- Quarterly Report (10-Q)

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2012

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 001-33391

DIALOGIC INC.

(Exact Name of Registrant as Specified in Its Charter)

Delaware

94-3409691

(State or Other Jurisdiction of

Incorporation or Organization)

(I.R.S. Employer

Identification Number)

1504 McCarthy Boulevard

Milpitas, California 95035-7405

(Address, including zip code, of Principal Executive Offices)

(408) 750-9400

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

As of November 8, 2012, 14,402,947 shares of the registrant’s common stock were outstanding.

DIALOGIC INC

FORM 10-Q

For the Quarterly Period Ended September 30, 2012

INDEX


PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS
Unaudited Condensed Consolidated Balance Sheets			3
Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss			4
Unaudited Condensed Consolidated Statements of Cash Flows			5
Notes to Unaudited Condensed Consolidated Financial Statements			6
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS			23
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK			36
ITEM 4. CONTROLS AND PROCEDURES			36

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS			37
ITEM 1A. RISK FACTORS			37
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS			55
ITEM 3. DEFAULTS UPON SENIOR SECURITIES			55
ITEM 4. MINE SAFETY DISCLOSURES			55
ITEM 5. OTHER INFORMATION			55
ITEM 6. EXHIBITS			56
SIGNATURE			58

DIALOGIC INC.

Condensed Consolidated Balance Sheets

(in thousands, except share and per share data)


	September 30, 2012			December 31, 2011
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	2,661		$	10,353
Restricted cash		1,000			1,497
Accounts receivable, net of allowance of $3,797 and $3,622, respectively		39,393			47,460
Inventory		9,741			20,127
Other current assets		7,845			9,157

Total current assets		60,640			88,594
Property and equipment, net		6,479			7,947
Intangible assets, net		26,675			33,267
Goodwill		31,223			31,223
Other assets		1,680			2,311

Total assets	$	126,697		$	163,342

LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities:
Accounts payable	$	19,414		$	21,569
Accrued liabilities		18,298			22,449
Deferred revenue, current portion		13,503			14,872
Bank indebtedness		10,709			12,509
Income taxes payable		920			1,665
Interest payable, related parties		50			3,452

Total current liabilities		62,894			76,516
Long-term debt, related parties, net of discount		64,233			94,675
Warrants		4,917			—
Other long-term liabilities		8,649			7,587

Total liabilities		140,693			178,778

Commitments and contingencies
Preferred stock, $0.001 par value:
Authorized – 10,000,000 shares; Issued and outstanding - 1 share		—			—
Stockholders’ deficit:
Common stock, $0.001 par value:
Authorized – 200,000,000 shares; Issued and outstanding 14,401,747 and 6,295,230 shares, respectively		14			6
Additional paid-in capital		257,049			222,087
Accumulated other comprehensive loss		(22,630	)		(22,206	)
Accumulated deficit		(248,429	)		(215,323	)

Total stockholders’ deficit		(13,996	)		(15,436	)

Total liabilities and stockholders’ deficit	$	126,697		$	163,342

See accompanying notes to Unaudited Condensed Consolidated Financial Statements

DIALOGIC INC.

Unaudited Condensed Consolidated Statements of Operations

and Comprehensive Loss

(in thousands, except per share data)


	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
Revenue:
Products	$	32,140		$	36,604		$	92,249		$	118,428
Services		10,251			10,817			29,808			29,644

Total revenue		42,391			47,421			122,057			148,072

Cost of revenue:
Products		11,070			13,700			38,038			45,237
Services		5,118			5,358			15,267			16,215

Total cost of revenue		16,188			19,058			53,305			61,452

Gross profit		26,203			28,363			68,752			86,620

Operating expenses:
Research and development, net		9,266			13,540			33,459			42,262
Sales and marketing		9,261			12,664			31,935			41,829
General and administrative		7,375			9,391			23,766			27,552
Restructuring charges		457			1,674			4,760			6,421

Total operating expenses		26,359			37,269			93,920			118,064

Loss from operations		(156	)		(8,906	)		(25,168	)		(31,444	)

Other income (expense):
Interest and other income (expense), net		242			(3	)		95			(3	)
Interest expense		(1,792	)		(4,695	)		(8,836	)		(13,227	)
Change in fair value of warrants		1,750			—			2,154			—
Foreign exchange loss, net		(278	)		(51	)		(1,047	)		(384	)

Total other expense, net		(78	)		(4,749	)		(7,634	)		(13,614	)

Loss before provision (benefit) for income taxes		(234	)		(13,655	)		(32,802	)		(45,058	)
Income tax provision (benefit)		56			(557	)		304			588

Net loss	$	(290	)	$	(13,098	)	$	(33,106	)	$	(45,646	)

Net loss per share—basic and diluted	$	(0.03	)	$	(2.09	)	$	(4.34	)	$	(7.30	)
Weighted average shares of common stock used in calculation of net loss per share – basic and diluted		10,229			6,269			7,634			6,257

Other comprehensive loss:
Foreign exchange translation adjustment		(192	)		(267	)		(424	)		(142	)

Total comprehensive loss	$	(482	)	$	(13,365	)	$	(33,530	)	$	(45,788	)

See accompanying notes to Unaudited Condensed Consolidated Financial Statements

DIALOGIC INC.

Unaudited Condensed Consolidated Statements of Cash Flows

(in thousands)


	Nine Months Ended September 30,
	2012			2011
Cash flows from operating activities:
Net loss	$	(33,106	)	$	(45,646	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		9,205			14,062
Stock-based compensation		1,896			2,328
Amortization of debt issuance costs and debt discount		677			2,208
Fair value adjustment to warrants		(2,154	)		—
Loss on disposal of fixed assets		364			—
Payment-in-kind interest expense on long-term debt		2,986			630
Deferred taxes		(48	)		—
Bad debt expense, net		334			96
Other non-cash charges		(108	)		230
Net changes in operating assets and liabilities:
Accounts receivable		6,994			11,829
Inventories		9,742			5,905
Other current assets		1,715			5,116
Accounts payable and accrued liabilities		(5,031	)		(4,971	)
Deferred revenue		(1,617	)		(2,952	)
Income taxes payable		(693	)		(209	)
Interest payable, related parties		(443	)		305
Other long-term liabilities		1,396			—

Net cash used in operating activities		(7,891	)		(11,069	)

Cash flows from investing activities:
Restricted cash		497			(952	)
Purchases of property and equipment		(967	)		(2,315	)
Purchases of intangible assets		(73	)		(129	)
Other assets		—			(103	)

Net cash used in investing activities		(543	)		(3,499	)

Cash flows from financing activities:
Proceeds from the exercise of stock options		—			157
Debt issuance costs		(1,511	)		—
Proceeds from (payments on) bank indebtedness, net		(1,800	)		(1,190	)
Proceeds from long-term debt		4,000			—

Net cash provided by (used in) financing activities		689			(1,033	)

Effect of exchange rate changes on cash and cash equivalents		53			24

Net decrease in cash and cash equivalents		(7,692	)		(15,577	)
Cash and cash equivalents at beginning of period		10,353			24,559

Cash and cash equivalents at end of period	$	2,661		$	8,982

Supplemental disclosure of cash flow information:
Cash paid:
Interest	$	5,293		$	10,024

Income taxes	$	548		$	1,287

Non-cash transactions:
Fair value adjustments to goodwill	$	—		$	392

Prepayment premium on term loan conversion paid in convertible notes	$	1,500		$	—

Accrued interest converted to long-term debt	$	2,958		$	—

Issuance of warrants in connection with debt refinancing	$	7,072		$	—

Conversion of long-term debt	$	33,034		$	—

See accompanying notes to Unaudited Condensed Consolidated Financial Statements

DIALOGIC INC.

Notes to Unaudited Condensed Consolidated Financial Statements

(in thousands)

Note 1 – The Company

Dialogic Inc. (“Dialogic” or the “Company”) is a leading provider of telecommunications platforms and technology that enable developers and service providers to build and deploy innovative applications without concern for the complexities of the telecommunication medium or network. The Company specializes in providing products and solutions that enhance the mobile telecommunications experience.

Wireless and wireline service providers use the Company’s products to transport, convert and manage data and voice traffic while enabling VoIP and other multimedia services. These service providers also utilize the Company’s underlying technology to provide innovative revenue-generating value-added services such as messaging, Short Message Service, voice mail and conferencing. These services are also increasingly becoming video-enabled. Enterprises rely on the Company’s innovative products to enable the integration of IP and wireless technologies and endpoints into existing telecommunication networks, and to enable applications that serve businesses, including unified telecommunication applications, contact center and Interactive Voice Response/ Interactive Voice Video Response.

The Company sells its products to both enterprise and service provider customers, both directly and indirectly through distribution partners such as Technology Equipment Manufacturers, Value Added Resellers and other channel partners. The Company’s customers build their enterprise telecommunications solutions, networks, or value-added services on its products.

The Company was incorporated in Delaware on October 18, 2001 as Softswitch Enterprises, Inc., and subsequently changed its name to NexVerse Networks, Inc. in 2001, Veraz Networks, Inc. in 2002 and Dialogic Inc. in 2010.

Note 2 – Basis of Presentation

The accompanying unaudited condensed consolidated financial statements include the accounts of Dialogic and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.

The accompanying unaudited condensed consolidated financial statements as of September 30, 2012 and for the three and nine months ended September 30, 2012 and September 30, 2011 are unaudited. These financial statements and notes should be read in conjunction with the audited consolidated financial statements and related notes, together with management’s discussion and analysis of financial condition and results of operations, contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.

On September 14, 2012, the Company effected a reverse split of its common stock pursuant to which each five shares of common stock outstanding became one share of common stock. All references to shares in the accompanying unaudited condensed consolidated financial statements and the notes, including but not limited to the number of shares and per share amounts, unless otherwise noted, have been adjusted to reflect the reverse stock split retroactively for all periods presented. Previously awarded options, restricted stock units and warrants to purchase shares of the Company’s common stock have been also retroactively adjusted to reflect the reverse stock split.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”), and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim reporting. As permitted under those rules, certain footnotes or other financial information that are normally required by U.S. GAAP have been condensed or omitted, and accordingly the balance sheet as of December 31, 2011 has been derived from audited consolidated financial statements at that date but does not include all of the information required by U.S. GAAP for complete financial statements. In the opinion of management, the accompanying unaudited condensed consolidated financial statements and notes have been prepared on the same basis as the annual financial statements and include adjustments (consisting of normal recurring adjustments) necessary for the fair presentation of the Company’s financial position as of September 30, 2012, results of operations for the three and nine months ended September 30, 2012 and September 30, 2011, and cash flows for the nine months ended September 30, 2012 and September 30, 2011. Certain reclassifications have been made to prior periods to conform to the current period presentation.

Note 3 – Summary of Significant Accounting Policies

As of September 30, 2012, the Company’s significant accounting policies and estimates, which are detailed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011, have not changed except for the following:

(a) Risks and Uncertainties

As discussed further in Note 8, on March 22, 2012, the Company amended the second amended and restated credit agreement dated October 1, 2010 (the “Term Loan Agreement”) with Obsidian, LLC, as agent, and Special Value Expansion Fund, LLC, Special Value Opportunities Fund, LLC, and Tennenbaum Opportunities Partners V, LP, as lenders (collectively the “Term Lenders”), which extended the maturity date to March 31, 2015, reduced the stated interest rate to 10% from 15% and revised the financial covenants. Also discussed in more detail in Note 8, on April 11, 2012 $33.0 million of outstanding debt (face value) under the Term Loan

Agreement and $5.0 million of outstanding stockholder loans (the “Stockholder Loans”) were cancelled in exchange for convertible promissory notes (the “Notes”), which Notes were converted into common stock on August 8, 2012. These actions were determined to be a troubled debt restructuring and were taken to improve the Company’s liquidity, leverage and future operating cash flow. The Company also took certain restructuring actions during the nine months ended September 30, 2012 (see Note 9 for further discussion), designed to improve the Company’s future operating performance.

As discussed further in Notes 7 and 8, the Company is required to meet certain financial covenants under the Term Loan Agreement and Revolving Credit Facility, including minimum EBITDA (as adjusted), minimum liquidity, minimum interest coverage ratio and maximum consolidated total leverage ratio, each beginning in the quarter ending June 30, 2013. Specifically, the EBITDA (as adjusted) covenant requires $16.9 million of EBITDA (as adjusted) for the four quarters ending June 30, 2013. In the event that forecasts of EBITDA (as adjusted) are reduced from anticipated levels, the covenants may not be met and the Company would be required to reclassify its long-term debt under the Term Loan Agreement to current liabilities on the consolidated balance sheet.

