolve product questions, as well as download maintenance release updates and new software upgrades. Our web-based eSupport enables end customers to open support cases on-line through either email or the Internet.
 
Research and Development
 
Our research and development activities take place in Herzeliya, Israel. As of March 31, 2007, 88 of our employees were engaged primarily in research and development. Our research and development team is composed of 50 software engineers, 13 hardware engineers, 20 quality assurance personnel as well as five new product introduction engineers. Our gross research and development expenditures were $6.7 million in 2004, $6.5 million in 2005, $7.7 million in 2006 and $2.7 million in the three months ended March 31, 2007.
 
Our research and development organization has four key functions, which are the development and maintenance of new hardware platforms, development and maintenance of new software, quality assurance at both a unit and systems level and future technical development and patent management. Our hardware activities include switch ASIC, circuit and mechanical design. Our software initiatives are focused on taking advantage of open-source software, where applicable, and building competitive differentiation for enhancing management and performance.
 
We also subcontract a portion of our research and development activities to various subcontractors. Our subcontracted services include mechanical and thermal design of our products, board layout and environmental testing.
 
Historically, our research and development efforts have been financed, in part, through grants from the Office of the Chief Scientist under our approved plans in accordance with the R&D Law. The government of Israel does not own proprietary rights in know-how developed using its funding and there is no restriction


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related to such funding on the export of products manufactured using the know-how. The know-how is, however, subject to other legal restrictions, including the obligation to manufacture the product based on the know-how in Israel and to obtain the Office of the Chief Scientist’s consent to transfer the know-how to a third party, whether in or outside Israel. See “Management’s Discussion and Analysis of Financial Position and Results of Operations — Government Grants.”
 
Manufacturing and Supply
 
We subcontract the manufacture, assembly and testing for our products to two contract manufacturers. These functions are performed by Sanmina-SCI Corporation and Zicon Ltd. These contract manufacturers provide us with full turn-key manufacturing and testing services. This full turn-key manufacturing strategy enables us to reduce our fixed costs, focus on our research and development capabilities and provides us with flexibility to meet market demand. Our engineering technologies group prepares full manufacturing instructions to enable our contract manufacturers to purchase the necessary components and manufacture our products based on our desired specifications. We have also developed automatic test equipment to control the quality of our manufactured products. We monitor our contract manufacturing operations through site visits by our manufacturing and planning managers. We also maintain an in-house materials procurement function to purchase strategic product components with a significant lead time, in order to maintain our relationships with key suppliers while balancing our manufacturing costs.
 
Sanmina-SCI is responsible for the manufacture of our Grid Switch ISR 9024. In October 2004, we entered into a letter agreement with Sanmina-SCI governing the terms of our manufacturing arrangement, but have not yet entered into a fully-negotiated agreement to formalize our business relationship. Pursuant to this letter agreement, we submit purchase orders to Sanmina-SCI for our manufacturing requirements at least 90 days in advance. We are not required to provide any minimum orders. Upon the termination of the letter agreement or a cancellation of an order, we are responsible for all components and finished products ordered within the lead-time.
 
Zicon manufactures all modules and mechanics related to our director-level switches and their gateway modules for connecting to Ethernet and Fibre Channel. We have not yet entered into an agreement to formalize our business relationship with Zicon, but are in the process of negotiating a long-term manufacturing contract. We currently place manufacturing orders with Zicon through committed purchase orders.
 
Some of the components used in our products are obtained from limited-source suppliers. In particular, we obtain the InfiniBand switching ASIC, the main component used in our Grid Director director-class switches and Grid Switch edge switches, from Mellanox Technologies Ltd., which is currently the only manufacturer of this chip. Sales of our products incorporating the ASIC accounted for approximately 54% of our revenues in 2006 and approximately 66% of our revenues for the three months ended March 31, 2007. We entered into a non-exclusive agreement with Mellanox on October 27, 2005 for an initial period of two years, which automatically renews for successive one-year periods unless one party notifies the other party within 90 days prior to each annual termination date that it does not wish to renew the agreement. The agreement is non-exclusive and does not contain any minimum purchase requirements. Mellanox may generally increase the purchase price of any product under the agreement upon 30 days’ written notice, and we have agreed to review and discuss product pricing on a good faith basis every six months. In addition, pursuant to our agreement, Mellanox must deposit with an escrow agent all the technological information necessary to manufacture the ASIC. Effective June 12, 2007, this information is held in trust by the escrow agent for our benefit in accordance with the terms of an escrow agreement. Mellanox may increase the price of the ASIC upon 30-days prior notice and has the right to alter the ASIC upon 120-days prior notice, and to discontinue production of the ASIC upon six-months prior notice. During a period of six months after our receipt of a notice of discontinuance from Mellanox, we may purchase from Mellanox such commercially reasonable quantity of the discontinued product as we deem reasonably necessary for our future requirements. Mellanox is obligated to continue to provide us the discontinued product and to facilitate our transition to new products for a period not to exceed nine months following our receipt of a notice of discontinuance. If Mellanox is unable to supply the switch chip on a timely basis or in the quantities that we require, we would likely be unable to manufacture our switching products without adopting a different industry-standard solution in place


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of InfiniBand. This would require significant changes to our products that would take time to complete if we are able to do so successfully.
 
In addition, we have designed our products to incorporate specific components, such as our InfiniBand connectors and backplanes, printed circuit boards, chassis and mechanical parts, power supplies and processor boards. We purchase these components from major industry suppliers, but do not have long-term supply contracts with these suppliers. We believe that substitute components are available from alternate sources, however, any change in these components would require us to qualify a new component for inclusion in our products which would likely require significant engineering and would take time to complete.
 
Governmental Regulation
 
We are subject to a number of governmental regulations. In particular, we are subject to European Union directives regarding the use of lead, mercury and certain other substances in electrical and electronic products placed on the market in the European Union and regarding the appropriate labeling for waste disposal purposes of all electrical and electronic equipment sold in the European Union. For more information, see “Risk Factors — Our business is subject to increasingly complex environmental legislation that may increase our costs and the risk of noncompliance.” We are also generally subject to export and import controls of the different jurisdictions in which we sell our products. We believe that we are currently in compliance with all applicable government regulations. To date, our business has not been materially affected by governmental regulation.
 
Competition
 
We believe that our products compete in the grid computing interconnect market based on the following:
 
  •  scalability;
 
  •  performance, including the ability to provide low latency and high bandwidth capabilities;
 
  •  ease of installation and management by IT personnel;
 
  •  flexibility across multiple architectures;
 
  •  reliability to ensure uninterrupted operability; and
 
  •  cost efficiency in acquisition, deployment and ongoing support.
 
We face significant competition in the markets in which we operate. We expect competition to continue in the future with the introduction of new technologies and the entrance of new participants. In addition, we expect that we will face competition from other new and established companies competing for next-generation data center solutions. Our current principal competitors are Cisco Systems, Inc. and QLogic Corporation. We compete to a lesser degree against providers of 10 Gigabit Ethernet and proprietary high-performance computing solutions.
 
Intellectual Property
 
Our intellectual property rights are very important to our business, and our continued success depends, in part, on our ability to protect our proprietary products. We rely on a combination of patents, copyright, trademarks, trade secrets, confidentiality clauses and other protective clauses in our agreements to protect our intellectual property, including invention assignment and non-disclosure agreements with our employees and certain outside contractors and non-disclosure agreements with our employees, distributors, resellers, software testers and contractors We believe that the complexity of our products and the know-how incorporated in them makes it difficult to copy them or replicate their features.
 
As of June 30, 2007, we had one issued U.S. patent and five pending patent applications in the United States. We also have four pending counterpart application outside of the United States, filed pursuant to the Patent Cooperation Treaty. We do not currently have a formal evaluation procedure for determining which inventions to protect by patents or other means. As of June 30, 2007, we also had trademark


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registrations for “VOLTAIRE” in Israel and the European Union, “V VOLTAIRE (and design)” in Israel, the United States, the European Union, China, Japan and Singapore, and “NVIGOR” in Israel, the United States and the European Union. We also have six pending trademark applications.
 
We cannot be certain that patents or trademarks will be issued as a result of the patent applications or trademark applications we have filed. We also claim common law copyright protection on various versions of our software products and product documentation. We may elect to abandon or otherwise not pursue prosecution of certain pending patent or trademark applications due to examination results, economic considerations, strategic concerns, or other factors. Further, our patents, trademark registrations and common law copyrights may not be upheld as valid and may not prevent the development of competitive products and services by our competitors.
 