If future covenant or other defaults occur under the Term Loan Agreement or under the Revolving Credit Agreement (the “Revolving Credit Agreement”) with Wells Fargo Foothill Canada ULC (the “Revolving Credit Lender”), the Company does not anticipate having sufficient cash and cash equivalents to repay the debt under these agreements should it be accelerated and would be forced to restructure these agreements and/or seek alternative sources of financing. There can be no assurances that restructuring of the debt or alternative financing will be available on acceptable terms or at all. In the event of an acceleration of the Company’s obligations under the Revolving Credit Agreement or Term Loan Agreement and the Company’s failure to pay the amounts that would then become due, the Revolving Credit Lender and Term Loan Lenders could seek to foreclose on the Company’s assets, as a result of which the Company would likely need to seek protection under the provisions of the U.S. Bankruptcy Code and/or its affiliates might be required to seek protection under the provisions of applicable bankruptcy codes. In that event, the Company could seek to reorganize its business or the Company or a trustee appointed by the court could be required to liquidate its assets. In either of these events, whether the stockholders receive any value for their shares is highly uncertain. If the Company needed to liquidate its assets, the Company might realize significantly less from them than the value that could be obtained in a transaction outside of a bankruptcy proceeding. The funds resulting from the liquidation of its assets would be used first to pay off the debt owed to secured creditors, including the Term Lenders and the Revolving Credit Lender, followed by any unsecured creditors, before any funds would be available to pay its stockholders. If the Company is required to liquidate under the federal bankruptcy laws, it is unlikely that stockholders would receive any value for their shares.

In order for the Company to meet the debt repayment requirements under the Term Loan Agreement and the Revolving Credit Agreement, the Company will need to raise additional capital by refinancing its debt, raising equity capital or selling assets. Uncertainty in future credit markets may negatively impact the Company’s ability to access debt financing or to refinance existing indebtedness in the future on favorable terms, or at all. If additional capital is raised through the issuance of debt securities or other debt financing, the terms of such debt may include different financial covenants, restrictions and financial ratios other than what the Company currently operates under. Any equity financing transaction could result in additional dilution to the Company’s existing stockholders.

Based on the Company’s current plans and business conditions, it believes that its existing cash and cash equivalents, expected cash generated from operations and available credit facilities will be sufficient to satisfy its anticipated cash requirements through 2012. The Company will need to either raise additional funding to fund future operations or to implement a business plan where cash flow will fully fund operations. However, there is no assurance that additional funding will be available to the Company on acceptable terms on a timely basis, if at all, or that we will achieve profitable operations. If the Company is unable to raise additional capital to fund our operations, it will need to curtail planned activities and to reduce costs. Doing so may affect the Company’s ability to operate effectively.

(b) Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Significant items subject to such estimates and assumptions include the useful lives of long-lived assets, the allowance for doubtful accounts, the reserves for sales returns and allowances, inventory obsolescence and warranty obligation, the valuation of deferred tax assets, stock-based compensation, income tax uncertainties, impairment testing of goodwill and intangible assets, estimating the fair value of assets acquired and liabilities assumed at date of acquisition for businesses acquired and the estimation of the fair value of warrants. The classification of the Company’s warrants as a liability requires the Company to estimate the fair value of these financial instruments at the end of each accounting period through the use of the Black-Scholes pricing model.

The financial statements include estimates based on currently available information and management’s judgment as to the outcome of future conditions and circumstances. Changes in the status of certain facts or circumstances could result in material changes in the estimates used in the preparation of the consolidated financial statements, and actual results could differ from the estimates and assumptions. Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic environment, which management believes to be reasonable under the circumstances. The Company adjusts such estimates and assumptions when facts and circumstances dictate. Illiquid credit markets, volatile equity, foreign

currency, emerging markets, and declines in consumer spending have combined to increase the uncertainty inherent in such estimates and assumptions. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates. Changes in those estimates resulting from continuing changes in the economic environment will be reflected in the financial statements in future periods.

(c) Concentrations and Credit risk

As of September 30, 2012 and December 31, 2011, accounts receivable aggregating approximately $9.2 million and $10.9 million, respectively, were insured for credit risk, which are amounts that represent total insured accounts receivable less an average co-insurance amount of 10%, subject to the terms of the insurance agreement. Under the terms of the insurance agreement, the Company is required to pay a premium equal to 0.20% of consolidated revenues.

No customer accounted for more than 10% of revenue for the three and nine months ended September 30, 2012 and September 30, 2011. No customer accounted for more than 10% of accounts receivable as of September 30, 2012. One customer accounted for 12% of accounts receivable as of December 31, 2011.

Note 4 – Goodwill and Intangible Assets

Goodwill at September 30, 2012 and December 31, 2011 was $31.2 million. The Company applies a fair value based impairment test to the carrying value of goodwill and indefinite-lived intangible assets on an annual basis in the fourth quarter of each fiscal year or earlier if indicators of impairment exist.

During the nine months ended September 30, 2012, the Company recorded additional amortization expense of $0.5 million for a change in useful lives of technology assets, which was recorded as a component of cost of product revenue in the accompanying unaudited condensed consolidated statements of operations. The Company wrote-off the gross intangible asset in the amount of $2.3 million and accumulated amortization in the amount of $2.3 million. There were no changes to the useful lives of the remaining intangible asset categories. As of September 30, 2012, no indicators of impairment were identified.

The following sets forth a summary of intangible assets as of September 30, 2012 and December 31, 2011:


	September 30, 2012
	Gross carrying amount		Accumulated amortization			Net carrying amount
Indefinite-lived intangibles:
Trade names	$	10,000	$	—		$	10,000
Finite-lived intangibles:
Technology		55,949		(44,628	)		11,321
Customer relationships		38,312		(33,137	)		5,175
Software licenses		3,489		(3,483	)		6
Other		1,317		(1,144	)		173

Total intangible assets	$	109,067	$	(82,392	)	$	26,675


	December 31, 2011
	Gross carrying amount		Accumulated amortization			Net carrying amount
Indefinite-lived intangibles:
Trade names	$	10,000	$	—		$	10,000
Finite-lived intangibles:
Technology		58,239		(42,529	)		15,710
Customer relationships		38,312		(30,994	)		7,318
Software licenses		3,489		(3,475	)		14
Other		1,244		(1,019	)		225

Total intangible assets	$	111,284	$	(78,017	)	$	33,267

Amortization expense was $1.6 million and $3.5 million for the three months ended September 30, 2012 and September 30, 2011, respectively. Amortization expense was $6.7 million and $10.4 million for the nine months ended September 30, 2012 and September 30, 2011, respectively.

Note 5 – Fair Value Measurement

Assets and liabilities are measured and recorded at fair value on a recurring basis for cash, cash equivalents and warrants, as presented in the accompanying unaudited condensed consolidated balance sheets as of September 30, 2012 and December 31, 2011. Cash equivalents consist of instruments with remaining maturities of three months or less at the date of purchase.

Fair Value of Financial Instruments

The fair value guidance clarifies the definition of fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The guidance classifies the inputs used to measure fair value into the following hierarchy:

Level 1: Unadjusted quoted prices in active markets for identical assets or liabilities

Level 2: Unadjusted quoted prices in active markets for similar assets or liabilities, unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs other than quoted prices that are observable for the assets or liability; and

Level 3: Unobservable inputs for the asset or liability.

The Company measures its warrants at fair value on a recurring basis and has determined that these financial assets should be classified as level 2 instruments in the fair value hierarchy. The following table sets forth the Company’s warrant liability that was measured at fair value as of September 30, 2012 using the Black-Scholes method of valuation using the following assumptions:


Expected Term	4.5 years
Volatility	90.00	%
Dividend Yield	0	%
Risk-Free Interest Rate	0.62	%


	Fair Value at Reporting Date Using
	September 30, 2012		Quoted prices in active markets for identical assets (level 1)		Significant other observable inputs (level 2)		Significant unobservable inputs (level 3)
Liabilities:
Warrants	$	4,917	$	—	$	4,917	$	—

The carrying amounts of cash, cash equivalents, accounts receivable, accounts payable and accrued liabilities and interest payable approximate fair value because of their generally short maturities. For cash equivalents the fair values are based on quoted market prices. The fair value of the revolving credit facility approximates the carrying amount since interest is based on market based variable rates and because of their short-term maturities.

Note 6 – Balance Sheet Components

The following tables set forth details of selected balance sheet items as of September 30, 2012 and December 31, 2011:


	September 30, 2012		December 31, 2011
Inventory:
Raw material and components	$	4,477	$	8,941
Work in process		2,120		6,799
Finished products		3,144		4,387

Total inventory	$	9,741	$	20,127

Inventory is stated at the lower of cost, determined on a first in, first out basis, or market, and consists primarily of raw material and components, work in process and finished products. During the nine months ended September 30, 2012, the Company recorded a charge of $4.8 million for the write-down of excess and obsolete inventory and capitalized overhead, which was recorded as a component of cost of product revenue in the accompanying unaudited condensed consolidated statements of operations.


	September 30, 2012			December 31, 2011
Property and equipment, net:
Computer equipment and software	$	40,617		$	41,668
Furniture and fixtures		3,237			3,811
Machinery and equipment		12,201			12,433
Leasehold improvements		4,592			4,709

		60,647			62,621
Accumulated depreciation		(54,168	)		(54,674	)

Total property and equipment, net	$	6,479		$	7,947

Depreciation expense on property and equipment was $0.7 million and $1.2 million for the three months and $2.5 million and $3.7 million for the nine months ended September 30, 2012 and September 30, 2011, respectively.


	September 30, 2012		December 31, 2011
Accrued liabilities:
Accrued compensation and benefits	$	7,680	$	9,554
Accrued restructuring expenses		2,137		1,828
Accrued royalty expenses		1,405		954
Accrued external sales agent commissions		1,255		1,230
Deferred rent		172		609
Other accrued expenses		5,649		8,274

Total accrued liabilities	$	18,298	$	22,449

Note 7 – Bank Indebtedness

The Company has a working capital facility, the Revolving Credit Agreement with the Revolving Credit Lender. On March 22, 2012, the Company entered into a Consent and Seventeenth Amendment (“Seventeenth Amendment”) to the Revolving Credit Agreement. Under the Seventeenth Amendment, the Revolving Credit Lender waived the events of default existing under the Revolving Credit Agreement as of March 22, 2012 and agreed to certain amendments to the Revolving Credit Agreement.

Specifically, pursuant to the Seventeenth Amendment, the Revolving Credit Agreement maturity date was amended and extended to the earlier of (i) March 31, 2015 and (ii) expiration of the Term Loan Agreement. The Company’s debt under the Revolving Credit Agreement may not exceed the lesser of (i) $25.0 million, which is referred to as the “maximum revolver amount” or (ii) 85% of the aggregate amount of eligible accounts receivable, reduced by certain reserves and offsets and subject to certain caps in the case of accounts receivable owed to the Company and certain guarantors of the Revolving Credit Agreement, which is referred to as the “borrowing base.”

As of September 30, 2012, the borrowing base under the Revolving Credit Agreement amounted to $15.8 million, the Company borrowed $10.7 million, and the unused line of credit totaled $14.3 million, of which $5.1 million was available for additional borrowings.

The following describes certain terms of the Revolving Credit Agreement, as amended by the Seventeenth Amendment:

Term. The commitment of the Revolving Credit Lender to make revolving credit loans terminates and all outstanding revolving credit loans are due on the maturity date described above. The Company may repay the facility at its own option with 30 days’ notice to the Revolving Credit Lender.

Mandatory Prepayments . The Company is required to prepay revolving credit loans in an amount equal to 100% of the net proceeds from the sale or other disposition of inventory other than in the ordinary course of business, subject to the right to apply the net proceeds to the acquisition of replacement property in lieu of prepayment.

Interest Rates and Fees . At the Company’s election, revolving credit loans may bear interest at a rate equal to the prime rate plus 1.5% or at a rate equal to reserve-adjusted one-, two- or three- month LIBOR plus 3%. Upon the occurrence and continuance of an event of default and at the election of the Revolving Credit Lender, the revolving credit loans will bear interest at a default rate equal to the then applicable interest rate or rates plus 2%. Dialogic Corporation pays the Revolving Credit Lender a monthly fee on the unused portion of the maximum revolver amount, as well as a monthly collateral management fee and an annual deferred closing fee.

Average interest rates for the three months ended September 30, 2012 and September 30, 2011 were 4.75% and 5.75%, respectively. Average interest rates for the nine months ended September 30, 2012 and September 30, 2011 were 5.05% and 5.75%, respectively.

Guarantors. The revolving credit loans are guaranteed by the Company, Dialogic (US) Inc., Cantata Technology, Inc., Dialogic Distribution Ltd., Dialogic Networks (Israel) Ltd. and Dialogic do Brasil Comercio de Equipamentos Para Telecomunicacao Ltda. (collectively the “Revolving Credit Guarantors”).

Security . The revolving credit loans are secured by a pledge of the assets of the Company and the Revolving Credit Guarantors consisting of accounts receivable and inventory and related property. The security interest of the Revolving Credit Lender is prior to the security interest of the Term Lenders, as defined below, in these assets, subject to the terms and conditions of an intercreditor agreement.

Minimum EBITDA — Defined as earnings plus interest expense, taxes, depreciation, amortization, foreign exchange gain or loss and subject to certain additional adjustments in accordance with U.S. GAAP. If the average amount of availability under the Revolving Credit Agreement plus unencumbered cash of the Company and the Revolving Credit Guarantors for the 30-day period preceding the applicable testing date is less than $2.5 million then the Company must maintain a Minimum EBITDA of at least $1.0 million for the three month period ending on June 30, 2012; $4.0 million for the six month period ending on September 30, 2012 and $7.5 million for the nine month period ending December 31, 2012. As of September 30, 2012, the Company exceeded the minimum liquidity requirement of $2.5 million; and therefore was not required to maintain a Minimum EBITDA for the three months ended September 30, 2012.