Employees
 
As of March 31, 2007, we had 150 employees, including students and subcontractors of whom 118 were based in Israel, 29 in the United States, one in Germany, one in China and one in Japan. The breakdown of our employees, including students and subcontractors, by department is as follows:
 
                                 
    December 31,     Three Months Ended
 
Department
  2004     2005     2006     March 31, 2007  
 
Management
    8       8       8       8  
Operations
    7       9       15       17  
Research and development
    54       65       79       88  
Sales and marketing
    19       26       30       28  
General and administration
    5       9       9       9  
                                 
Total
    93       117       141       150  
 
Under applicable Israeli law, we and our employees are subject to protective labor provisions such as restrictions on working hours, minimum wages, minimum vacation, sick pay, severance pay and advance notice of termination of employment, as well as equal opportunity and anti-discrimination laws. Orders issued by the Israeli Ministry of Industry, Trade and Labor may make certain industry-wide collective bargaining agreements applicable to us. These agreements affect matters such as cost of living adjustments to salaries, length of working hours and week, recuperation, travel expenses and pension rights. Our employees are not represented by a labor union. We provide our employees with benefits and working conditions, which we believe are competitive with benefits and working conditions provided by similar companies in Israel. We have never experienced labor-related work stoppages and believe that our relations with our employees are good.
 
Facilities
 
Our principal administrative and research and development activities are conducted in a 20,516 square foot (1,906 square meters) facility in Herzeliya, Israel. The lease for this facility expires in October 2011, but we may terminate the lease on December 31, 2008, upon 90-days prior written notice and by paying an additional payment equal to three months rent. We lease office space totaling approximately 9,745 square feet (905 square meters) in the United States. The lease for this facility expires on December 31, 2009 with an option to extend the lease to December 31, 2012. We also have offices in England, Germany and China. We believe that our existing facilities are adequate for our current needs and that suitable additional or alternative space will be available on commercially reasonable terms to meet our future needs.
 
Legal Proceedings
 
We are not a party to any material litigation or proceeding and are not aware of any material litigation or proceeding, pending or threatened, to which we may become a party.


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MANAGEMENT
 
Our executive officers and directors, their ages and positions as the date of this prospectus, are as follows:
 
             
Name
 
Age
 
Position
 
Miron (Ronnie) Kenneth
  50   Chairman of the Board and Chief Executive Officer
Mark Favreau
  52   President
Josh Siegel
  44   Chief Financial Officer
Jacob (Koby) Segal
  47   Chief Operating Officer
Yaron Haviv
  37   Chief Technology Officer
Patrick Guay
  40   Senior Vice President of Marketing
Amir Prescher
  38   Vice President of Business Development
Eric Benhamou(1)(2)
  51   Director
Thomas J. Gill(1)(2)(3)
  48   Director
Dr. Yehoshua (Shuki) Gleitman(1)(3)
  57   Director
P. Kevin Kilroy(2)(3)
  52   Director
Nechemia (Chemi) J. Peres(3)
  48   Director
Yoram Oron
  59   Director
 
 
(1) Member of our audit and finance committee.
 
(2) Member of our nominating and governance committee.
 
(3) Member of our compensation committee.
 
Directors
 
Miron (Ronnie) Kenneth has served as our Chairman and Chief Executive Officer since January 2001. From 2001 to 2002, Mr. Kenneth served as Chairman of the Board of Iamba Technologies, Inc., a developer of fiber-to-the-premise technology. From 1998 to 2001, Mr. Kenneth was a consultant to startup companies and venture capital firms on business strategies, management development and fund raising. From 1997 to 1998, Mr. Kenneth was a general partner of Telos Venture Partners, an early stage venture capital company focusing on technology companies. Prior to that, from 1994 to 1996, Mr. Kenneth was the European Business Unit General Manager at Cadence Design Systems, Inc., an electronic design automation and engineering services company. From 1989 to 1994, Mr. Kenneth established and managed Cadence’s Israeli operation. Mr. Kenneth holds a B.A. in Economics and Computer Science from Bar Ilan University, Israel, and an M.B.A. from Golden Gate University in San Francisco, California.
 
Eric Benhamou has served as a director since March 2007. Mr. Benhamou was appointed as a director by Baker Capital, Pitango Venture Capital and Vertex Venture Capital. Since 2003, Mr. Benhamou has served as Chairman of the Board and Chief Executive Officer of Benhamou Global Ventures, LLC, a venture capital fund focused on high-tech firms, which he founded in 2003. Prior to founding Benhamou Global Ventures, Mr. Benhamou served as Chief Executive Officer of Palm, Inc., a provider of mobile products and solutions, from October 2001 to October 2003. From 1990 until October 2000, Mr. Benhamou served as Chief Executive Officer of 3Com Communications, a provider of secure, converged voice and data networking solutions. In 1981, Mr. Benhamou co-founded Bridge Communications, Inc., a provider of internetwork routers and bridges, and was Vice-President of Engineering until its merger with 3Com Communications in 1987. Since 1994, Mr. Benhamou has served as Chairman of the Board of 3Com Corporation and, since 1997, Mr. Benhamou has been Chairman of the Board of Palm, Inc. Mr. Benhamou also serves as Chairman of the Board of Cypress Semiconductor Corporation, and is a member of the board of directors of RealNetworks, Inc. and SVB Financial Group. Mr. Benhamou holds a Diplôme d’Ingénieur from Ecole Nationale Supérieure d’Arts et Métiers, Paris, and an M.Sc in Engineering from Stanford University.
 
Thomas J. Gill has served as a director since March 2007. Mr. Gill was appointed by BCF II Belgium Holdings SPRL, an affiliate of Baker Capital Partners, LLC, a private equity firm investing in communication


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equipment, software, services and applications providers. Since 2003, Mr. Gill has served as the Managing Partner of SALTT Development Co., LLC, a real estate development and construction company. From 2000 to 2004, Mr. Gill served as the Managing Partner of G4 Partners, LLC, an early stage private equity fund. From 1998 to 2000, Mr. Gill served as Chief Executive Officer and President of FORE Systems, Inc., a designer, developer and manufacturer of high speed networking equipment. From 1993 to 1998, Mr. Gill held various positions at FORE Systems, Inc., including Chief Operating Officer, Chief Financial Officer and Vice President of Finance. From 1991 to 1993, Mr. Gill served as the Vice President of Finance at Cimflex Teknowledge, Inc., a designer and manufacturer of automated factory systems. Prior to serving as Vice President of Finance, from 1987 to 1991, Mr. Gill served as Director of Finance at Cimflex Teknolwedge, Inc. Mr. Gill has served on the board of directors of several companies, including, from 2003 to 2004, FreeMarkets, Inc., a publicly-traded company that provides business-to-business online auctions and sourcing software and solutions, from 2002 to 2004, PrintCafe Software, Inc., a publicly-traded company that provides print management software, which was acquired by Electronics for Imaging, Inc. in 2003, and, from 2002 to 2003, WaveSmith Networks, Inc., a provider of multiservice switching solutions. In addition, from 1998 to 1999, Mr. Gill served on the board of directors of FORE Systems, Inc. Since 2001, Mr. Gill has served on the board of directors of Helium Networks, Inc., a mobile and wireless solutions company, which he co-founded in 2001, and, since 2005, Mr. Gill has served on the board of directors of SEEC, Inc., a provider of software solutions. Since 2001, Mr. Gill has served on the board of trustees of Sewickley Academy, an independent college-preparatory day school in Pittsburgh, Pennsylvania, and was appointed Vice Chair in 2004. Mr. Gill holds a B.Sc. in Business Administration from the University of Pittsburgh.
 
Dr. Yehoshua (Shuki) Gleitman has served as a director since May 2003. Dr. Gleitman was appointed by the Shrem, Fudim, Kelner Technologies Ltd, an affiliate of the SFK Group. Since August 2000, Dr. Gleitman has served as the Managing Director of Platinum Venture Capital Fund, LLC, a venture capital firm investing in Israeli high technology companies, which he founded in 2000. Since January 2001, Dr. Gleitman has served as the Chairman and Chief Executive Officer of Danbar Technology Ltd., an investment company listed on the Tel Aviv Stock Exchange. From February 2000 through December 2005, Dr. Gleitman was the Chief Executive Officer of Shrem, Fudim, Kelner — Technologies Ltd., an investment company publicly traded on the Tel Aviv Stock Exchange, which he co-founded. Prior to that, Dr. Gleitman was the Chief Executive Officer of AMPAL Investment Corporation, an investment company listed on The Nasdaq Global Market, from 1997 through 2000, and the Chief Scientist of the Israeli Ministry of Industry and Trade from 1992 to 1997. From 1996 to 1997, Dr. Gleitman was also the Director General of the Israeli Ministry of Industry and Trade of the Office of the Chief Scientist. In addition to Danbar Technology, Dr. Gleitman currently serves on the board of directors of the following publicly-traded companies: Capitol Point Ltd., a technology incubation company listed on the Tel Aviv Stock Exchange; Walla Ltd., an Internet portal listed on the Tel Aviv Stock Exchange; Teuza Ventures Ltd., a publicly-traded venture capital firm listed on the Tel Aviv Stock Exchange; and Mer Telemanagement Solutions Ltd., a billing solution company for the telecommunication industry listed on The Nasdaq Global Market. Dr. Gleitman holds B.Sc., M.Sc. and Ph.D. degrees in Physical Chemistry from the Hebrew University of Jerusalem. Dr. Gleitman has served as the Honorary Consul General of Singapore in Israel since 1998.
 