The Company must also maintain Minimum EBITDA of $16.9 million for the twelve month period ending on June 30, 2013; $17.1 million for each of the twelve month periods ending on September 30, 2013 and December 31, 2013; $18.1 million for the twelve month period ending on March 31, 2014; $19.4 million for the twelve month period ending on June 30, 2014; $20.9 million for the twelve month period ending on September 30, 2014; $22.6 million for the twelve month period ending on December 31, 2014; and $24.7 million for the twelve month period ending on March 31, 2015 and the last date of each twelve month period thereafter.

Other Terms . The Company and their subsidiaries are subject to affirmative and negative covenants, including restrictions on incurring additional debt, granting liens, entering into mergers, consolidations and similar transactions, selling assets, prepaying indebtedness, paying dividends or making other distributions on its capital stock, entering into transactions with affiliates and making capital expenditures. The Revolving Credit Agreement contains customary events of default, including a change in control of the Company and an Event of Default (as defined in the Revolving Credit Agreement, and which constitutes an event of default under the Term Loan Agreement), which results in a cross-default under the Term Loan Agreement.

On April 11, 2012, the Company and certain of its subsidiaries entered into an Eighteenth Amendment to Revolving Credit Agreement (the “Eighteenth Amendment”), with the Revolving Credit Lender. Pursuant to the Eighteenth Amendment, the Revolving Credit Agreement was amended to permit the Company to issue the Notes in the Private Placement, as described in greater detail in Note 8 below.

On November 13, 2012, the Company and certain of its subsidiaries entered into a Nineteenth Amendment to Revolving Credit Agreement (the “Nineteenth Amendment”) with the Revolving Credit Lender. Pursuant to the Nineteenth Amendment , the Revolving Credit Agreement was amended to postpone the application of certain financial covenants, including the minimum EBITDA and the minimum liquidity covenants, from the fiscal quarter ending March 31, 2013 to the fiscal quarter ending June 30, 2013 provided that the average amount of Availability (as defined in the Revolving Credit Agreement) plus any unencumbered cash held by Dialogic Corporation or any Guarantor (as defined in the Revolving Credit Agreement ) (in the United States or any foreign jurisdiction) for the 30-day period immediately preceding the end of a fiscal quarter exceeds $2,500,000. The Revolving Credit Agreement was also amended to reduce the Borrowing Base by an availability block in the amount of $250,000 at all times from the Nineteenth Amendment Effective Date through compliance with the financial covenants for the period ending June 30, 2013. In addition the definition of Triggering Event in the Revolving Credit Agreement was amended to add as of any date of determination, that Qualified Cash (as defined in the Revolving Credit Agreement) is at any time less than $2,500,000.

Note 8 – Debt and Related Party Transactions

Term Loan Agreement

On March 22, 2012, the Company entered into a third amended and restated Term Loan Agreement with the Term Lenders (the “Third Amendment”), which among other things lowered stated interest rate to 10% from 15%, extended the maturity date to March 31, 2015 and established new covenants. Tennenbaum Capital Partners, LLC (“Tennenbaum”), a private equity firm, manages the funds of the Term Lenders. Tennenbaum also owned approximately 48% of the Company’s common stock as of September 30, 2012. A Managing Partner for Tennenbaum also serves as a member of the Company’s Board of Directors. In connection with entering into the Third Amendment, the Company issued to the Term Lenders warrants to purchase 3.6 million shares of common stock with an exercise price of $5.00 per share.

The fair value of the warrants at issuance of $7.1 million reduced the carrying amount of the Term Loan as a debt discount and is accreted to interest expense over the life of the Term Loan. The warrants have been determined to qualify as a liability and,

therefore, have been classified as such in the Company’s accompanying unaudited condensed consolidated balance sheet. The fair value of the warrants is determined at the end of each reporting period and the change in fair value is recorded as a change in fair value of warrants in the Company’s unaudited condensed consolidated statement of operations and comprehensive loss. The fair value of the warrants was determined to be $4.9 million at September 30, 2012 and the Company recorded a gain of $1.8 million and $2.2 million for the three and nine months ended September 30, 2012, respectively, to reflect this change in fair value, which is recorded as a component of other income (expense), net in the accompanying unaudited condensed consolidated statement of operations.

The following describes certain provisions of the Term Loan Agreement as amended and restated on March 22, 2012.

Additional Borrowings. The Term Lenders have at their discretion the ability to provide additional loans to the Company up to $10.0 million on the same terms as the Term Loans. As of September 30, 2012, the Company had received $4.0 million under this provision.

Maturity. The Term Loans are due on March 31, 2015.

Voluntary and Mandatory Prepayments. The Term Loans may be prepaid, in whole or in part, from time to time, subject to payment of (i) if prepaid prior to the first anniversary of the closing date, a premium of 5%, (ii) if prepaid after the first but prior to the second anniversary of the closing date, a premium of 2% and (iii) if prepaid after the second anniversary of the closing date, no premium is required.

The Company is required to offer to prepay the Term Loans out of the net proceeds of certain asset sales (including asset sales by the Company and its subsidiaries) at 100% of the principal amount of Term Loans prepaid, plus the prepayment premiums described above, subject to the Company’s right to retain proceeds of up to $1.0 million in the aggregate each fiscal year. Subject to the right to retain proceeds of up to $1.5 million in the aggregate in each fiscal year, the Company is also required to prepay the Term Loans out of 50% of the net proceeds from certain equity issuances by the Company and its subsidiaries, plus the prepayment premiums described above, except that no prepayment premium is required to be paid in respect of the first $35 million of net proceeds of an issuance by the Company of stock at a price of $6.25 per share or more.

Interest Rates . The Term Loans bear interest, payable quarterly in cash, at a rate per annum of 10% except that, in 2012 and thereafter if certain minimum cash requirements are not met, interest may be paid at the rate of 5% in cash with the remaining 5% added to principal and paid in kind (“PIK”). Upon the occurrence and continuance of an event of default, the Term Loans will bear interest at a default rate equal to the applicable interest rate plus 2%. For interest incurred during the three months ended September 30, 2012, the Company was permitted, based on an agreement with the Term Lender dated October 1, 2012, to pay the cash interest due as PIK.

Guarantors. The Term Loans are guaranteed by the Company, Dialogic US Inc., Dialogic Distribution Limited, Dialogic Manufacturing Limited, Dialogic Networks (Israel) Ltd., Dialogic do Brasil Comercio de Equipamentos Para Telecomunicacao Ltda. and certain U.S. subsidiaries of the Company (collectively, the “Term Loan Guarantors”).

Security . The Term Loans are secured by a pledge of all of the assets of the Company and the Term Loan Guarantors, including all intellectual property, accounts receivable, inventory and capital stock in the Company’s direct and indirect subsidiaries. The security interest of the Term Lenders in inventory, accounts receivable and related property of Dialogic Corporation and the Term Loan Guarantors is subordinated to the security interest of the Revolving Credit Lender in those assets.

Financial Covenants. The following summarizes the financial covenants as defined in the Third Amendment.

•

Minimum Liquidity — Defined as either liquidity of not less than $15.0 million or Qualified Cash (as defined in the Term Loan Agreement) of not less than $10.0 million, as of June 30, 2013 and thereafter.

•

Minimum EBITDA — Defined as earnings plus interest expense, taxes, depreciation, amortization, foreign exchange gain or loss and subject to certain additional adjustments in accordance with U.S. GAAP of at least $16.9 million for the four quarters ending June 30, 2013; $17.1 million for the four quarters ending September 30, 2013 and December 31, 2013; $18.1 million for the four quarters ending March 31, 2014; $19.4 million for the four quarters ending June 30, 2014; $20.9 million for the four quarters ending September 30, 2014; $22.6 million for the four quarters ending December 31, 2014; and $24.7 million for the four quarters ending March 31, 2015.

•

Minimum Interest Coverage Ratio — Defined as the ratio of (i) Consolidated EBITDA for such period minus Consolidated Capital Expenditures for such period to (ii) Consolidated Interest Expense for such period and is not permitted to be less than the correlative ratio of 1.50 to 1 for the four quarters ending June 30, 2013, September 30, 2013, December 31, 2013, March 31, 2014, June 30, 2014, September 30, 2014, December 31, 2014 and March 31, 2015.

•

Maximum Consolidated Total Leverage Ratio — Defined as the ratio of (i) the total consolidated debt outstanding at the end of the quarter to (ii) the consolidated EBITDA for such period and is not permitted to be greater than a ratio of 3.90 to 1 for the four quarters ending June 30, 2013; ratio of 3.80 to 1 for

the four quarters ending September 30, 2013; ratio of 3.90 to 1 for the four quarters ending December 31, 2013; ratio of 3.60 to 1 for the four quarters ending March 31, 2014; ratio of 3.40 to 1 for the four quarters ending June 30, 2014; ratio of 3.20 to 1 for the four quarters ending September 30, 2014; ratio of 2.90 to 1 for the four quarters ending December 31, 2014; and ratio of 2.7 to 1 for the four quarters ending March 31, 2015.

Other Terms . The Company and their subsidiaries are subject to various affirmative and negative covenants under the Term Loan Agreement, including restrictions on incurring additional debt and contingent liabilities, granting liens, making investments and acquisitions, paying dividends or making other distributions in respect of its capital stock, selling assets and entering into mergers, consolidations and similar transactions, entering into transactions with affiliates and entering into sale and lease-back transactions. The Term Loan Agreement contains customary events of default, including a change in control of the Company without the Term Lenders consent and an Event of Default (as defined in the Term Loan Agreement, and which constitutes an event of default under the Revolving Credit Agreement), which results in a cross-default under the Revolving Credit Agreement.

For the three months ended September 30, 2012 and September 30, 2011, the Company recorded interest expense of $1.5 million and $4.2 million, respectively, related to the Term Loan Agreement, of which $1.6 million and zero, respectively, related to accrued PIK interest. For the nine months ended September 30, 2012 and September 30, 2011, the Company recorded interest expense of $7.5 million and $11.4 million, respectively, related to the Term Loan Agreement of which $2.6 million and zero, respectively, related to accrued PIK interest; and $0.8 million and $1.7 million, respectively, related to amortization charges for deferred debt issuance costs and accretion of debt discount.

On April 11, 2012, the Company and certain of its subsidiaries entered into a First Amendment to the Term Loan Agreement (the “First Amendment”). Pursuant to the First Amendment, the Term Loan Agreement was amended to permit the cancellation of $33.0 million of outstanding debt under the Term Loan Agreement in exchange for the Notes, and a share of the Company’s Series D-1 Preferred Stock, subject to payment of a prepayment premium of $1.5 million. The Term Loan Agreement was also amended to permit the Company to issue the remaining Notes sold in the Private Placement. On August 8, 2012, the Notes were converted into common stock.

On November 6, 2012, Dialogic Corporation and the Term Loan Guarantors entered into a Second Amendment to the Term Loan Agreement (the “Second Amendment”). Pursuant to the Second Amendment, the financial covenants in the Term Loan Agreement, including the minimum EBITDA and the minimum liquidity covenants, were amended to postpone the application of the financial covenants. Previously the financial covenants would have commenced in the fiscal quarter ending March 31, 2013 and under the terms of the Second Amendment they will commence in the fiscal quarter ending June 30, 2013.

Stockholder Loans

As of September 30, 2012 and December 31, 2011, the Company had zero and $4.8 million, respectively, in Stockholder Loans to certain stockholders of the Company (the “Related Party Lenders”), including the Company’s Chief Executive Officer and members of the Company’s Board of Directors, which bore interest at an annual rate of 20% compounded monthly in form of a PIK and repayable six months from their September 2015 maturity date. On April 11, 2012, the Stockholder Loans were exchanged for the Notes. On August 8, 2012, the Notes were converted into common stock.

During the three and nine months ended September 30, 2012, respectively, the Company recorded interest expense related to these Stockholder Loans of zero and $0.3 million, compared to $0.2 million and $0.6 million in the corresponding 2011 periods. There were no covenants or cross default provisions associated with the Stockholder Loans.

The following table summarizes debt with related parties as of September 30, 2012 and December 31, 2011:


	September 30, 2012			December 31, 2011
Term Loan, principal	$	66,466		$	89,875
Debt Discount		(2,233	)		—

		64,233			89,875
Shareholder Loans		—			4,800

Total long-term		64,233			94,675
Accrued interest payable—term loan		—			3,452

	$	64,233		$	98,127

Restructuring of Debt Obligations

A troubled debt restructuring is generally the modification of debt in which a creditor grants a concession it would not otherwise consider to a debtor that is experiencing financial difficulties. These modifications may include a reduction of the stated interest rate, an extension of the maturity dates, a reduction of the face amount or maturity amount of the debt, or a reduction of accrued interest.

On April 11, 2012, the Company entered into a securities purchase agreement, as amended by a Letter Agreement with an effective date of May 10, 2012 (the “Purchase Agreement”) with accredited investors (the “Investors”), including certain related

parties, pursuant to which the Company issued and sold $39.5 million aggregate principal amount of the Notes and one share of the Company’s Series D-1 Preferred Stock, par value $0.001 per share (the “Series D-1 Preferred Share”), to the Investors in a private placement (the “Private Placement”) in exchange for the cancellation of $38.0 million of Term Loans and Stockholder Loans. This exchange of debt was treated as a “Troubled Debt Restructuring” in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 470-60, “Troubled Debt Restructurings by Debtors” (“ASC 470-60”), as the Company had been experiencing financial difficulty and the lenders granted a concession to the Company. The Company assessed the total future cash flows of the restructured debt as compared to the carrying amount of the original debt and determined the total future cash flows to be greater than the carrying amount at the date of the restructuring. Further, the effective interest rate for both the Term Loans and Stockholders Loans was higher before the restructuring than subsequent to the restructuring. As such, the carrying amount was not adjusted and no gain was recorded, consistent with troubled debt restructuring accounting.