P. Kevin Kilroy has served as a director since January 2002. Mr. Kilroy was initially appointed by the company as an industry expert, but was later appointed by BCF II Belgium Holdings SPRL, an affiliate of Baker Capital Partners, LLC, a private equity firm investing in communication equipment, software, services and applications providers, in March 2004. Since 2001, Mr. Kilroy has served as Partner at Baker Capital. From February 2001 to September 2001, Mr. Kilroy served as the Vice President and General Manager of HP Middleware Division at the Hewlett-Packard Company, a global information technology company. Prior to that, from 1997 to 2001, Mr. Kilroy was Chief Executive Officer and Chairman for Bluestone Software, Inc., a provider of Internet software platforms, tools and technologies for Internet transactions, which was acquired by Hewlett-Packard in February 2001. Mr. Kilroy has served as Chairman of the Board of Action Engine Inc. since 2003, a Baker Capital portfolio company, and provider of mobile middleware software. Since 2004, Mr. Kilroy has also served as Chairman of the Board of Dotster, Inc., a Baker Capital portfolio company, and provider of Internet services, and Permabit, Inc., a Baker Capital portfolio company, and provider of software storage solutions delivering Content Addressable Storage (CAS). Since 2001, Mr. Kilroy has served on the


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board of trustees of North Carolina Wesleyan College. Mr. Kilroy holds a B.A. in Political Science from North Carolina Wesleyan College.
 
Nechemia (Chemi) J. Peres has served as a director since March 2001. Mr. Peres was appointed by Pitango Venture Capital (formerly Polaris Venture Capital). Since 1992, Mr. Peres has served as Managing Director of Mofet Israel Technology Fund Limited, an Israeli venture capital fund publicly traded on the Tel Aviv Stock Exchange, which he founded in 1992. Prior to Mofet, from 1998 to 1992, Mr. Peres was Vice President of Marketing and Business Development at Decision Systems Israel, a real-time software developer traded on the Tel Aviv Stock Exchange. From 1986 to 1998, Mr. Peres served as Senior Consultant to Israel Aircraft Industries, Ltd. a manufacturer of aerospace and large electronic systems. Since 1996, Mr. Peres has served as General Partner of Pitango Venture Capital, a venture capital firm formerly known as Polaris Venture Capital, which he co-founded in 1996. Mr. Peres also opened the Pitango Venture Capital office in Silicon Valley in 1998. Mr. Peres currently serves on the boards of numerous Pitango portfolio companies including Mercado Software, Inc., a provider of ecommerce search, navigation and merchandising solutions, and Olive Software, Inc., a provider of extensible markup language, or XML, automation software. Since 2003, Mr. Peres has been a member of the Executive Board of the Israel Venture Association, an organization representing the Israeli venture capital community, which he co-founded in 1996. Since 2002, Mr. Peres has served on the Board of the University Authority for the Applied Research and Industrial Development Ltd., the technology transfer company of Tel Aviv University, and, since 2003, Mr. Peres has served as Chairman of the Advisory Board of the Tel Aviv University Faculty of Management. Mr. Peres also has served on the Board of Governors of the Weizmann Institute of Science, an international center for scientific research and graduate study, since 2004. Mr. Peres holds a B.Sc. in Industrial Engineering and Management and an M.B.A. from Tel Aviv University, Israel.
 
Yoram Oron has served as a director since March 2007. Mr. Oron was appointed by Vertex Israel II Management, Ltd. Since 1996, Mr. Oron has served as a Managing Partner at Vertex Venture Capital, a venture capital firm investing in Israeli technology companies, which he founded in 1996. From 1992 to 1996, Mr. Oron served as President and Chief Executive Officer of Aryt Industries, Ltd., a holding company with interests in the defense, technology and medical sectors. From 1989 to 1992, Mr. Oron served as Vice-President of Geotek Communications, Inc., a provider of mobile communication services. Mr. Oron currently serves on the board of directors of several companies, including NovaFora, Inc., a developer of high definition video processors for consumer multimedia entertainment products, and Genoa Color Technologies, Ltd., a developer of solutions for flat panel display televisions. Mr. Oron holds a B.Sc. in Electrical Engineering from the Technion-Israel Institute of Technology, Israel and an M.B.A from Tel-Aviv University, Israel.
 
Executive Officers
 
Mark Favreau has served as the President of Voltaire, Inc., our wholly-owned U.S. subsidiary, since December 2005. Prior to his position as President, Mr. Favreau served as Executive Vice President of Global Sales and Support from 2003 to 2006. Prior to joining us, Mr. Favreau served as Vice President of Sales and Marketing at InfiniSwitch Corporation in 2003, a provider of Switched Fabric Networking solutions for enterprise data center high availability computing and high-performance computing server clusters. From 1999 to 2003, Mr. Favreau served as Vice President of Global OEM Sales at Brocade Communications Systems, Inc., a publicly traded company that provides platforms, solutions and services for shared storage environments. From 1991 to 1999, Mr. Favreau served as Director of Channel Sales at Silicon Graphics, Inc., a manufacturer of high-performance computing solutions. From 1984 to 1991, Mr. Favreau held senior sales executive positions with Tektronix, Inc., a public corporation in the testing and measuring equipment industry, and CalComp Technology, Inc., a producer of plotters, digitizers and other graphic input/output devices. Mr. Favreau holds a B.A. in Business Administration from St. Michael’s College.
 
Josh Siegel has served as our Chief Financial Officer since December 2005. Prior to his position as Chief Financial Officer, from April 2002 to December 2005, Mr. Siegel first served as Director of Finance and then served as Vice President of Finance. Prior to joining us, from 2000 to 2002, Mr. Siegel was Vice President of Finance at KereniX Networks Ltd, a terabit routing and transport system company. From 1995 to 2000, Mr. Siegel served in various positions at Lucent Technologies Networks Ltd., a telecommunication equipment


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manufacturer, including controller and treasurer. Prior to Lucent Technologies Networks Ltd., from 1990 to 1995, Mr. Siegel served in various positions at SLM Corporation (Sallie Mae — Student Loan Marketing Association), a federally established, publicly traded corporation and parent company to a number of college savings, education-lending and debt-collection companies, including Director of Capital Markets and Director of Credit Risk Management. Mr. Siegel holds a B.A. in Economics and an M.B.A., with a concentration in Finance, from the University of Michigan in Ann Arbor.
 
Jacob (Koby) Segal has served as our Chief Operating Officer since December 2005. Prior to his position as Chief Operating Officer, from 2001 to 2005, Mr. Segal served as the general manager of our offices in Israel and Vice President of Research and Development. Prior to joining us, from 1998 to 2001, Mr. Segal was Vice President of Research and Development and Customer Support at Lucent Technologies Inc. and then Avaya (after its spin-off from Lucent Technologies, Inc.). From 1995 to 1998, Mr. Segal served as Director of Research and Development at Madge Network N.V., a wholly-owned subsidiary of Lannet Data Communications Ltd., supplying advanced Ethernet, ATM and multilayer switching solutions. Prior to 1995, Mr. Segal served in various positions at Lannet Data Communications Ltd., including Director of Research and Development, Manager of Hardware Development and LAN switch project manager. Mr. Segal holds a B.Sc. in electrical engineering and electronics from Tel Aviv University, Israel and an M.B.A. from Heriot-Watt University in Edinburgh, Scotland.
 
Yaron Haviv has served as our Chief Technology Officer since 2001. Previously, from 1999 to 2001, Mr. Haviv served as Vice President of Research and Development and, from 1997 to 1999, was the chief designer responsible for the system architecture of our InfiniBand solutions. Prior to joining us, from 1995 to 1997, Mr. Haviv served as a hardware and chip designer at Scitex Corporation Ltd., an Israeli-based developer, manufacturer, marketer and servicer of interactive computerized prepress systems for the graphic design, printing, and publishing markets. From 1991 to 1995, Mr. Haviv served as an independent software consultant conducting software projects for private and government institutes. Mr. Haviv holds a B.Sc. in Electrical Engineering from Tel-Aviv University, Israel.
 
Patrick Guay has served as our Senior Vice President of Marketing since April 2005. Prior to joining us, from January 2003 to April 2005, Mr. Guay was Executive Vice President of Marketing at netForensics, Inc., a provider of security information management solutions. From November 1993 to November 2002, Mr. Guay held several key positions at 3Com Corporation, a global provider of networking solutions, including Vice President, Worldwide Marketing and Vice President and General Manager, LAN Infrastructure Division. From 1989 to 1993, Mr. Guay served in business development roles at Control Data Corporation, a supercomputer firm.
 
Amir Prescher is a founder of Voltaire and has served as Vice President of Business Development since 2001. Previously, from 1999 to 2001, Mr. Prescher served as our Vice President of Marketing and, from 1997 to 1999, Mr. Prescher served as our Vice President of Research and Development. Prior to joining, from 1987 to 1997, Mr. Prescher served as an officer in Israel’s Defense Forces Technical Intelligence Unit.
 
Corporate Governance Practices
 
As a foreign private issuer, we are permitted to follow Israeli corporate governance practices instead of The Nasdaq Global Market requirements, provided we disclose which requirements we are not following and the equivalent Israeli requirement. We intend to rely on this “foreign private issuer exemption” only with respect to the quorum requirement for meetings of our shareholders. Under our articles of association to be effective following this offering, the quorum required for an ordinary meeting of shareholders will consist of at least two shareholders present in person, by proxy or by written ballot, who hold or represent between them at least 25% of the voting power of our shares, instead of 331/3% of the issued share capital provided by under The Nasdaq Global Market requirements. This quorum requirement is the default requirement under the Israeli Companies law. We otherwise intend to comply with the rules of the Securities and Exchange Commission and The Nasdaq Global Market requiring that listed companies maintain an audit committee comprised of three independent directors, and with The Nasdaq Global Market rules requiring that listed companies have a majority of independent directors and maintain a compensation and nominating committee composed entirely


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of independent directors. In addition, following the closing of this offering, we intend to comply with Israeli corporate governance requirements applicable to companies incorporated in Israel whose securities are listed for trading on a stock exchange outside of Israel.
 
Board of Directors and Officers
 
Our current board of directors consists of seven directors. Certain of our directors were appointed to our board pursuant to rights contained in our existing articles of association as indicated in the biography of each such director. Our articles of association to be effective upon the closing of this offering provide that we may have up to nine directors.
 
Under our articles of association to be effective upon the closing of this offering, our directors (other than the outside directors, whose appointment is required under the Companies Law; see “— Outside Directors”) are divided into three classes. Each class of directors consists, as nearly as possible, of one-third of the total number of directors constituting the entire board of directors (other than the outside directors). At each annual general meeting of our shareholders, the election or re-election of directors following the expiration of the term of office of the directors of that class of directors, will be for a term of office that expires on the third annual general meeting following such election or re-election, such that from 2008 and after, each year the term of office of only one class of directors will expire. Class I directors, consisting of Eric Benhamou, Yoram Oron and Nechemia (Chemi) J. Peres, will hold office until our annual meeting of shareholders to be held in 2008. Class II directors, consisting of Thomas J. Gill and Dr. Yehoshua (Shuki) Gleitman will hold office until our annual meeting of shareholders to be held in 2009. Class III directors, consisting of Miron (Ronnie) Kenneth and P. Kevin Kilroy, will hold office until our annual meeting of shareholders to be held in 2010. The directors shall be elected by a vote of the holders of a majority of the voting power present and voting at that meeting (excluding abstentions). Each director will hold office until the annual general meeting of our shareholders for the year in which his or her term expires, unless the tenure of such director expires earlier pursuant to the Companies Law or unless he or she is removed from office as described below.
 
Under our articles of association to be effective upon the closing of this offering, the approval of a special majority of the holders of at least 75.0% of the voting rights present and voting at a general meeting (excluding abstentions) is generally required to remove any of our directors from office. The holders of a majority of the voting power present and voting at a meeting (excluding abstentions) may elect directors in their stead or fill any vacancy, however created, in our board of directors. In addition, vacancies on our board of directors, other than vacancies created by an outside director, may be filled by a vote of a simple majority of the directors then in office. A director so chosen or appointed will hold office until the next annual general meeting of our shareholders or until a special general meeting is convened in order to fill such vacancy, unless earlier removed by the vote of a simple majority of the directors then in office prior to such shareholders meeting. See “— Outside Directors” for a description of the procedure for election of outside directors.
 
In addition, under the Companies Law, our board of directors must determine the minimum number of directors having financial and accounting expertise that our board of directors should include. Under applicable regulations, a director with financial and accounting expertise is a director who, by reason of his or her education, professional experience and skill, has a high level of proficiency in and understanding of business accounting matters and financial statements. He or she must be able to thoroughly comprehend the financial statements of the listed company and initiate debate regarding the manner in which financial information is presented. In determining the number of directors required to have such expertise, the board of directors must consider, among other things, the type and size of the company and the scope and complexity of its operations. Our board of directors has determined that we require at least two directors with the requisite financial and accounting expertise and that Messrs. Benhamou and Gill have such expertise.
 
Each of our executive officers serves at the discretion of the board of directors and holds office until his or her resignation or removal. There are no family relationships among any of our directors or executive officers.


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Outside Directors
 
Qualifications of Outside Directors
 
Under the Israeli Companies Law, companies incorporated under the laws of the State of Israel that are “public companies,” which also includes companies with shares listed on The Nasdaq Global Market, are required to appoint at least two outside directors at a shareholders’ meeting to be held within three months after the closing of this offering.
 
A person may not serve as an outside director if at the date of the person’s appointment or within the prior two years, the person, the person’s relatives, entities under the person’s control, or the person’s partner or employer, have or had any affiliation with us or any entity controlled by or under common control with us during the prior two years, or which controls us at the time of such person’s appointment.
 
The term affiliation includes:
 
  •  an employment relationship;
 
  •  a business or professional relationship maintained on a regular basis;
 
  •  control; and
 
  •  service as an office holder, excluding service as a director in a private company prior to the first offering of its shares to the public if such director was appointed as a director of the private company in order to serve as an outside director following the public offering.
 
The term relative is defined as spouses, siblings, parents, grandparents, descendants, spouse’s descendants and the spouses of each of these persons.
 
The term office holder is defined as a director, general manager, chief business manager, deputy general manager, vice general manager, executive vice president, vice president, other manager directly subordinate to the general manager or any other person assuming the responsibilities of any of the foregoing positions, without regard to such person’s title.
 
No person can serve as an outside director if the person’s position or other business create, or may create, a conflict of interests with the person’s responsibilities as a director or may otherwise interfere with the person’s ability to serve as a director. If at the time an outside director is appointed all current members of the board of directors are of the same gender, then that outside director must be of the other gender.
 
The Companies Law provides that an outside director must meet certain professional qualifications or have financial and accounting expertise, and that at least one outside director must have financial and accounting expertise. However, if at least one of our directors meets the independence requirements of the Securities Exchange Act of 1934, as amended, and the standards of The Nasdaq Global Market rules for membership on the audit committee and also has financial and accounting expertise as defined in the Companies Law and applicable regulations, then our outside directors are required to meet the professional qualifications only. The regulations define a director with the requisite professional qualifications as a director who satisfies one of the following requirements: (1) the director holds an academic degree in either economics, business administration, accounting, law or public administration, (2) the director either holds an academic degree in any other field or has completed another form of higher education in the company’s primary field of business or in an area which is relevant to the office of an outside director, or (3) the director has at least five years of cumulative experience serving in one or more of the following capacities: (a) a senior business management position in a corporation with a substantial scope of business, (b) a senior position in the company’s primary field of business or (c) a senior position in public administration.
 
Until the lapse of two years from termination of office, a company may not engage an outside director to serve as an office holder and cannot employ or receive professional services for payment from that person, either directly or indirectly, including through a corporation controlled by that person.


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Election of Outside Directors
 
Outside directors are elected by a majority vote at a shareholders’ meeting, provided that either:
 
  •  the majority of shares voted at the meeting, including at least one-third of the shares of non-controlling shareholders voted at the meeting, excluding abstentions, vote in favor of the election of the outside director; or
 
  •  the total number of shares of non-controlling shareholders voted against the election of the outside director does not exceed one percent of the aggregate voting rights in the company.
 
The initial term of an outside director is three years and he or she may be reelected to additional terms of three years each by a majority vote at a shareholders’ meeting, subject to the conditions described above for election of outside directors. Reelection to each additional term beyond the first extension must comply with the following additional conditions: (1) the audit committee and, subsequently, the board of directors confirmed that the reelection for an additional term is for the benefit of the company, taking into account the outside director’s expertise and special contribution to the function of the board of directors and its committees, and (2) the general meeting of the company’s shareholders, prior to its approval of the reelection of the outside director, was informed of the term previously served by him or her and of the reasons of the board of directors and audit committee for the extension of the outside director’s term. Outside directors may only be removed by the same majority of shareholders as is required for their election, or by a court, as follows: (1) if the board of directors is made aware of a concern that an outside director has ceased to meet the statutory requirements for his or her appointment, or has violated his or her duty of loyalty to the company, then the board of directors is required to discuss the concern and determine whether it is justified, and if the board of directors determines that the concern is justified, to call a special general meeting of the company’s shareholders, the agenda of which includes the dismissal of the outside director; and (2) at the request of a director or a shareholder of the company, a court may remove an outside director from office if it determines that the outside director has ceased to meet the statutory requirements for his or her appointment, or has violated his or her duty of loyalty to the company, or (3) at the request of the company, a director, a shareholder or a creditor of the company, a court may remove an outside director from office if it determines that the outside director is unable to perform his or her duties on a regular basis, or is convicted of certain offenses set forth in the Companies Law. If the vacancy of an outside directorship causes the company to have fewer than two outside directors, a company’s board of directors is required under the Companies Law to call a special general meeting of the company’s shareholders as soon as possible to appoint a new outside director.
 