The following table sets forth the carrying amounts of long-term debt prior to the restructuring on April 11, 2012, and carrying amounts of the long-term debt upon effecting the modifications described above.


	Prior to Restructuring			Subsequent to Restructuring
Term Loan, principal	$	94,093		$	61,135
Term Loan Debt Discount		(7,657	)		(2,530	)

		86,436			58,605

Convertible Notes, carrying value		—			32,905

		—			32,905

Shareholder Loans		5,074			—

Total long-term		91,510			91,510
Accrued interest payable—term loan		260			260

	$	91,770		$	91,770

The conversion feature embedded in the Notes was not required to be bifurcated on the restructuring closing date and separately measured as a derivative liability, as the Company had sufficient authorized and unissued common shares to satisfy conversion of the Notes among other criteria that were met. Further, stockholders owning greater than 50% of the Company’s common stock already agreed to conversion, and as a result, on August 8, 2012, the Notes were converted into equity.

The Notes

The Investors in the Private Placement included the Term Lenders and the Related Party Lenders. The Term Lenders purchased $34.5 million aggregate principal amount of Notes in exchange for the cancellation of (i) $33.0 million in outstanding principal under the Term Loan Agreement, $3.0 million of which represents accrued but unpaid interest that was capitalized under the Term Loan Agreement on March 22, 2012 (the “Interest Amount”), and (ii) a prepayment premium of $1.5 million triggered by the cancellation of the outstanding debt described above. The remaining $5.0 million aggregate principal amount of Notes was purchased by the Related Party Lenders in exchange for the cancellation of Stockholder Loans.

The Notes had an interest at the rate of 1% per annum, compounded annually, and were converted into shares of the Company’s common stock, par value $0.001 per share (the “Common Stock”) on August 8, 2012. The conversion price of the Notes was generally $5.00 per share, except for the Notes of $3.0 million issued to the Term Lenders in exchange for the cancellation of the Interest Amount, which had a conversion price of $4.35 per share, in each case as adjusted for any stock split, reverse stock split, stock dividend, recapitalization, reclassification, combination or other similar transaction. Under the terms of the Notes, the principal and all accrued but unpaid interest converted into approximately 8.0 million shares of Common Stock upon stockholder approval of the Private Placement on August 8, 2012.

Series D-1 Preferred Stock

On April 11, 2012, the Company filed a certificate of designation (the “Certificate”) for the Company’s Series D-1 Preferred Stock (the “Series D-1 Preferred”) with the Secretary of State of the State of Delaware. The Series D-1 Preferred Share was issued and sold to Tennenbaum in exchange for cancellation of $100 dollars in outstanding principal under the Term Loan Agreement.

The Certificate authorizes one share of Series D-1 Preferred Stock, which is non-voting and is not convertible into other shares of the Company’s capital stock. However, following stockholder approval of the Private Placement, if it occurs, the holder of the Series D-1 Preferred Share (the “Holder”) has the right to designate certain members of the Board as follows:

•

four directors to the Board (each director to the Board designated and elected pursuant by the Holder, a “Series D-1 Director”, and all such directors, (the “Series D-1 Directors”) at any time while the Holder (together with its affiliates) beneficially owns in the aggregate at least 45% of the then issued and outstanding shares of Common Stock (assuming (x) the exercise in full of all warrants then exercisable by the Holder and any affiliates thereof and (z) conversion or exercise, as applicable, of any other securities of the Company that by their terms are convertible or exercisable into shares of Common Stock that are held by the Holder, collectively, the “Fully Diluted Common Stock”);

•

three Series D-1 Directors at any time while the Holder (together with its affiliates) beneficially owns in the aggregate at least 30% and less than 45% of the Fully Diluted Common Stock;

•

two Series D-1 Directors at any time while the Holder (together with its affiliates) beneficially owns in the aggregate at least 10% and less than 30% of the Fully Diluted Common Stock; or

•

one Series D-1 Director at any time while the Holder (together with its affiliates) beneficially owns in the aggregate at least three percent and less than 10% of the Fully Diluted Common Stock.

The Certificate further provides that the Company must obtain the Holder’s consent to, among other things, (i) take any action that alters or changes the rights, preferences or privileges of the Series D-1 Preferred; (ii) convert the Company into any other organizational form; (iii) change the size of the Board; (iii) appoint or remove the chairman of the Board; or (iv) establish, remove or change the authority of any committee of the Board or appoint or remove members thereof.

The Holder is not entitled to any dividends from the Company. However, upon any liquidation, dissolution or winding up of the Company, excluding the sale of all or substantially all of the assets or capital stock of the Company and the merger or consolidation of the Company into or with any other entity or the merger or consolidation of any other entity into or with the Company (a “Liquidation Event”), the Holder is entitled to a liquidation preference, prior to any distribution of the Company’s assets to the holders of Common Stock, in an amount equal to $100 payable in cash. After payment to the Holder of the full preferential amount, the Holder will have no further right or claim to the Company’s remaining assets.

The Series D-1 Preferred Share is redeemable for $100 (i) at the written election of the Holder, or (ii) at the election of the Company at any time after the earlier to occur of the following: (x) the Holder (together with its affiliates) beneficially owns in the aggregate less than three percent (3%) of the Fully Diluted Common Stock at any time following the stockholder approval of the Private Placement, if it occurs, or (y) a Liquidation Event.

Note 9 – Restructuring Charges

During 2012 and 2011, the Company has implemented various initiatives to reduce its overall cost structure, including exiting certain facilities and transitioning work to other locations. Costs incurred in connection with these actions include employee separation costs, including severance, benefits and outplacement, lease and facility exit costs, and other expenses in connection with exit activities.

For the three and nine months ended September 30, 2012, the Company recorded employee separation costs and other costs related to employee termination benefits in the amount of $0.2 million and $3.6 million, respectively. Such charges were recorded as a component of restructuring charges in the accompanying unaudited condensed consolidated statements of operations. Substantially, all of these costs are expected to be cash expenditures. As of September 30, 2012, $1.4 million remained accrued and unpaid for these termination benefits, which are reflected as a component of accrued liabilities in the accompanying unaudited condensed consolidated balance sheets.

For the three and nine months ended September 30, 2011, the Company recorded employee separation costs and other costs related to employee termination benefits in the amount of $1.7 million and $2.9 million, respectively. As of December 31, 2011, $1.4 million was accrued and unpaid for termination benefits, which are reflected as a component of accrued liabilities in the accompanying unaudited condensed consolidated balance sheets.

In an effort to reduce overall operating expenses, the Company decided it was beneficial to close or consolidate office space at certain locations. For the three and nine months ended September 30, 2012, the Company incurred expense of $0.3 million and $1.2 million, respectively, in lease and facility exit costs related to the Company’s research and development facilities in Eatontown, New Jersey, Getzville, New York and Renningen, Germany. Such charges are recorded as a component of restructuring charges in the accompanying unaudited condensed consolidated statements of operations.

For the three and nine months ended September 30, 2011, the Company incurred expense of zero and $3.6 million, respectively, related to lease and facility exits costs for the Company’s Salem, New Hampshire and Parsippany, New Jersey facilities.

As of September 30, 2012, $0.8 million of lease and facility exit costs were reflected as a component of accrued liabilities and $2.2 million was reflected as a component of other non-current liabilities in the accompanying unaudited condensed consolidated balance sheets. As of December 31, 2011, $0.5 million was reflected as a component of accrued liabilities and $2.4 million was reflected as a component of other non-current liabilities in the accompanying unaudited condensed consolidated balance sheets.

The following table sets forth restructuring activity for the three and nine month periods ended on March 31, 2012, June 30, 2012 and September 30, 2012, respectively:


	Employee Termination/ Severance and Related Costs			Facilities Costs			Total
Balance at December 31, 2011	$	1,357		$	2,942			4,299
Charges to operations		57			—			57
Payments made during the quarter		(1,173	)		(204	)		(1,377	)

Balance at March 31, 2012		241			2,738			2,979
Charges to operations		3,341			905			4,246
Payments made during the quarter		(985	)		(216	)		(1,201	)

Balance at June 30, 2012		2,597			3,427			6,024
Charges to operations		179			278			457
Payments made during the quarter		(1,408	)		(668	)		(2,076	)

Balance at September 30, 2012	$	1,368		$	3,037		$	4,405

Note 10 – Stock-Based Compensation

Stock-Based Compensation

The following table summarizes the effects of stock-based compensation:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2012		2011		2012		2011
Cost of revenues	$	86	$	89	$	244	$	245
Research and development		146		239		506		565
Sales and marketing		175		234		551		775
General and administrative		238		198		595		743

Total stock-based compensation expense	$	645	$	760	$	1,896	$	2,328

Stock Options

A summary of the Company’s stock option activity for the nine months ended September 30, 2012 is set forth in the following table:


	Number of Options Outstanding			Weighted Average Exercise Price		Weighted Average Contractual Life (In Years)
	(in 000’s)
Balance at December 31, 2011		581		$	23.88		3.25
Options granted		401		$	4.88
Options exercised		—
Options cancelled and forfeited		(136	)

Balance at September 30, 2012		846		$	14.90		7.75

Options vested and expected to vest at September 30, 2012		795		$	15.47		7.63
Options exercisable at September 30, 2012		296		$	28.88		4.70

During the three and nine months ended September 30, 2012 and September 30, 2011, the Company granted the following stock options:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2012		2011		2012		2011
Options granted (in 000’s)		27		70		401		150
Weighted-average grant date fair value per share	$	3.95	$	8.93	$	2.93		12.64

For the three months ended September 30, 2012 and September 30, 2011, stock-based compensation related to stock options amounted to $0.3 million in both periods. For the nine months ended September 30, 2012 and September 30, 2011, stock-based compensation expense related to stock options amounted to $0.8 million and $1.2 million, respectively.

The total intrinsic value of options exercised was zero and $0.3 million during the nine months ended September 30, 2012 and September 30, 2011, respectively.

As of September 30, 2012, the balance of $2.6 million of total unrecognized compensation cost related to non-vested stock options granted to employees and directors is expected to be recognized over a weighted average period of 3.10 years.

The Company uses the Black-Scholes option-pricing model to determine the fair value of options which is then amortized on a straight-line basis over the requisite service periods of the awards, which is generally the vesting period.

The expected term represents the period that stock-based awards are expected to be outstanding, giving consideration to the contractual terms of the stock-based awards, vesting schedules and expectations of future employee behavior as influenced by changes to the terms of the Company’s stock-based awards. The expected term was determined using the “simplified method”. Under this approach, the expected term was presumed to be the mid-point between the vesting date and the end of the contractual term. The use of this approach, with appropriate disclosure, is permitted for a plain vanilla employee stock option for which the value is estimated using a Black-Scholes formula. Accordingly, the Company will continue to use the simplified method until it has enough historical experience to provide a reasonable estimate of expected term.

The risk-free interest rate for the expected term of the award was based on the U.S. Treasury yield curve in effect at the time of grant. The computation of expected volatility is derived from a blend of the Company’s own historical volatility as well as the historical volatilities of a comparable group of publicly listed companies within the Company’s industry over a period equal to the expected term of its options. A peer group is used in the determination of implied volatility because the Company has limited historic stock prices needed for determining its own volatility. Management makes an estimate of expected forfeitures and recognizes compensation costs only for those equity awards expected to vest. The Company has not declared dividends to date.

The following weighted average assumptions were used to value options granted during the three and nine months ended September 30, 2012 and September 30, 2011, respectively:


	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
Expected term (in years)		6.00			6.00			6.00			6.00
Risk -free interest rate		0.95	%		1.16	%		0.87	%		1.93	%
Volatility		89.00	%		81.00	%		89.00	%		77.30	%
Dividend yield		—			—			—			—

Restricted Stock Awards

Restricted stock award activity for the period from December 31, 2011 to September 30, 2012 was as follows:


	Number of Options Outstanding			Weighted Average Contractual Life (In Years)
	(in 000’s)
Balance at December 31, 2011		131			1.34
Restricted stock units granted		196
Restricted stock units releases		(70	)
Restricted stock units cancelled and forfeited		(16	)

Balance at September 30, 2012		241			1.21


	Number of Shares (in 000’s)			Weighted Average Grant Date Fair Value
Nonvested at December 31, 2011		131		$	4.84
Granted		196		$	3.87
Vested		(70	)	$	4.49
Forfeited or expired		(16	)	$	24.11

Nonvested at September 30, 2012		241		$	8.19

Generally, restricted stock units (“RSU”) vest over four years in equal installments on each of the first through fourth anniversaries of the vesting commencement date. Upon vesting, all RSUs will convert into an equivalent number of shares of common stock. The amount of the expense related to RSUs is based on the closing market price of the Company’s common stock on the date of grant and is amortized on a straight-line basis over the requisite service period.

For the three months ended September 30, 2012 and September 30, 2011, stock-based compensation related to restricted stock awards amounted to $0.4 million, in both periods. For the nine months ended September 30, 2012 and September 30, 2011, stock-based compensation expense related to restricted stock awards amounted to $1.0 million and $1.1 million, respectively.