Each committee to which the company’s board delegates power is required to include at least one outside director and our audit and finance committee is required to include all of the outside directors.
 
An outside director is entitled to compensation in accordance with regulations promulgated under the Companies Law and is otherwise prohibited from receiving any other compensation, directly or indirectly, in connection with services provided as an outside director.
 
Nasdaq Requirements
 
Under the rules of The Nasdaq Global Market, a majority of directors must meet the definition of independence contained in those rules. Our board of directors has determined that all of our directors, other than Miron (Ronnie) Kenneth meet the independence standards contained in the rules of The Nasdaq Global Market. We do not believe that any of these directors has a relationship that would preclude a finding of independence under these rules and, in reaching its determination, our board of directors determined that the other relationships that these directors have with us do not impair their independence.


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Audit and Finance Committee
 
Companies Law Requirements
 
Under the Companies Law, the board of directors of any public company must also appoint an audit committee comprised of at least three directors including all of the outside directors, but excluding the:
 
  •  chairman of the board of directors;
 
  •  controlling shareholder or a relative of a controlling shareholder; and
 
  •  any director employed by the company or who provides services to the company on a regular basis.
 
Nasdaq Requirements
 
Under The Nasdaq Global Market rules, we are required to maintain an audit committee consisting of at least three independent directors, all of whom are financially literate and one of whom has accounting or related financial management expertise. We have constituted an audit and finance committee. Our audit and finance committee members are required to meet additional independence standards, including minimum standards set forth in rules of the Securities and Exchange Commission and adopted by The Nasdaq Global Market.
 
Approval of Transactions with Office Holders and Controlling Shareholders
 
The approval of the audit and finance committee is required to effect specified actions and transactions with office holders and controlling shareholders. The term controlling shareholder means a shareholder with the ability to direct the activities of the company, other than by virtue of being an office holder. A shareholder is presumed to be a controlling shareholder if the shareholder holds 50.0% or more of the voting rights in a company or has the right to appoint the majority of the directors of the company or its general manager. For the purpose of approving transactions with controlling shareholders, the term also includes any shareholder that holds 25.0% or more of the voting rights of the company if the company has no shareholder that owns more than 50.0% of its voting rights. For purposes of determining the holding percentage stated above, two or more shareholders who have a personal interest in a transaction that is brought for the company’s approval are deemed as joint holders. The audit and finance committee may not approve an action or a transaction with a controlling shareholder or with an office holder unless at the time of approval two outside directors are serving as members of the audit committee and at least one of them was present at the meeting at which the approval was granted.
 
Audit and Finance Committee Role
 
Our board of directors has adopted an audit and finance committee charter setting forth the responsibilities of the audit and finance committee consistent with the rules of the Securities and Exchange Commission and The Nasdaq Global Market rules which include:
 
  •  retaining and terminating the company’s independent auditors, subject to shareholder ratification;
 
  •  pre-approval of audit and non-audit services provided by the independent auditors; and
 
  •  approval of transactions with office holders and controlling shareholders, as described above, and other related-party transactions.
 
Additionally, under the Companies Law, the role of the audit and finance committee is to identify irregularities in the business management of the company in consultation with the internal auditor or the company’s independent auditors and suggest an appropriate course of action to the board of directors and to approve the yearly or periodic work plan proposed by the internal auditor to the extent required. The audit and finance committee charter states that in fulfilling this role the committee is entitled to rely on interviews and consultations with our management, our internal auditor and our independent auditor, and is not obligated to conduct any independent investigation or verification.


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Our audit and finance committee consists of our directors, Eric Benhamou (Chairman), Thomas Gill and Dr. Yehoshua (Shuki) Gleitman. The financial expert on the audit and finance committee pursuant to the definition of the Securities and Exchange Commission is Eric Benhamou. Under the Companies Law, the outside directors who will be appointed within three months after our becoming a “public company” must be members of our audit and finance committee.
 
Compensation Committee
 
We have established a compensation committee consisting of our directors Thomas Gill (Chairman), Yehoshua (Shuki) Gleitman, P. Kevin Kilroy and Nechemia (Chemi) J. Peres. At least one of the outside directors to be appointed within three months after our becoming a “public company” must be a member of our compensation committee. Our board of directors has adopted a compensation committee charter setting forth the responsibilities of the committee consistent with The Nasdaq Global Market rules which include:
 
  •  reviewing and recommending overall compensation policies with respect to our chief executive officer and other executive officers;
 
  •  reviewing and approving corporate goals and objectives relevant to the compensation of our chief executive officer and other executive officers including evaluating their performance in light of such goals and objectives;
 
  •  reviewing and approving the granting of options and other incentive awards; and
 
  •  reviewing, evaluating and making recommendations regarding the compensation and benefits for our non-employee directors.
 
Nominating and Governance Committee
 
We have established a nominating and governance committee consisting of our directors Eric Benhamou (Chairman), P. Kevin Kilroy and Thomas Gill. Our board of directors has adopted a nominating and governance committee charter setting forth the responsibilities of the committee consistent with The Nasdaq Global Market rules which include:
 
  •  reviewing and recommending nominees for election as directors;
 
  •  developing and recommending to our board corporate governance guidelines and a code of conduct and ethics for our directors, officers and employees in compliance with applicable law;
 
  •  reviewing developments relating to corporate governance issues;
 
  •  reviewing and making recommendations regarding board member skills and qualifications, the nature of duties of board committees and other corporate governance matters; and
 
  •  establishing procedures for and administering annual performance evaluations of our board.
 
Internal Auditor
 
Under the Companies Law, the board of directors of a public company must appoint an internal auditor nominated by the audit committee. The role of the internal auditor is, among other things, to examine whether a company’s actions comply with applicable law and orderly business procedure. Under the Companies Law, the internal auditor may be an employee of the company but not an interested party or an office holder or a relative of an interested party or an office holder, nor may the internal auditor be the company’s independent auditor or the representative of the same.
 
An interested party is defined in the Companies Law as a holder of 5.0% or more of the issued share capital or voting power in a company, any person or entity who has the right to designate one director or more or the chief executive officer of the company or any person who serves as a director or as a chief executive officer. We intend to appoint an internal auditor following the closing of this offering.


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Approval of Specified Related Party Transactions Under Israeli Law
 
Fiduciary Duties of Office Holders
 
The Companies Law imposes a duty of care and a duty of loyalty on all office holders of a company.
 
The duty of care requires an office holder to act with the degree of care with which a reasonable office holder in the same position would have acted under the same circumstances. The duty of care includes a duty to use reasonable means, in light of the circumstances, to obtain:
 
  •  information on the advisability of a given action brought for his or her approval or performed by virtue of his or her position; and
 
  •  all other important information pertaining to these actions.
 
The duty of loyalty requires an office holder to act in good faith and for the benefit of the company, and includes the duty to:
 
  •  refrain from any conflict of interest between the performance of his or her duties in the company and his or her other duties or personal affairs;
 
  •  refrain from any activity that is competitive with the company;
 
  •  refrain from exploiting any business opportunity of the company for the purpose of gaining a personal advantage for himself or herself or others; and
 
  •  disclose to the company any information or documents relating to a company’s affairs which the office holder received as a result of his or her position as an office holder.
 
Disclosure of Personal Interests of an Office Holder
 
The Companies Law requires that an office holder promptly disclose to the company any personal interest that he or she may have and all related material information or documents in his or her possession relating to any existing or proposed transaction by the company. An interested office holder’s disclosure must be made promptly and in any event no later than the first meeting of the board of directors at which the transaction is considered. An office holder is not obliged to disclose such information if the personal interest of the office holder derives solely of the personal interest of his or her relative in a transaction that is not extraordinary.
 
“Personal interest” is defined under the Companies Law to include a personal interest of a person in an action or in the business of a company, including the personal interest of such person’s relative or the interest of any corporation in which the person is an interested party.
 
Under the Companies Law, an extraordinary transaction is a transaction:
 
  •  other than in the ordinary course of business;
 
  •  that is not on market terms; or
 
  •  that may have a material impact on the company’s profitability, assets or liabilities.
 
Under the Companies Law, once an office holder has complied with the above disclosure requirement, a company may approve a transaction between the company and the office holder or a third party in which the office holder has a personal interest, or approve an action by the office holder that would otherwise be deemed a breach of duty of loyalty. However, a company may not approve a transaction or action that is adverse to the company’s interest or that is not performed by the office holder in good faith. If the transaction is an extraordinary transaction, both the audit committee and the board of directors must approve the transaction. Under certain circumstances, shareholder approval may also be required. A director who has a personal interest in a matter which is considered at a meeting of the board of directors or the audit committee, may generally not be present at this meeting or vote on this matter unless a majority of the directors or members of the audit committee have a personal interest in the matter. If a majority of the directors have a personal interest in the matter, it also requires approval of the shareholders of the company.


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Under the Companies Law, unless the articles of association provide otherwise, a transaction with an office holder, or a transaction with a third party in which the office holder has a personal interest, requires approval by the board of directors. If it is an extraordinary transaction or an undertaking to indemnify or insure an office holder who is not a director, audit committee approval is required, as well. Arrangements regarding the compensation, indemnification or insurance of a director require the approval of the audit committee, board of directors and shareholders, in that order. Our articles of association provide that a non-extraordinary transaction with an office holder, or with a third party in which an office holder has a personal interest, may be approved by our board of directors or by a committee of our board of directors to which out board of directors has delegated its authority for such purpose. Our board of directors has delegated such authority to the compensation committee.
 
Disclosure of Personal Interests of a Controlling Shareholder
 
Under the Companies Law, the disclosure requirements that apply to an office holder also apply to a controlling shareholder of a public company. Extraordinary transactions with a controlling shareholder or in which a controlling shareholder has a personal interest, and the terms of engagement of a controlling shareholder or a controlling shareholder’s relative, whether as an office holder or an employee, require the approval of the audit committee, the board of directors and a majority of the shares voted by the shareholders of the company participating and voting on the matter in a shareholders’ meeting. In addition, the shareholder approval must fulfill one of the following requirements:
 
  •  at least one-third of the shares held by shareholders who have no personal interest in the transaction and are voting at the meeting must be voted in favor of approving the transaction, excluding abstentions; or
 
  •  the shares voted by shareholders who have no personal interest in the transaction who vote against the transaction represent no more than 1.0% of the voting rights in the company.
 
Under the Companies Law, a shareholder has a duty to refrain from abusing its power in the company and to act in good faith and in an acceptable manner in exercising its rights and performing its obligations to the company and other shareholders, including, among other things, voting at general meetings of shareholders on the following matters:
 
  •  an amendment to the articles of association;
 
  •  an increase in the company’s authorized share capital;
 
  •  a merger; and
 
  •  approval of related party transactions that require shareholder approval.
 
A shareholder also has a general duty to refrain from acting to the detriment of other shareholders.
 
In addition, any controlling shareholder, any shareholder that knows that its vote can determine the outcome of a shareholder vote and any shareholder that, under the company’s articles of association, has the power to appoint or prevent the appointment of an office holder, or has another power with respect to the company, is under a duty to act with fairness towards the company. The Companies Law does not describe the substance of this duty except to state that the remedies generally available upon a breach of contract will also apply in the event of a breach of the duty to act with fairness, taking the shareholder’s position in the company into account.
 
Exculpation, Insurance and Indemnification of Office Holders
 
Under the Companies Law, a company may not exculpate an office holder from liability for a breach of the duty of loyalty. However, the company may approve an act performed in breach of the duty of loyalty of an office holder provided that the office holder acted in good faith, the act or its approval does not harm the company, and the office holder discloses the nature of his or her personal interest in the act and all material facts and documents a reasonable time before discussion of the approval. An Israeli company may exculpate


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an office holder in advance from liability to the company, in whole or in part, for damages caused to the company as a result of a breach of duty of care but only if a provision authorizing such exculpation is inserted in its articles of association. Our articles of association include such a provision. An Israeli company may not exculpate a director for liability arising out of a prohibited dividend or distribution to shareholders.
 
An Israeli company may indemnify an office holder in respect of certain liabilities either in advance of an event or following an event provided a provision authorizing such indemnification is inserted in its articles of association. Our articles of association contain such an authorization. An undertaking provided in advance by an Israeli company to indemnify an office holder with respect to a financial liability imposed on him or her in favor of another person pursuant to a judgment, settlement or arbitrator’s award approved by a court must be limited to events which in the opinion of the board of directors can be foreseen based on the company’s activities when the undertaking to indemnify is given, and to an amount or according to criteria determined by the board of directors as reasonable under the circumstances, and such undertaking shall detail the abovementioned events and amount or criteria. In addition, a company may undertake in advance to indemnify an office holder against the following liabilities incurred for acts performed as an office holder:
 
  •  reasonable litigation expenses, including attorneys’ fees, incurred by the office holder as a result of an investigation or proceeding instituted against him or her by an authority authorized to conduct such investigation or proceeding, provided that (i) no indictment was filed against such office holder as a result of such investigation or proceeding; and (ii) no financial liability, such as a criminal penalty, was imposed upon him or her as a substitute for the criminal proceeding as a result of such investigation or proceeding or, if such financial liability was imposed, it was imposed with respect to an offense that does not require proof of criminal intent; and
 
  •  reasonable litigation expenses, including attorneys’ fees, incurred by the office holder or imposed by a court in proceedings instituted against him or her by the company, on its behalf or by a third party or in connection with criminal proceedings in which the office holder was acquitted or as a result of a conviction for an offense that does not require proof of criminal intent.
 
An Israeli company may insure an office holder against the following liabilities incurred for acts performed as an office holder if and to the extent provided in the company’s articles of association:
 
  •  a breach of duty of loyalty to the company, to the extent that the office holder acted in good faith and had a reasonable basis to believe that the act would not prejudice the company;
 
  •  a breach of duty of care to the company or to a third party, including a breach arising out of the negligent conduct of the office holder; and
 
  •  a financial liability imposed on the office holder in favor of a third party.
 
An Israeli company may not indemnify or insure an office holder against any of the following:
 
  •  a breach of duty of loyalty, except to the extent that the office holder acted in good faith and had a reasonable basis to believe that the act would not prejudice the company;
 
  •  a breach of duty of care committed intentionally or recklessly, excluding a breach arising out of the negligent conduct of the office holder;
 
  •  an act or omission committed with intent to derive illegal personal benefit; or
 
  •  a fine or forfeit levied against the office holder.
 
Under the Companies Law, exculpation, indemnification and insurance of office holders must be approved by our audit committee and our board of directors and, in respect of our directors, by our shareholders.
 
Our articles of association allow us to indemnify and insure our office holders to the fullest extent permitted by the Companies Law. Our office holders are currently covered by a directors and officers’ liability insurance policy. As of the date of this offering, no claims for directors and officers’ liability insurance have been filed under this policy and we are not aware of any pending or threatened litigation or proceeding involving any of our directors or officers in which indemnification is sought.


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We have entered into agreements with each of our directors and executive officers exculpating them, to the fullest extent permitted by law, from liability to us for damages caused to us as a result of a breach of duty of care, and undertaking to indemnify them to the fullest extent permitted by law, including with respect to liabilities resulting from this offering. This indemnification is limited to events determined as foreseeable by the board of directors based on our activities, and to an amount or according to criteria determined by the board of directors as reasonable under the circumstances, and the insurance is subject to our discretion depending on its availability, effectiveness and cost. The current maximum amount set forth in such agreements is the greater of (1) with respect to indemnification in connection with a public offering of our securities, the gross proceeds raised by us and/or any selling shareholder in such public offering, and (2) with respect to all permitted indemnification, including a public offering of our securities, an amount equal to 50% of the our shareholders’ equity on a consolidated basis, based on our most recent financial statements made publicly available before the date on which the indemnity payment is made. In the opinion of the U.S. Securities and Exchange Commission, however, indemnification of directors and office holders for liabilities arising under the Securities Act is against public policy and therefore unenforceable.
 
Compensation of Office Holders
 
The aggregate compensation paid by us and our subsidiaries to our current executive officers, including stock based compensation, for the three months ended March 31, 2007 was approximately $0.5 million. This amount includes approximately $0.1 million set aside or accrued to provide pension, severance, retirement or similar benefits or expenses, but does not include business travel, relocation, professional and business association dues and expenses reimbursed to office holders, and other benefits commonly reimbursed or paid by companies in Israel. None of our directors has so far received any cash compensation for his or her services as a director other than reimbursement of expenses.
 
Commencing July 1, 2007, we will pay an annual cash retainer and per meeting cash fee to each of our non-employee directors and will reimburse them for expenses arising from their board membership. The annual cash retainer will be comprised of a base amount of $20,000 to each person serving as a director, plus an annual amount of up to $5,000 for membership or chairmanship on a committee of the board of directors. Our lead independent director, who is currently Eric Benhamou, will receive an additional annual cash retainer of $25,000. Our outside directors will each receive an annual cash retainer equal to the lower of $26,000 and the maximum amount permitted under the Israeli regulations with respect to annual compensation of outside directors. In addition, each existing non-employee director who does not currently hold options to purchase our ordinary shares and each future non-employee director will receive upon his or her appointment, election or reelection, an initial grant of options to purchase 50,000 of our ordinary shares, subject to a four year vesting period. At such time as the options granted to each of our existing and future non-employee directors become fully vested and every twelve months thereafter, such director will be granted additional options to purchase 12,500 of our ordinary shares, subject to a one-year vesting period. The vesting of the options granted to a non-employee director will be accelerated upon a change of control as part of which such non-employee director is asked to resign, is terminated or is not asked to become a director in the successor company.
 
Employment and Consulting Agreements with Executive Officers
 
We have entered into written employment agreements with all of our executive officers. These agreements each contain provisions regarding noncompetition, confidentiality of information and assignment of inventions. The enforceability of covenants not to compete in Israel and the United States is subject to limitations. The provisions of certain of our executive officers’ employment agreements contain termination or change of control provisions. See “Certain Relationships and Related Party Transactions — Agreements with Directors and Officers — Employment of Ronnie Kenneth”, “Employment of Mark Favreau” and “Employment of Patrick Guay” for additional information.