As of September 30, 2012, 240,626 shares of restricted stock based awards were outstanding and unvested, with an aggregate intrinsic value of $0.6 million. During the three and nine months ended September 30, 2012, the aggregate intrinsic value of vested restricted stock based awards was zero and $0.3 million, respectively.

As of September 30, 2012, the balance of $1.5 million of total unrecognized compensation cost related to non-vested restricted stock granted to employees and directors is expected to be recognized over a weighted average period of 1.74 years.

Stock Purchase Plan

As of September 30, 2012, 30,326 shares have been issued under this plan and 165,730 shares remained available for issuance under the Employee Stock Purchase Plan (“ESPP”).

Subject to certain limitations, employees may elect to have 1% to 15% of their compensation withheld through payroll deductions to purchase shares of common shares under the ESPP. Employees purchase shares of common stock at a price per share equal to 85% of lesser of the fair market value on the first day of the purchase period or the fair market value on the purchase date at the end of each six-month purchase period. The first purchase period under the ESPP commenced on June 1, 2011 and the next offering period is expected to commence on November 15, 2012 and end on May 14, 2013.

Note 11 – Net Loss Allocable to Common Stockholders per Share

Net loss per share is computed by dividing the net loss by the weighted average number of shares of common stock outstanding. The Company has outstanding stock options and restricted stock units, which have not been included in the calculation of diluted net loss per share because to do so would be anti-dilutive. As such, the numerator and the denominator used in computing both basic and diluted net loss per share for each period are the same.

Basic and diluted net loss per share was calculated as follows.


	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
Numerator:
Net loss	$	(290	)	$	(13,098	)	$	(33,106	)	$	(45,646	)

Denominator:
Basic and diluted weighted-average shares:
Weighted-average shares used in computing basic and diluted net income (loss) per share		10,229			6,269			7,634			6,257

Net income (loss) per share - basic and diluted	$	(0.03	)	$	(2.09	)	$	(4.34	)	$	(7.30	)

Note 12 – Commitments and Contingencies

(a) Office of the Chief Scientist Grants

The Company’s research and development efforts in Israel have been partially financed through grants from that country’s Office of the Chief Scientist (“OCS”). In return for the OCS’s participation, the Company is committed to pay royalties to the Israeli Government at the rate of approximately 3.5% of sales of products in which the Israeli Government has participated in financing the research and development, up to the amounts granted plus interest. The grants received bear annual interest at LIBOR as of the date of approval. The grants are presented in the accompanying unaudited condensed consolidated statements of operations as an offset to related research and development expenses. Repayment of the grants is not required in the event that there are no sales of products developed within the framework of such funded programs. However, under certain limited circumstances, the OCS may withdraw its approval of a research program or amend the terms of its approval. Upon withdrawal of approval, the grant recipient may be required to refund the grant, in whole or in part, with or without interest, as the OCS determines. Royalties payable to the OCS are recorded as sales are recognized and the associated royalty becomes due and are classified as cost of revenues. Royalty expenses relating to OCS grants included in cost of product revenues were $0.4 million and $0.3 million for the three months ended September 30, 2012 and September 30, 2011, respectively, and $0.7 million and $0.9 million for the nine months ended September 30, 2012 and September 30, 2011, respectively. As of September 30, 2012 and December 31, 2011, the royalty payable amounted to $0.7 million and $0.4 million, respectively. The maximum amount of the contingent liability under these grants potentially due to the Israeli Government (excluding interest) was $16.9 million and $17.6 million, respectively, as of September 30, 2012 and December 31, 2011.

(b) Guarantees

From time to time, customers require the Company to issue bank guarantees for stated monetary amounts that expire upon achievement of certain agreed objectives, typically customer acceptance of the product, completion of installation and commissioning services, or expiration of the term of the product warranty or maintenance period. Restricted cash represents the collateral securing these guarantee arrangements with banks. As of September 30, 2012 and December 31, 2011, the maximum potential amount of future payments the Company could be required to make under the guarantees, amounted to $1.0 million and $1.5 million, respectively. The guarantee term generally varies from three months to 30 years. The guarantees are usually provided for approximately 10% of the contract value.

(c) SEC Investigation

On March 28, 2011, the Company received a letter from the SEC informing the Company that the SEC was conducting an informal inquiry (“SEC Informal Inquiry”), and requesting that the Company preserve certain categories of records in connection with the SEC Informal Inquiry. In a follow up discussion with the SEC on March 30, 2011, the SEC informed the Company that the inquiry related to allegations of improper revenue recognition and potential violations of the Foreign Corrupt Practices Act of 1977, as amended, by former Veraz Networks Inc. business during periods prior to completion of the Company’s business combination with Dialogic Corporation. The Company’s Board of Directors (the “Board”), appointed a committee to review these issues, with the aid of counsel, and to make recommendations to the Board as to what, if any, remedial actions would be appropriate. The committee engaged Sheppard Mullin Richter & Hampton LLP (“Sheppard Mullin”), as outside counsel to the committee. The Board has taken the remedial actions recommended by Sheppard Mullin and the committee and the Company has updated and improved its compliance procedures. In addition, the Company produced documents to the Department of Justice (“DOJ”), relating to the SEC Informal

Inquiry. Sheppard Mullin subsequently became counsel to the Company on this matter and with Sheppard Mullin, the Company continues to fully cooperate with the SEC and DOJ, in connection with the SEC Informal Inquiry. At the current time, the Company cannot determine the probability of or quantify the amount of any fines or penalties associated with the SEC matters discussed above. Based on information currently available to the Company, it believes that any of the allegations, even if true, would not have a material adverse effect on the accompanying unaudited condensed consolidated financial statements.

Note 13 – Segment and Geographic Information

Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision making group, in deciding how to allocate resources and in assessing performance. The Company is required to disclose certain information regarding operating segments, products and services, geographic areas of operation and major customers. The Company’s chief operating decision maker is the Company’s Chief Executive Officer. The Chief Executive Officer reviews financial information presented on a consolidated basis, accompanied by information about revenue by geographic region for purposes of allocating resources and evaluating financial performance. The Company has one business activity and there are no segment managers who are held accountable for operations, operating results and plans for levels or components below the consolidated unit level. Accordingly, the Company is considered to be in a single reporting segment and operating unit structure. Revenue by geography is based on the billing address of the customer.

The following tables set forth revenue and long-lived assets by geographic area.

(a) Revenue by geographic areas


	Three Months Ended September 30,				Nine Months Ended September 30,
	2012		2011		2012		2011
Americas	$	17,867	$	20,445	$	55,775	$	66,310
Europe, Middle East, Africa		13,350		16,381		39,128		50,113
Asia Pacific		11,174		10,595		27,154		31,649

Total revenue	$	42,391	$	47,421	$	122,057	$	148,072

(b) Long-lived assets and goodwill by geographic area


	September 30, 2012		December 31, 2011
Americas:
United States	$	33,360	$	36,067
Canada		29,228		34,289
Other foreign countries		1,789		2,081

Total long-lived assets	$	64,377	$	72,437

Note 14 – Income Taxes

The Company recorded an income tax provision of $0.1 million and an income tax benefit of ($0.6) million for the three months ended September 30, 2012 and September 30, 2011, respectively. For the three months ended September 30, 2012 and September 30, 2011, the Company’s effective tax rate was approximately 10.9% and 4.1%, respectively.

For the nine months ended September 30, 2012 and September 30, 2011, the Company recorded a provision for income taxes of $0.3 million and $0.6 million, respectively. For the nine months ended September 30, 2012 and September 30, 2011, the Company’s effective tax rate was approximately (0.9)% and (1.3)%, respectively.

The effective tax rate is significantly different from the statutory rate as the Company is not benefiting from current losses in the US and foreign jurisdictions. The tax expense for the three months and nine months ended September 30, 2012 was primarily due to current tax expense in the Company’s profitable foreign entities with no corresponding tax attributes.

The Company’s net deferred tax assets were $0.6 million at September 30, 2012 and December 31, 2011. A valuation allowance is provided to the extent recoverability of the deferred tax asset, or the timing of such recovery, is not “more likely than not”. The need for a valuation allowance is continually reviewed by management. The utilization of tax attributes by the Company is dependent on the generation of taxable income by the Company in the principal jurisdictions in which it operates and/or has tax planning strategies. As required, the Company has evaluated and weighted the positive and negative evidence present at each period. In arriving at its conclusion the Company has given significant weight to the history of pretax losses. If circumstances change and management believes a larger or smaller deferred tax asset is justified, the reduction/ (increase) of the valuation allowance will result in an income tax benefit/ (expense).

The Company files U.S. federal income tax returns as well as income tax returns in various states and foreign jurisdictions. The Company is currently under examination by the Internal Revenue Service (“IRS”), for calendar years 2008 and 2009. The Company does not expect an adverse outcome. Additionally, any net operating losses and credits that were generated in prior years may also be subject to examination by the IRS, in the tax year the net operating loss is utilized. In addition, the Company may be subject to examination in various foreign jurisdictions for the years ranging from 2004 through 2011.

Unrecognized tax benefits represent uncertain tax positions for which reserves have been established. As of September 30, 2012 and December 31, 2011, the total liability for unrecognized tax benefits was $2.6 million and $2.5 million respectively, all of which would impact the annual effective rate, if realized, consistent with the principles of ASC No. 805. Each year the statute of limitations for income tax returns filed in various jurisdictions closes, sometimes without adjustments. During the nine months ended September 30, 2012, the unrecognized tax benefits increased by $0.1 million due to interest expense.

Utilization of the Company’s net operating loss carry forwards and tax credits may be subject to substantial annual limitation due to the ownership change limitations provided by the Internal Revenue Code (Section 382) and similar foreign provisions. Such an annual limitation could result in the expiration of the net operating loss before utilization. The Company has not yet determined the full extent of such limitations or if an ownership change has occurred. The Company expects to complete a Section 382 analysis.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction with our Condensed Consolidated Financial Statements and Notes thereto included in Part 1, Item 1 of this Quarterly Report on Form 10-Q and our Consolidated Financial Statements and Notes thereto for the year ended December 31, 2011, in our Annual Report on Form 10-K, filed with the Securities and Exchange Commission on April 16, 2012. The discussion in this Quarterly Report on Form 10-Q contains forward-looking statements that involve risks and uncertainties, including, but not limited to, statements of our future financial operating results, future expectations concerning cash and cash equivalents available to us, our business strategy, including whether we can successfully develop new products and the degree to which these gain market acceptance, revenue estimations, plans, objectives, expectations and intentions. In some cases, you can identify forward-looking statements by terms such as “anticipates,” “believes,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “projects,” “should,” “will,” “would” and similar expressions intended to identify forward-looking statements. Forward-looking statements reflect our current views with respect to future events are based on assumptions and are subject to risks, uncertainties and other important factors. Our actual results could differ materially from those discussed here. See “Risk Factors” in Item 1A of Part II for factors that could cause future results to differ materially from any results expressed or implied by these forward-looking statements. Given these risks, uncertainties and other important factors, you should not place undue reliance on these forward-looking statements, which speak only as of the date hereof. Except as required by law, we assume no obligation to update any forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in any forward-looking statements, even if new information becomes available in the future.

Overview

We are a leading provider of telecommunications platforms and technology that enable developers and service providers to build and deploy innovative applications without concern for the complexities of the telecommunications medium or network. We specialize in providing products and solutions that enhance the mobile telecommunications experience. Our technology impacts over two billion mobile subscribers and our network solutions carry more than 15 billion minutes of traffic per month.

Wireless and wireline service providers use our products to transport, convert and manage data and voice traffic while enabling VoIP and other multimedia services. These service providers also utilize our underlying technology to provide innovative revenue-generating value-added services such as messaging, Short Message Service, voice mail and conferencing which are also increasingly becoming video-enabled. Enterprises rely on our innovative products to enable the integration of IP and wireless technologies and endpoints into existing telecommunications networks, and to enable applications that serve businesses, including unified telecommunications applications, contact center and Interactive Voice Response/Interactive Voice Video Response.

We sell our products to both enterprise and service provider customers and sell both directly and indirectly through distribution partners such as Technology Equipment Manufacturers, Value Added Resellers and other channel partners. Our customers build their enterprise telecommunications solutions, their networks, or their value-added services on our products.

We were incorporated in Delaware on October 18, 2001 as Softswitch Enterprises, Inc., and subsequently changed our name to NexVerse Networks, Inc. in 2001, Veraz Networks, Inc. in 2002 and Dialogic Inc. in 2010.

Industry Background

The telecommunications industry has traditionally been highly regulated. However, in recent years regulatory barriers to entry have been removed and service providers with telephone, cable, and wireless networks have expanded their offerings to voice, data, and video services over a single broadband platform, increasing competition in the industry.

This increase in competition has also led to steep price reductions, which have in turn caused the revenues of incumbent telecom operators to decline. At the same time, the demand for IP-based technologies increased due to the need to reduce costs and the need to diversify revenue streams. In developed countries, services are increasingly bundled; for example, Internet access is often bundled with voice telephony and television channels. Service providers and enterprises either maintain their legacy networks or steadily plan on migrating telecom systems from PSTN to a single IP network to deliver video calls, text messaging, and location-based services and other high-demand services.

Our products allow service providers to deploy services smoothly over disparate networks. We offer a softswitch that allows new services to be implemented securely and dynamically throughout the entire network along with routing, billing, and number portability for operational savings. Our media servers enable creation of value-added telecommunications services. Our media gateways interconnect multimedia streams and include bandwidth and codec optimization. We also offer optimization of wireless telecommunication streams in the backhaul network. Our video gateway converts pictures and video streams from different compression formats seamlessly enabling the delivery of video between different network generations and multiple types and sizes of devices and screens. We also offer a session border controller with a secure proxy architecture that is transparent to the end-to-end flow of signaling messages, enabling a reduction in the time and cost of deploying new services.

Our products meet specific customer requirements and certain industry standards, and are subject to various laws, restrictions and regulations, including, but not limited to, environmental protection, import-export controls, and political and economic boundaries, which are more fully discussed in “Item 1A. Risk Factors.”

Our Products

Our products include both Next-Generation products that serve the growing mobile and IP networks and also connect these disparate networks together, as well as Legacy products that serve the TDM networks.

Our Next-Generation products and solutions are offered in four main categories:

Service Provider Infrastructure: These products serve in the core or edge of a service provider network and make the fundamental connections that allow networks to function. Our service provider product portfolio includes a Class 4 softswitch, network signaling products such as Sigtran for SS7 over IP networks, and media gateways that connect IP and PSTN networks. Dialogic has also invested in expanding our SBC product line and we now have SBCs that reside at the edge of a network for peering or access from one type of IP network to another.

Our Next-Generation switching solution consists of the Dialogic ^® ControlSwitch™ System, a Class 4 IP softswitch and service delivery platform comprised of numerous IMS-compatible software modules. This product suite allows our customers to customize and tailor solutions. Our gateways enable telecommunication from one type of network to another and convert from one type of media stream format to another and/or one type of signaling format to another. Our Dialogic ^® Bordernet™ 2020 product is a combined gateway and SBC that supports IP-to-IP transcoding for network peering applications and mediation, thereby eliminating the need for separate SBCs in an environment where only the mediation function is required. Our Dialogic ^® BorderNet™ 3000 Session Border Controller is a compact, highly reliable security and session management platform for access to mobile and fixed VoIP networks. In 2012, we also introduced a high performance Dialogic ^® BorderNet™ 4000 SBC that will enable peering for both wireless and wireline IP-based service provider networks.

Bandwidth Optimization: These products serve in the core or edge of a service provider network and address the capacity challenges of networks by optimizing the media traffic on these networks. Our bandwidth optimization products consist of our Dialogic ^® I-Gate ^® 4000 family of media gateways and enable service providers to gain more bandwidth out of their existing infrastructure. The I-Gate 4000 SBO Mobile Backhaul solution can deliver high quality data and voice optimization for both 3G and 2G networks and can deliver up to 50% additional bandwidth over existing infrastructure. The I-Gate 4000 SBO Core and Core-X optimize VoIP traffic in 3G mobile and next generation switching networks in the core of the network.

Value-Added Services / Cloud Enablement: These platforms enable our customers to build advanced telecommunication applications such as messaging, IVR, conferencing and SMS applications that may be delivered by our customers either via a cloud delivery model or via a stand-alone solution model. The Dialogic ^® PowerMedia™ software solutions act as media servers that allow our customers and partners to build rich value-added service applications including voice mail, IVR, contact center, facsimile, conferencing, speech recognition, unified messaging, SMS, CRBT, and announcement systems. PowerMedia performs multimedia processing tasks on general-purpose servers without requiring the use of specialized hardware (available in Linux and Windows versions) and uses our existing APIs and industry standard APIs as the programming environment to support high density advanced multimedia features. These advanced multimedia functions include transcoding a variety of video codecs, transrating different screen sizes and enabling mobile video conferencing of a variety of different mobile devices.

Mobile Video: We offer Dialogic ^® Vision™ gateways that can connect SIP-based video and multimedia services to both voice-only and video/3G enabled mobile devices. The ability of these gateways to simultaneously support video and voice-only calls simplifies the routing and switch logic needed to support video and voice services.

Our Legacy products and solutions serve the TDM only markets. While all networks are moving to IP or mobile based networks, TDM networks still exist and will continue to exist for many years. As such, there will continue to be demand, albeit decreasing demand, for the TDM products to connect to these existing networks. Our Legacy products are offered via an array of traditional network and/or media processing boards that range from two-port analog interface boards to octal span T1/E1 media and network interface boards. These products connect to and interact with an enterprise or service provider based circuit switched network, and support a suite of media processing features, including echo cancellation, DTMF detection, voice play and record, conferencing, fax, modem and speech integration. The boards are grouped into four media board families, i.e., Dialogic ^® Media and Network Interface boards with various architectures, Dialogic ^® Diva ^® Media Boards, Dialogic ^® CG Series Media Boards and Dialogic ^® Brooktrout ^® Fax Boards.

We have expanded upon our experience with voice solutions to include data and video. We believe that the continued demand for services by mobile users will drive increasing demand for bandwidth and, as a result, we have continued to invest in data optimization products for our portfolio to enable mobile operators to expand their bandwidth in the mobile backhaul access portion of the network. We are also actively expanding products enabling video applications to mobile devices. Our customers and partners are

increasingly adding video to value-added service application and our products support key video codecs, perform video transcoding and transrating functions from one codec type to another, and enable video play/record and video conferencing. We also support the new voice functionality such as high definition voice codecs.

Critical Accounting Policies and Estimates

Management’s discussion and analysis of our financial position and results of operations is based upon the consolidated financial statements, which have been prepared in accordance with U.S. GAAP pursuant to the rules and regulations of the Securities and Exchange Commission, or SEC. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. We base our estimates on historical experience, knowledge of current conditions and beliefs of what could occur in the future given available information. If actual results differ significantly from management’s estimates and projections, there could be a material effect on our financial statements. Certain reclassifications have been made to prior periods to conform to the current presentation.

As of September 30, 2012, our significant accounting policies and estimates, which are detailed in our Annual Report on Form 10-K for the year ended December 31, 2011, have not changed except for the following.

The accompanying unaudited condensed consolidated financial statements have been prepared assuming that we will continue as a going concern. For the nine months ended September 30, 2012, we incurred a net loss of $33.1 million and cash used in operating activities was $7.9 million. As of September 30, 2012, our cash and cash equivalent balance was $2.7 million, of which $2.2 million was held by subsidiaries outside the U.S. and could be subject to tax implications if repatriated to the U.S. As of September 30, 2012, current bank indebtedness was $10.7 million and debt with related parties, net of discount, was $64.2 million. Based on our current plans and business conditions, we believe that our existing cash and cash equivalents, expected cash generated from operations and available credit facilities will be sufficient to satisfy our anticipated cash requirements through 2012. We will need to either raise additional funding to fund future operations or to implement a business plan where cash flow will fully fund operations. However, there is no assurance that additional funding will be available to us on acceptable terms on a timely basis, if at all, or that we will achieve profitable operations. If we are unable to raise additional capital to fund our operations, we will need to curtail planned activities and to reduce costs. Doing so may affect our ability to operate effectively.

On March 22, 2012, we amended the second amended and restated credit agreement dated October 1, 2010, or the Term Loan Agreement with Obsidian, LLC, as agent, and Special Value Expansion Fund, LLC, Special Value Opportunities Fund, LLC, and Tennenbaum Opportunities Partners V, LP, as lenders, or the Term Lenders, which extended the maturity date to March 31, 2015, reduced the stated interest rate to 10% from 15% and revised the financial covenants. On April 11, 2012, $33.0 million of outstanding debt (face value) under the Term Loan Agreement and $5.0 million of outstanding stockholder loans, or the Stockholder Loans were cancelled in exchange for convertible promissory notes, or the Notes, which Notes were converted into approximately 8.0 million shares of our common stock on August 8, 2012. These actions were determined to be a troubled debt restructuring and were taken to improve our liquidity, leverage and future operating cash flow. We also took certain restructuring action during the nine months ended September 30, 2012, designed to improve our future operating performance.

We are required to meet certain financial covenants under the Term Loan Agreement, including minimum EBITDA (as adjusted), minimum liquidity, minimum interest coverage ratio and maximum consolidated total leverage ratio, each beginning in the quarter ending June 30, 2013. Specifically, the EBITDA (as adjusted) covenant requires $16.9 million of EBITDA (as adjusted) for the four quarters ending June 30, 2013. In the event that forecasts of EBITDA (as adjusted) are reduced from anticipated levels, the covenants may not be met and we would be required to reclassify its long-term debt under the Term Loan Agreement to current liabilities on the consolidated balance sheet.

If future covenant or other defaults occur under the Term Loan Agreement or under the Revolving Credit Agreement with Wells Fargo Foothill Canada ULC, or the Revolving Credit Lender, we do not anticipate having sufficient cash and cash equivalents to repay the debt under these agreements should it be accelerated and would be forced to restructure these agreements and/or seek alternative sources of financing. There can be no assurances that restructuring of the debt or alternative financing will be available on acceptable terms or at all. In the event of an acceleration of our obligations under the Revolving Credit Agreement or Term Loan Agreement and our failure to pay the amounts that would then become due, the Revolving Credit Lender and Term Loan Lenders could seek to foreclose on our assets, as a result of which we would likely need to seek protection under the provisions of the U.S. Bankruptcy Code and/or its affiliates might be required to seek protection under the provisions of applicable bankruptcy codes. In that event, we could seek to reorganize its business or the Company or a trustee appointed by the court could be required to liquidate its assets. In either of these events, whether the stockholders receive any value for their shares is highly uncertain. If we needed to liquidate its assets, we might realize significantly less from them than the value that could be obtained in a transaction outside of a bankruptcy proceeding. The funds resulting from the liquidation of its assets would be used first to pay off the debt owed to secured creditors, including the Term Lenders and the Revolving Credit Lender, followed by any unsecured creditors such as the convertible promissory notes, before any funds would be available to pay its stockholders. If the Company is required to liquidate under the federal bankruptcy laws, it is unlikely that stockholders would receive any value for their shares.

In order for us to meet the debt repayment requirements under the Term Loan Agreement and the Revolving Credit Agreement, we will need to raise additional capital by refinancing its debt, raising equity capital or selling assets. Uncertainty in future credit markets may negatively impact our ability to access debt financing or to refinance existing indebtedness in the future on favorable

terms, or at all. If additional capital is raised through the issuance of debt securities or other debt financing, the terms of such debt may include different financial covenants, restrictions and financial ratios other than what we currently operate under. Any equity financing transaction could result in additional dilution to our existing stockholders.

Results of Operations (amounts in 000’s)

Comparison of Three Months Ended September 30, 2012 and September 30, 2011

Revenue


	Three Months Ended September 30,
	2012					2011					Period-to-Period Change
(USD and $000’s)	Amount		% of Total Revenue			Amount		% of Total Revenue			Amount			Percentage
Revenue:
Products	$	32,140		76	%	$	36,604		77	%	$	(4,464	)		(12	)%
Services		10,251		24			10,817		23			(566	)		(5	)

Total revenue	$	42,391		100	%	$	47,421		100	%	$	(5,030	)		(11	)%

Legacy vs. Next-Gen
Legacy	$	13,527		32	%	$	17,239		36	%	$	(3,712	)		(22	)%
Next-Gen		28,864		68			30,182		64			(1,318	)		(4	)

Total revenue	$	42,391		100	%	$	47,421		100	%	$	(5,030	)		(11	)%

Revenue by geography:
Americas	$	17,867		42	%	$	20,445		43	%	$	(2,578	)		(13	)%
Europe, Middle East and Africa		13,350		31			16,381		35			(3,031	)		(19	)
Asia Pacific		11,174		27			10,595		22			579			5

Total revenue	$	42,391		100	%	$	47,421		100	%	$	(5,030	)		(11	)%

Revenue

Total revenue of $42.4 million for the three months ended September 30, 2012 decreased by $5.0 million, or 11%, from $47.4 million for the three months ended September 30, 2011.

Our product revenue was 76% of total revenue at $32.1 million for the three months ended September 30, 2012, compared to 77% of total revenue, or $36.6 million for the three months ended September 30, 2011, a decrease of $4.5 million, or 12%. The decrease in product revenue is primarily attributable to project timing and associated revenue recognition of Next-Gen products, as well as a slower than expected sales of Legacy products, compared to the corresponding 2011 period.

Our services revenue was 24% of total revenue at $10.3 million for the three months ended September 30, 2012, compared to 23% of total revenue, or $10.8 million for the three months ended September 30, 2011, a decrease of $0.6 million, or 5%. The decrease in services revenue was the result of decommissioning of our Legacy products in customer networks, partially offset by customer expansions and upgrades of our Next-Gen products.

Cost of Revenue and Gross Profit


	Three Months Ended September 30,
	2012					2011					Period-to-Period Change
(USD and $000’s)	Amount		% of Total Related Revenue			Amount		% of Total Related Revenue			Amount			Percentage
Cost of Revenues:
Products	$	11,070		34	%	$	13,700		38	%	$	(2,630	)		(19	)%
Services		5,118		50			5,358		50			(240	)		(4	)

Total cost of revenues	$	16,188		38	%	$	19,058		40	%	$	(2,870	)		(15	)%

Gross Profit:
Products	$	21,070		66	%	$	22,904		62	%	$	(1,834	)		(8	)%
Services		5,133		50			5,459		50			(326	)		(6	)

Total gross profit	$	26,203		62	%	$	28,363		60	%	$	(2,160	)		(8	)%

Cost of Revenue

Total cost of revenue of $16.2 million for the three months ended September 30, 2012 decreased by 15% or $2.9 million from $19.1 million for the three months ended September 30, 2011.