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Share Options Plans
 
We have adopted four stock option plans and, as of March 31, 2007, we had (i) 3,604,976 ordinary shares reserved for issuance under these plans, with respect to which options to purchase 2,977,803 ordinary shares at a weighted average exercise price of $1.26 and options to purchase 6,127 ordinary shares at an exercise price of $320.00 were outstanding, and (ii) options to purchase 45,307 ordinary shares already exercised by certain of the grantees and such shares had been issued by us. As of March 31, 2007, options to purchase 2,004,309 ordinary shares were vested and exercisable. Any shares underlying any option that terminates without exercise under any of our plan become available for future issuance under all plans. However, following the adoption of our 2003 Section 102 Plan, we stopped making any grants under our 2001 Section 102 Plan. Furthermore, there will be no additional grants under our 2001 Plan following the date on which the 2007 Incentive Compensation Plan becomes effective, which is the date of closing of this offering, and there will be no additional grants under our 2003 Section 102 Plan following the approval of our 2007 Plan by the Israeli tax authority, which is expected within three months of the date of this prospectus.
 
The following table provides information regarding the options to purchase our ordinary shares by each of our directors or executive officers beneficially owning greater than one percent of our ordinary shares or options to purchase more than one percent of our ordinary shares immediately prior to the closing of this offering:
 
                                 
    Number of Shares
                Total Shares
 
    Underlying
    Exercise
          Underlying
 
Name
  Options     Price     Expiration Date     Options  
 
Ronnie Kenneth
    692,863     $ 1.00       July 13, 2014          
      141,332       1.00       June 5, 2015          
      184,172       1.00       January 1, 2016          
      27,101       4.40       February 22, 2017          
      275,799       8.00       May 21, 2017       1,321,267  
Mark Favreau
    213,144     $ 1.00       July 13, 2014          
      7,500       8.00       May 21, 2017       220,644  
 
2007 Incentive Compensation Plan
 
We adopted the 2007 Incentive Compensation Plan to become effective upon the closing of this offering. Following the approval of the 2007 plan by the Israeli tax authorities, which we expect will be within three months of the date of this prospectus, we will only grant options or other equity incentive awards under the 2007 plan, although previously-granted options will continue to be governed by our other plans. The 2007 plan is intended to further our success by increasing the ownership interest of certain of our and our subsidiaries’ employees, directors and consultants and to enhance our and our subsidiaries’ ability to attract and retain employees, directors and consultants.
 
We may issue up to 296,570 ordinary shares remaining available for issuance and not subject to outstanding awards under our 2003 Section 102 Plan, 2001 Section 102 Plan and 2001 Plan on June 22, 2007, upon the exercise or settlement of share options or other equity incentive awards granted under the 2007 plan. The number of ordinary shares that we may issue under the 2007 plan will increase on the first day of each fiscal year during the term of the 2007 plan, in each case in an amount equal to the lesser of (i) 1,500,000 shares, (ii) 4.0% of our outstanding ordinary shares on the last day of the immediately preceding year, or (iii) an amount determined by our board of directors. The number of shares subject to the 2007 plan is also subject to adjustment if particular capital changes affect our share capital. Ordinary shares subject to outstanding awards under the 2007 plan or our 2003 Section 102 Plan, 2001 Section 102 Plan or 2001 Plan that are subsequently forfeited or terminated for any other reason before being exercised will again be available for grant under the 2007 plan. As of the closing of this offering, no options or other awards will have been granted under the 2007 plan.
 
A share option is the right to purchase a specified number of ordinary shares in the future at a specified exercise price and subject to the other terms and conditions specified in the option agreement and the 2007


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plan. The exercise price of each option granted under the 2007 plan will be determined by our compensation committee and for “incentive stock options” shall be equal to or greater than the fair market value of our ordinary shares at the time of grant (except for any options granted under the 2007 plan in substitution or exchange for options or awards of another company involved in a corporate transaction with us or a subsidiary, which will have an exercise price that is intended to preserve the economic value of the award that is replaced). The exercise price of any share options granted under the 2007 plan may be paid in cash, ordinary shares already owned by the option holder or any other method that may be approved by our compensation committee, such as a cashless broker-assisted exercise that complies with law.
 
Our compensation committee may also grant, or recommend that our board of directors to grant, other forms of equity incentive awards under the 2007 plan, such as restricted share awards, share appreciation rights, restricted share units and other forms of equity-based compensation.
 
Israeli participants in the 2007 plan may be granted options subject to Section 102 of the Israeli Income Tax Ordinance. Section 102 of the Israeli Income Tax Ordinance allows employees, directors and officers, who are not controlling shareholders and are considered Israeli residents to receive favorable tax treatment for compensation in the form of shares or options. We have elected to issue our options and shares under Section 102(b)(2) of the ordinance, the capital gains track. To comply with the capital gains track, all options and shares issued under the plan, as well as any shares received subsequently following any realization of rights with respect to such options and shares, are granted to a trustee and should be held by the trustee for a period of two years from the date of grant. Under the capital gains track we are not allowed to deduct an expense with respect to the issuance of the options or shares. Under certain conditions we will be able to change our election with respect to future grants under the plan. In addition, we will be able to make a different election under a new plan. Any stock options granted under the 2007 plan to participants in the United States will be either “incentive stock options,” which may be eligible for special tax treatment under the Internal Revenue Code of 1986, or options other than incentive stock options (referred to as “nonqualified stock options”), as determined by our compensation committee and stated in the option agreement.
 
Our compensation committee will administer the 2007 plan. Our board of directors may, subject to any legal limitations, exercise any powers or duties of the compensation committee concerning the 2007 plan. The compensation committee will select which of our and our subsidiaries’ and affiliates’ eligible employees, directors and/or consultants shall receive options or other awards under the 2007 plan and will determine, or recommend to our board of directors, the number of ordinary shares covered by those options or other awards, the terms under which such options or other awards may be exercised (however, options generally may not be exercised later than 10 years from the grant date of an option) or may be settled or paid, and the other terms and conditions of such options and other awards under the 2007 plan in accordance with the provisions of the 2007 plan. Holders of options and other equity incentive awards may not transfer those awards, unless they die or, except in the case of incentive stock options, the compensation committee determines otherwise.
 
If we undergo a change of control, as defined in the 2007 plan, subject to any contrary law or rule, or the terms of any award agreement in effect before the change of control, (a) the compensation committee may, in its discretion, accelerate the vesting, exercisability and payment, as applicable, of outstanding options and other awards; and (b) the compensation committee, in its discretion, may adjust outstanding awards by substituting ordinary shares or other securities of any successor or another party to the change of control transaction, or cash out outstanding options and other awards, in any such case, generally based on the consideration received by our shareholders in the transaction.
 
Subject to particular limitations specified in the 2007 plan and under applicable law, our board of directors may amend or terminate the 2007 plan, and the compensation committee may amend awards outstanding under the 2007 plan. The 2007 plan will continue in effect until all ordinary shares available under the 2007 plan are delivered and all restrictions on those shares have lapsed, unless the 2007 plan is terminated earlier by our board of directors. No awards may be granted under the 2007 plan on or after the tenth anniversary of the date of adoption of the plan.


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The 2003 Section 102 Stock Option/Stock Purchase Plan
 
The 2003 Section 102 Stock Option/Stock Purchase Plan, or the 2003 Section 102 Plan, provides for the grant of stock options or issuance of shares under share purchase agreements to our and our affiliates’ employees, including officers and directors. As of March 31, 2007, there were (i) options to purchase 1,931,641 ordinary shares outstanding under the 2003 Section 102 Plan, of which 1,413,568 were vested and exercisable and (ii) options to purchase 45,307 ordinary shares under the 2003 Section 102 Plan that were already exercised.
 
The terms of the 2003 Section 102 Plan are intended to comply with Section 102 of the Israeli Income Tax Ordinance, or the ordinance, following its amendment in 2003, which allows employees, directors and officers, who are not controlling shareholders and are considered Israeli residents for tax purposes, to receive favorable tax treatment for compensation in the form of shares or share options.
 
We have elected to issue our options and shares under Section 102(b)(2) of the ordinance, the capital gains track. To comply with the capital gains track, all options and shares issued under the plan, as well as any shares received subsequently following any realization of rights with respect to such options and shares, are granted to a trustee and should be held by the trustee for a period of two years from the date of grant if granted after January 1, 2006, or for a period, which is the lesser of 30 months from the date of grant or two years following the end of the tax year in which the options or shares were originally granted, if granted before January 1, 2006.
 