Cost of product revenue of $11.1 million for the three months ended September 30, 2012 decreased by 19% or $2.6 million from $13.7 million for the three months ended September 30, 2011. The change is primarily attributable to lower standard product costs, as a result of the decline in volume and a reduction in salaries and benefits due to the decrease in headcount.

Cost of services revenues of $5.1 million for the three months ended September 30, 2012 decreased by 4% or $0.2 million from $5.4 million for the three months ended September 30, 2011, as a result of the decrease in headcount compared to the corresponding 2011 period. Cost of services includes the direct costs of customer support and consists primarily of payroll, related benefits and travel for our support personnel.

Gross Profit

Gross profit of $26.2 million for the three months ended September 30, 2012 decreased by $2.2 million, or 8%, from $28.4 million for the three months ended September 30, 2011. Gross profit margin increased to 62% of total revenue for the three months ended September 30, 2012 from 60% of total revenue for the three months ended September 30, 2011.

For the three months ended September 30, 2012, product gross profit decreased by 8%, or $1.8 million, from $22.9 million for the three months ended September 30, 2011 to $21.1 million for the three months ended September 30, 2012. Gross profit margin increased from 62% of total product revenue for the three months ended September 30, 2011 to 66% of total product revenue for the three months ended September 30, 2012. The decrease in gross profit on product revenue is primarily a result of an overall decline in product revenue.

For the three months ended September 30, 2012, services gross profit decreased by 6%, or $0.3 million from $5.5 million for the three months ended September 30, 2011 to $5.1 million for the three months ended September 30, 2012, due to revenue recognized on a contract for which there were no associated costs incurred during the period. In the normal course of business, we may experience fluctuations in our gross profit margin as revenue is recognized on significant contracts. Gross profit margin remained consistent at 50% for the three months ended September 30, 2012 and the three months ended September 30, 2011.

Operating Expenses


	Three Months Ended September 30,
	2012					2011					Period-to-Period Change
	Amount		% of Total Revenue			Amount		% of Total Revenue			Amount			Percentage
Research and development, net	$	9,266		21	%	$	13,540		29	%	$	(4,274	)		(32	)%
Sales and marketing		9,261		21			12,664		27			(3,403	)		(27	)
General and administrative		7,375		17			9,391		20			(2,016	)		(21	)
Restructuring charges		457		1			1,674		4			(1,217	)		(73	)

Total operating expenses	$	26,359		61	%	$	37,269		79	%	$	(10,910	)		(29	)%

Research and Development Expenses

Research and development expenses of $9.3 million, or 21% of total revenue, for the three months ended September 30, 2012 decreased by $4.3 million, or 32%, from $13.5 million, or 29%, of total revenue for the three months ended September 30, 2011. The change was primarily the result of a decrease in salaries and benefits of $2.9 million associated with a decrease in departmental headcount, as the result of our restructuring efforts.

Sales and Marketing

Sales and marketing expenses of $9.3 million, or 21% of total revenue, for the three months ended September 30, 2012 decreased by $3.4 million, or 27%, from $12.7 million, or 27% of total revenue for the three months ended September 30, 2011. The change in sales and marketing expenses is primarily attributable to decreases in salaries and employee benefits of $1.6 million, sales commissions of $0.1 million, travel and entertainment of $0.2 million and marketing expense of $0.2 million.

General and Administrative

General and administrative expenses of $7.4 million, or 17% of total revenue, for the three months ended September 30, 2012 decreased by $2.0 million, or 21%, from $9.4 million, or 20% of total revenue for the three months ended September 30, 2011. The change is primarily attributable to decreased expenses related to consulting fees of $1.5 million and salaries and employee benefits of $0.3 million.

Restructuring Charges

During 2012 and 2011, we have implemented various cost reduction initiatives to reduce our overall cost structure including exiting certain facilities and transitioning work to other locations. Costs incurred in connection with these actions include employee separation costs, including severance, benefits and outplacement, lease and facility exit costs, and other expenses in connection with exit activities.

For the three months ended September 30, 2012, we recorded employee separation costs and other costs related to employee termination benefits in the amount of $0.2 million. Substantially, all of these costs are expected to be cash expenditures. For the three months ended September 30, 2011, the Company recorded employee separation costs and other costs related to employee termination benefits in the amount of $1.7 million. As of September 30, 2012 and December 31, 2011, $1.4 million and $1.4 million, respectively, remained accrued and unpaid for termination benefits, which are reflected as a component of accrued liabilities in the accompanying unaudited condensed consolidated balance sheets.

In an effort to reduce overall operating expenses, we decided it was beneficial to close or consolidate office space at certain locations. For the three months ended September 30, 2012, we incurred expense of $0.3 million in lease and facility exit costs related to our Eatontown, New Jersey location. For the three months ended September 30, 2011, the Company did not incur expenses related to lease and facility exits costs. As of September 30, 2012 and December 31, 2011, we had a liability in the amount of $3.0 million and $2.9 million, respectively, which was accrued for lease and facility exit costs. As of September 30, 2012, $0.8 million was reflected as a component of accrued liabilities and $2.2 million was reflected as a component of other non-current liabilities in the accompanying unaudited condensed consolidated balance sheets. As of December 31, 2011, $0.5 million was reflected as a component of accrued liabilities and $2.4 million was reflected as a component of other non-current liabilities in the accompanying unaudited condensed consolidated balance sheets.

Interest Expense

Interest expense decreased by $2.9 million, or 62%, from $4.7 million for the three months ended September 30, 2011 to $1.8 million for the three months ended September 30, 2012. The decrease is primarily attributable to lower interest rates for the three months ended September 30, 2012 on our Term Loan Agreement, which decreased from a stated interest rate of 15% to 10%. In addition, the interest rate on the Revolving Credit Agreement decreased from 5.75% for the three months ended September 30, 2011 to 4.75% for the three months ended September 30, 2012.

Change in Fair Value of Warrants

The change in fair value of warrants represented a gain of $1.8 million for the three months ended September 30, 2012, as a result of a decline in our stock price from June 30, 2012 to September 30, 2012. There was no such activity in the corresponding period of 2011, as no warrants were outstanding.

Foreign Exchange Loss net

Foreign exchange loss was $0.3 million for the three months ended September 30, 2012, compared to a loss of $0.1million for the three months ended September 30, 2011.

Income Tax Provision

We recorded an income tax provision of $0.1 million and an income tax benefit of ($0.6) million for the three months ended September 30, 2012 and September 30, 2011, respectively. The tax provision for the three months ended September 30, 2012 was primarily due to current tax expense in our profitable foreign entities with no corresponding tax attributes. The tax benefit during the three months ended September 30, 2011 was primarily attributable to a decrease in a reserve for uncertain tax positions. There was no deferred provision recorded in the three month periods ended September 30, 2012 or September 30, 2011.

Comparison of Nine Months Ended September 30, 2012 and September 30, 2011

Revenue


	Nine Months Ended September 30,
	2012					2011					Period-to-Period Change
(USD and $000’s)	Amount		% of Total Revenue			Amount		% of Total Revenue			Amount			Percentage
Revenue:
Products	$	92,249		76	%	$	118,428		80	%	$	(26,179	)		(22	)%
Services		29,808		24			29,644		20			164			1

Total revenue	$	122,057		100	%	$	148,072		100	%	$	(26,015	)		(18	)%

Legacy vs. Next-Gen
Legacy	$	42,830		35	%	$	52,319		35	%	$	(9,489	)		(18	)%
Next-Gen		79,227		65			95,753		65			(16,526	)		(17	)

Total revenue	$	122,057		100	%	$	148,072		100	%	$	(26,015	)		(18	)%

Revenue by geography:
Americas	$	55,775		46	%	$	66,310		45	%	$	(10,535	)		(16	)%
Europe, Middle East and Africa		39,128		32			50,113		34			(10,985	)		(22	)
Asia Pacific		27,154		22			31,649		21			(4,495	)		(14	)

Total revenue	$	122,057		100	%	$	148,072		100	%	$	(26,015	)		(18	)%

Revenue

Total revenue of $122.1 million for the nine months ended September 30, 2012 decreased by $26.0 million, or 18%, from $148.1 million for the nine months ended September 30, 2011.

Our product revenue was 76% of total revenues at $92.2 million for the nine months ended September 30, 2012, compared to 80% of total revenue, or $118.4 million for the nine months ended September 30, 2011, a decrease of $26.2 million, or 22%. The decrease in product revenue is primarily attributable to project timing and associated revenue recognition of Next-Gen products, as well as a slower than expected sales of Legacy products, compared to the corresponding 2011 period.

Our services revenue was 24% of total revenue at $29.8 million for the nine months ended September 30, 2012, compared to 20% of total revenue, or $29.6 million for the three months ended September 30, 2011, an increase of $0.2 million, or 1%. The increase in services revenue was the result of customer expansions and upgrades of our Next-Gen products, partially offset by a decommissioning of our Legacy products in customer networks.

Cost of Revenue and Gross Profit


	Nine Months Ended September 30,
	2012					2011					Period-to-Period Change
(USD and $000’s)	Amount		% of Total Related Revenue			Amount		% of Total Related Revenue			Amount			Percentage
Cost of Revenues:
Products	$	38,038		41	%	$	45,237		38	%	$	(7,199	)		(16	)%
Services		15,267		51			16,215		55			(948	)		(6	)

Total cost of revenues	$	53,305		43	%	$	61,452		42	%	$	(8,147	)		(13	)%

Gross Profit:
Products	$	54,211		59	%	$	73,191		62	%	$	(18,980	)		(26	)%
Services		14,541		49			13,429		45			1,112			8

Total gross profit	$	68,752		57	%	$	86,620		58	%	$	(17,868	)		(21	)%

Cost of Revenue

Total cost of revenue of $53.3 million for the nine months ended September 30, 2012 decreased by 13% or $8.2 million from $61.5 million for the nine months ended September 30, 2011.

Cost of product revenue of $38.0 million for the nine months ended September 30, 2012 decreased by 16% or $7.2 million from $45.2 million for the nine months ended September 30, 2011. The change is primarily attributable to lower standard product costs, as a result of the decline in volume and a reduction in salaries and benefits due to the decrease in headcount, partially offset by a $4.8 million charge during the nine months ended September 30, 2012, of which $4.2 million related to excess and obsolete inventory provision and $0.6 million related to capitalized overhead.

Cost of services revenues of $15.3 million for the nine months ended September 30, 2012 decreased by 6% or $0.9 million from $16.2 million for the nine months ended September 30, 2011. The change is primarily attributable to the decrease in headcount compared to the corresponding 2011 period. Cost of services includes the direct costs of customer support and consists primarily of payroll, related benefits and travel for our support personnel.

Gross Profit

Gross profit of $68.7 million for the nine months ended September 30, 2012 decreased by $17.9 million, or 21%, from $86.6 million for the nine months ended September 30, 2011. Gross profit margin decreased from 58% of total revenue for the nine months ended September 30, 2011 to 57% of total revenue for the nine months ended September 30, 2012.

For the nine months ended September 30, 2012, product gross profit decreased by 26%, or $19.0 million, from $73.2 million for the nine months ended September 30, 2011 to $54.2 million for the nine months ended September 30, 2012. Gross profit margin decreased from 62% of total product revenue for the nine months ended September 30, 2011 to 59% of total product revenue for the nine months ended September 30, 2012. The decrease in gross profit on product revenue is primarily a result of an overall decline in product revenue, as well as the charge of $4.8 million related to excess and obsolete inventory and capitalized overhead, as discussed above.

For the nine months ended September 30, 2012, services gross profit increased by 8%, or $1.1 million from $13.4 million for the nine months ended September 30, 2011 to $14.5 million for the nine months ended September 30, 2012, due to revenue recognized on a contract for which there were no associated costs incurred during the period, as well as improved efficiencies gained from our integration efforts. In the normal course of business, we may experience fluctuations in our gross margin as revenue is recognized on significant contracts. Gross profit margin increased from 45% for the nine months ended September 30, 2011 to 49% for the nine months ended September 30, 2012.

Operating Expenses


	Nine Months Ended September 30,
	2012					2011					Period-to-Period Change
	Amount		% of Total Revenue			Amount		% of Total Revenue			Amount			Percentage
Research and development, net	$	33,459		27	%	$	42,262		29	%	$	(8,803	)		(21	)%
Sales and marketing		31,935		26			41,829		28			(9,894	)		(24	)
General and administrative		23,766		19			27,552		19			(3,786	)		(14	)
Restructuring charges		4,760		4			6,421		4			(1,661	)		(26	)

Total operating expenses	$	93,920		76	%	$	118,064		80	%	$	(24,144	)		(20	)%

Research and Development Expenses

Research and development expenses of $33.5 million, or 27% of total revenue, for the nine months ended September 30, 2012 decreased by $8.8 million, or 21%, from $42.3 million, or 29% of total revenue for the nine months ended September 30, 2011. The decrease was primarily the result of a $6.8 million decrease in salaries and benefits associated with a decrease in departmental headcount, as the result of our integration and restructuring efforts.

We expect that research and development expenses on an absolute basis and as a percentage of total revenue will continue to decrease in 2012, as we continue to integrate our research and development operations.