The 2003 Section 102 Plan is administered by our board of directors which has delegated responsibilities to our compensation committee. Our compensation committee is authorized to determine the grantees of options and the terms of the grant, including, the number and type of options or shares granted, exercise prices, method of payment, vesting schedules, and all other matters necessary in the administration of the 2003 Section 102 Plan. Our board of directors determines the maximum number of shares that may be issued under the 2003 Section 102 Plan. An appropriate and proportionate adjustment will be made in (1) the maximum number and kind of shares reserved for issuance under the 2003 Section 102 Plan, (2) the number and kind of shares or other securities already issued under the 2003 Section 102 Plan or subject to any outstanding options and (3) the per share exercise prices of outstanding options, in the event of stock dividends, stock splits, mergers, asset sales, reorganizations, recapitalizations or other corporate transactions that affect our shares as described in the 2003 Section 102 Plan.
 
Options under the 2003 Section 102 Plan generally vest and become exercisable over a period of four years with 25% vesting on the first anniversary of the vesting start date and 6.25% vesting at the end of each subsequent three months period. See “Certain Relationships and Related Party Transactions — Agreements with Directors and Officers — Employment Agreements” for a description of accelerating provisions applicable to options held by Miron (Ronnie) Kenneth, Mark Favreau and Patrick Guay. Options generally expire ten years from the grant date. Grantees may exercise their options after seven years from the grant date, unless our board of directors decides otherwise. However, vested options may be exercised earlier upon the earlier of (1) the date we sell our shares in an underwritten public offering (an “IPO”) (2) the date our board of directors approves the final form of the documents for an acquisition event, defined as a (i) merger, acquisition or consolidation, resulting in our voting securities outstanding immediately prior thereto (either by remaining outstanding or by being converted into voting securities of the surviving or acquiring entity) representing immediately thereafter less than 50% of the combined voting power of our voting securities or the voting securities of such surviving or acquiring entity; (ii) sale of all or substantially all of our assets; or (iii) our complete liquidation, or (3) if a grantee’s employment terminates for any reason other than for cause before such IPO or acquisition event, the grantee or his estate may exercise his vested options as described in the paragraph below, subject to compliance with any requirements prescribed by our compensation committee. Options may not be transferred, except upon the grantee’s death by will or the laws of descent and distribution.
 
If we terminate an employee for cause, all of the employee’s options expire on the cessation date, unless our compensation committee decides otherwise. Upon termination of employment for any reason, other than for cause or death or disability, the grantee may exercise his or her vested options within three months of the


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date of termination, unless prescribed otherwise by our compensation committee. Upon termination of employment due to death or disability, an employee or his or her estate may exercise his or her vested options within twelve months from the date of death or disability. Options may not, however, be exercised after the option’s expiration date.
 
Upon the occurrence of an acquisition event, our board of directors will take any one or more of the following actions with respect to the outstanding options: (i) provide that the outstanding options will be assumed, or have equivalent options substituted, by the acquiring or succeeding corporation, as long as those substituted options satisfy Section 102, (ii) provide that all unexercised options will become exercisable in full or in part as of a specified time and terminate immediately prior to the acquisition event, (iii) if the terms of the acquisition event provide that the holders of outstanding ordinary shares will receive upon consummation of the acquisition event a cash payment for each share surrendered in the acquisition event, make or provide for a cash payment to grantees that is equal to the acquisition price per share times the shares subject to the grantee’s vested options, minus the aggregate exercise price of such vested options, in exchange for the termination of vested and unvested options, or (iv) provide that all vested and unvested outstanding options will terminate immediately prior to the acquisition event.
 
The 2003 Section 102 Plan provides that the trustee will vote the shares held by it in trust pursuant to the terms of this plan in accordance with the directions of our board of directors.
 
Our board of directors may at any time amend or terminate the 2003 Section 102 Plan provided, however, that any such action shall not adversely affect any options or shares granted under the plan prior to such action. Unless terminated earlier by our board of directors, the 2003 Section 102 Plan will terminate in 2013.
 
The 2001 Section 102 Stock Option/Stock Purchase Plan
 
The 2001 Section 102 Stock Option/Stock Purchase Plan, or the 2001 Section 102 Plan provided for the grant of shares or share options to our employees. As of March 31, 2007, there were options to purchase 1,403 ordinary shares outstanding under the 2001 Section 102 Plan, all of which were vested and exercisable, and none of which were exercised.
 
The terms of the 2001 Section 102 Plan are intended to comply with Section 102 of the ordinance, as was in effect in 2001 and prior to its amendment in 2003, which allows employees, who are considered Israeli residents for tax purposes, to receive favorable tax treatment for compensation in the form of shares or share options. Other than the different tax treatment, the terms of our 2001 Section 102 Plan are substantially similar to the terms of the our 2003 Section 102 Plan. Our 2001 Section 102 Plan will terminate in 2011.
 
2001 Stock Option Plan
 
The 2001 Stock Option Plan, or the 2001 Plan, provides for the grant of stock options to our and our affiliates’ consultants and advisors and non-Israeli employees, officers and directors. As of March 31, 2007, there were options to purchase 1,050,886 ordinary shares outstanding, of which 589,338 were vested and exercisable, and none of which were exercised.
 
Options granted under the 2001 Plan that are granted to persons who are considered U.S. residents for tax purposes may be either incentive stock options under the requirements of Section 422 of the U.S. Internal Revenue Code, or the Code, or non-statutory stock options that are not intended to meet those requirements. Incentive stock options may only be granted to employees of us or any parent or subsidiary of us. In respect of incentive stock options, the 2001 Plan provides for special terms relating to exercise price and dollar limitation on vesting of incentive stock options, as required to meet the requirements of Section 422 of the Code. Other than the different tax treatment, the terms of our 2001 Plan are substantially similar to the terms of our 2003 Section 102 Plan. Our 2001 Plan will terminate in 2011.


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CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
 
Our policy is to enter into transactions with related parties on terms that, on the whole, are no more favorable, or no less favorable, than those available from unaffiliated third parties. Based on our experience in the business in which we operate and the terms of our transactions with unaffiliated third parties, we believe that all of the transactions described below met this policy standard at the time they occurred.
 
Financing Transactions
 
Original rounds of financing.  Since our founding, we have raised capital through multiple rounds of financing. Between 1997 and 2002, we raised capital through sales of our ordinary shares and our Series A, Series B, Series B1, Series C, Series D, Series D1 and Series D2 preferred shares.
 
Series E financing.  In 2004, we sold Series E preferred shares convertible into 3,749,994 ordinary shares, at a purchase price per share of $4.00 for an aggregate investment of $15.0 million. In 2005, we sold additional Series E preferred shares convertible into 4,249,997 ordinary shares, at a purchase price per share of $4.00 for an aggregate investment of $17.0 million. Each Series E preferred share will convert into one ordinary share upon the closing of this offering.
 
In connection with the sale of our Series E preferred shares in 2004, our Series A, Series B and Series B1 preferred shares were converted into ordinary shares. At the time of this conversion, we issued junior liquidation securities to the SFK Group, Pitango Venture Capital Group, K.T. Concord, the Challenge Fund-Etgar II, LP and other shareholders. The junior liquidation securities entitle the holders to an aggregate payment of $1.8 million, following payment of certain required amounts to the holders of the Series C, D, E, and E2 preferred shares, if we complete a merger transaction or are acquired or liquidated. The junior liquidation securities do not have voting rights and will be cancelled upon the closing of this offering for no consideration.
 
The following table sets forth the number of ordinary shares resulting from conversion upon the closing of this offering of the Series E preferred shares purchased by entities which, as of the date of this prospectus, beneficially own more than 5.0% of our outstanding ordinary shares assuming the conversion of all of our outstanding preferred shares:
 
                 
          Number of Ordinary
 
          Shares Resulting from the
 
    Aggregate
    Conversion of Series E
 
Shareholder
  Purchase Price     Preferred Shares  
 
BCF II Belgium Holding SPRL (an affiliate of Baker Capital)
  $ 8,068,000       2,017,000  
Pitango Venture Capital Group
    6,684,000       1,670,998  
Vertex Venture Capital Group
    7,468,000       1,866,998  
Tamir Fishman Group
    2,133,590       533,395  
SFK Group
    2,186,236       546,558  


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Series E2 financing.  In February and March 2007, we sold Series E2 preferred shares convertible into 1,802,654 ordinary shares, at a purchase price per underlying share of $6.32 in consideration for an aggregate investment of $11.4 million. Each Series E2 preferred share will convert into one ordinary share upon the closing of this offering. The following table sets forth the number of ordinary shares resulting from conversion upon the closing of this offering of the Series E2 preferred shares purchased by entities which, as of the date of this prospectus, beneficially own more than 5.0% of our outstanding ordinary shares assuming the conversion of all of our outstanding preferred shares:
 
                 
          Number of Ordinary
 
          Shares Resulting from the
 
    Aggregate
    Conversion of Series E2
 
Shareholder
  Purchase Price     Preferred Shares  
 
BCF II Belgium Holding SPRL (an affiliate of Baker Capital)
  $ 3,183,671       503,745  
Pitango Venture Capital Group
    2,453,860       388,265  
Vertex Venture Capital Group
    1,577,984       249,679  
SFK Group
    741,687       117,354  
Tamir Fishman Group
    769,273       121,717  
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