Sales and Marketing

Sales and marketing expenses of $31.9 million, or 26% of total revenue, for the nine months ended September 30, 2012 decreased by $9.9 million, or 24%, from $41.8 million, or 28% of total revenue for the nine months ended September 30, 2011. The change in sales and marketing expenses is primarily attributable to decreases in salaries and employee benefits of $4.2 million, sales commissions of $1.1 million, and travel and entertainment of $1.2 million.

We expect that sales and marketing expenses, on an absolute basis and as a percentage of total revenue will continue to decrease in 2012, as we continue to integrate our sales and marketing operations during the year.

General and Administrative

General and administrative expenses of $23.8 million, or 19% of total revenue, for the nine months ended September 30, 2012 decreased by $3.8 million, or 14%, from $27.6 million, or 19% of total revenue for the nine months ended September 30, 2011. The change is primarily attributable to decreased expenses for consulting fees of $1.9 million and salaries and employee benefits of $1.4 million.

We expect that general and administrative expenses, on an absolute dollar basis and as a percentage of total revenue, will decrease in 2012 as we continue to integrate our general and administrative operations during the year and gain efficiencies in lower overhead and employee costs.

Restructuring Charges

For the nine months ended September 30, 2012, we recorded employee separation costs and other costs related to employee termination benefits in the amount of $3.6 million. Substantially, all of these costs are expected to be cash expenditures. For the nine months ended September 30, 2011, the Company recorded employee separation costs and other costs related to employee termination benefits in the amount of $2.8 million. As of September 30, 2012 and December 31, 2011, $1.4 million and $1.4 million, respectively, remained accrued and unpaid for termination benefits, which are reflected as a component of accrued liabilities in the accompanying unaudited condensed consolidated balance sheets.

In an effort to reduce overall operating expenses, we decided it was beneficial to close or consolidate office space at certain locations. For the nine months ended September 30, 2012, we incurred expense of $1.2 million in lease and facility exit costs related to our Eatontown, New Jersey, Getzville, New York and Renningen, Germany locations. For the nine months ended September 30, 2011, the Company incurred expense of $3.6 million related to lease and facility exits costs for the Company’s Salem, New Hampshire and Parsippany, New Jersey facilities. As of September 30, 2012 and December 31, 2011, we had a liability in the amount of $3.0 million and $2.9 million, respectively, which was accrued for lease and facility exit costs. As of September 30, 2012, $0.8 million was reflected as a component of accrued liabilities and $2.2 million was reflected as a component of other non-current liabilities in the accompanying unaudited condensed consolidated balance sheets. As of December 31, 2011, $0.5 million was reflected as a component of accrued liabilities and $2.4 million was reflected as a component of other non-current liabilities in the accompanying unaudited condensed consolidated balance sheets.

Interest Expense

Interest expense decreased by $4.4 million or 33%, from $13.2 million for the nine months ended September 30, 2011 to $8.8 million for the nine months ended September 30, 2012. The decrease is primarily attributable to lower interest rates for the nine months ended September 30, 2012 on our Term Loan Agreement, which decreased from a stated interest rate of 15% to 10%. In addition, the average interest rate on the Revolving Credit Agreement decreased from 5.75% for the nine months ended September 30, 2011 to 5.05% for the nine months ended September 30, 2012.

Change in Fair Value of Warrants

The change in fair value of warrants represented a gain of $2.2 million for the nine months ended September 30, 2012, as a result of a decline in our stock price from grant date to September 30, 2012. There was no such activity in the corresponding period of 2011, as no warrants were outstanding.

Foreign Exchange Loss, net

Foreign exchange loss was $1.0 million for the nine months ended September 30, 2012, compared to a loss of $0.4 million for the nine months ended September 30, 2011.

Income Tax Provision

For the nine months ended September 30, 2012 and September 30, 2011, we recorded a provision for income taxes of $0.3 million and $0.6 million, respectively. The tax provision during the nine months ended September 30, 2012 was primarily attributable to our profitable foreign operations. The tax provision during the nine months ended September 30, 2011 was primarily attributable to our profitable foreign operation which was partly offset by a decrease in a reserve for uncertain tax positions. There was no deferred provision recorded in the nine month periods ended September 30, 2012 or September 30, 2011.

Financial Position

Liquidity and Capital Resources

As of September 30, 2012, we had cash and cash equivalents of $2.7 million, compared to $10.4 million of cash and cash equivalents as of December 31, 2011. Our primary anticipated sources of liquidity are funds generated from operations, and as required, funds borrowed under the Revolving Credit Agreement and Term Loan Agreement. As of September 30, 2012, we had borrowed $10.7 million under our Revolving Credit Agreement. Under the Revolving Credit Agreement, the unused line of credit totaled $14.3 million, of which $5.1 million was available to us. Since December 31, 2011, our borrowings decreased by $1.8 million under the Revolving Credit Agreement and we used net cash in operating activities of $7.9 million. As of September 30, 2012, availability under the Revolving Credit Agreement was $5.1 million, compared to $2.4 million as of December 31, 2011. In addition, during the nine months ended September 30, 2012, we borrowed $4.0 million under the Term Loan Agreement.

During the nine months ended September 30, 2012, we paid $5.3 million to service the interest payments on the Term Loan and Revolving Credit Agreements.

We monitor and manage liquidity by preparing and updating annual budgets, as well as monitor compliance with terms of our financing agreements.

We believe that we will continue as a going concern. For the nine months ended September 30, 2012, we incurred a net loss of $33.1 million and used cash in operating activities of $7.9 million. As of September 30, 2012, our cash and cash equivalents was $2.7 million, our bank indebtedness was $10.7 million and our long-term debt with related parties was $64.2 million, net of discount.

On March 22, 2012, we amended the second amended and restated credit agreement dated October 1, 2010, or the Term Loan Agreement with Obsidian, LLC, as agent, and Special Value Expansion Fund, LLC, Special Value Opportunities Fund, LLC, and Tennenbaum Opportunities Partners V, LP, as lenders, or the Term Lenders, which extended the maturity date to March 31, 2015, reduced the stated interest rate to 10% from 15% and revised the financial covenants. On April 11, 2012 $33.0 million of outstanding debt (face value) under the Term Loan Agreement and $5.0 million of outstanding stockholder loans, or the Stockholder Loans were cancelled in exchange for convertible promissory notes, or the Notes, which Notes were converted into 8.0 million shares of our common stock on August 8, 2012. These actions were determined to be a troubled debt restructuring and were taken to improve our liquidity, leverage and future operating cash flow. We also took certain restructuring action during the nine months ended September 30, 2012, designed to improve our future operating performance.

We are required to meet certain financial covenants under the Term Loan Agreement, including minimum EBITDA (as adjusted), minimum liquidity, minimum interest coverage ratio and maximum consolidated total leverage ratio, each beginning in the quarter ending June 30, 2013. Specifically, the EBITDA covenant (as adjusted) requires $16.9 million of EBITDA (as adjusted) for the four quarters ending June 30, 2013. In the event that forecasts of EBITDA (as adjusted) are reduced from anticipated levels, the covenants may not be met and we would be required to reclassify its long-term debt under the Term Loan Agreement to current liabilities on the consolidated balance sheet.

If we should default on any of the covenants contained in the Term Loan and Revolving Credit Agreements, we do not anticipate having sufficient cash and cash equivalents to repay the debt should the revolving credit lender and related party term loan lenders accelerate the maturity dates and we would be forced to restructure these agreements and/or seek alternative sources of financing. There can be no assurances that restructuring of the debt or alternative financing will be available on acceptable terms or at all. This could harm us by:

•

increasing our vulnerability to adverse economic conditions in our industry or the economy in general;

•

requiring substantial amounts of cash to be used for debt servicing, rather than other purposes, including operations;

•

limiting our ability to plan for, or react to, changes in our business and industry; and

•

influencing investor and customer perceptions about our financial stability and limiting our ability to obtain financing or acquire customers.

Unfavorable economic and market conditions in the United States and the rest of world could impact our business in a number of ways, including:

•

deferment of purchases and orders by customers;

•

negative impact from increased financial pressures on distributors and resellers of our product; and

•

negative impact from increased financial pressures on key suppliers.

In order for us to meet the debt repayment requirements, we will need to raise additional capital by refinancing our debt, raising equity capital or selling assets. Uncertainty in future credit markets may negatively impact our ability to access debt financing or to refinance existing indebtedness in the future on favorable terms, or at all. If additional capital is raised through the issuance of debt securities or other debt financing, the terms of such debt may include different financial covenants, restrictions and financial ratios other than what we currently operate under. Any equity financing transaction could result in additional dilution to our existing stockholders.

In the event of an acceleration of the our obligations under the Revolving Credit Agreement or Term Loan Agreement and our failure to pay the amounts that would then become due, the Revolving Credit Lender and Term Loan Lenders could seek to foreclose on our assets, as a result of which we would likely need to seek protection under the provisions of the U.S. Bankruptcy Code and/or our affiliates might be required to seek protection under the provisions of applicable bankruptcy codes. In that event, we could seek to reorganize our business, or we or a trustee appointed by the court could be required to liquidate our assets. In either of these events, whether the stockholders receive any value for their shares is highly uncertain. If we needed to liquidate our assets, we might realize significantly less from them than the value that could be obtained in a transaction outside of a bankruptcy proceeding. The funds resulting from the liquidation of its assets would be used first to pay off the debt owed to secured creditors, including the Term Lenders, Revolving Credit Lender followed by any unsecured creditors before any funds would be available to pay our stockholders. If we are required to liquidate under the federal bankruptcy laws, it is unlikely that stockholders would receive any value for their shares.

Based on our current plans and business conditions, we believe that our existing cash and cash equivalents, expected cash generated from operations and available credit facilities will be sufficient to satisfy our anticipated cash requirements during 2012. We will need to either raise additional funding to fund future operations or to implement a business plan where cash flow will fully fund operations. However, there is no assurance that additional funding will be available to us on acceptable terms on a timely basis, if at all, or that we will achieve profitable operations. If we are unable to raise additional capital to fund our operations, we will need to curtail planned activities and to reduce costs. Doing so may affect our ability to operate effectively.

Operating Activities

Net cash used in operating activities of $7.9 million for the nine months ended September 30, 2012 was primarily attributable to our net loss of $33.1 million, partially offset by adjustments for non-cash items aggregating to $13.1 million. Operating assets decreased by $18.4 million and operating liabilities decreased by $6.4 million. The decrease in operating assets relates to inventory of $9.7 million, accounts receivable of $7.0 million and other current assets of $1.7 million. The decrease in operating liabilities is primarily attributable to decreases of $5.0 million in accounts payable and accrued liabilities, deferred revenue of $1.6 million, income taxes payable of $0.7 million and interest payable of $0.4 million, partially offset by an increase in other long-term liabilities of $1.4 million.

Net cash used in operating activities of $11.1 million for the nine months ended September 30, 2011 was primarily attributable to our net loss of $45.6 million, partially offset by adjustments for non-cash items aggregating to $19.5 million. Operating assets decreased by $22.9 million and operating liabilities decreased by $7.8 million. The decrease in operating assets relates to accounts receivable of $11.8 million, other current assets of $5.1 million and inventory of $5.9 million. The decrease in operating liabilities is primarily attributable to decreases of $3.0 million in deferred revenue, accounts payable and accrued liabilities of $4.9 million, and income taxes payable of $0.2 million, partially offset by an increase in interest payable, related parties of $0.3 million.

Investing Activities

Net cash used in investing activities of $0.5 million for the nine months ended September 30, 2012 consisted primarily of an increase of $0.5 million related to restricted cash, offset by $1.0 million related to the purchase of property and equipment and $0.1 million of intangible asset purchases.

Net cash used in investing activities of $3.5 million for the nine months ended September 30, 2011 consisted primarily of a decrease of $1.0 million related to restricted cash, $2.3 million for the purchase of property and equipment, $0.1 million for the purchase of intangible assets and an increase in other assets of $0.1 million.

Financing Activities

Net cash provided by financing activities of $0.7 million for the nine months ended September 30, 2012 included $4.0 million in proceeds from our long-term debt, partially offset by net payments to our Revolving Credit Agreement of $1.8 million and debt issuance costs of $1.5 million.

Net cash used in financing activities of $1.0 million in the nine months ended September 30, 2011 included $1.2 million in payments on our Revolving Credit Agreement facility, partially offset by $0.2 million in proceeds from the exercise of stock options.

Restructuring of Debt Obligations

On April 11, 2012, we entered into a Purchase Agreement with accredited Investors including certain related parties, pursuant to which we issued and sold $39.5 million aggregate principal amount of the Notes and one share of Series D-1 Preferred Share, to the Investors in a Private Placement in exchange for $38.0 million of Term Loans and Stockholder Loans. This exchange of debt was treated as a “Troubled Debt Restructuring” in accordance FASB ASC 470-60, “Troubled Debt Restructurings by Debtors ,” as we had been experiencing financial difficulty and the lenders granted a concession to us. We assessed the total future cash flows of the restructured debt as compared to the carrying amount of the original debt and determined the total future cash flows to be greater than the carrying amount at the date of the restructuring. Further, the effective interest rate for both the Term Loans and Stockholders Loans was higher before the restructuring than subsequent to the restructuring. As such, the carrying amount was not adjusted and no gain was recorded, consistent with troubled debt restructuring accounting.


	Prior to Restructuring			Subsequent to Restructuring
Term Loan, principal	$	94,093		$	61,135
Term Loan Debt Discount		(7,657	)		(2,530	)

		86,436			58,605

Convertible Notes, carrying value		—			32,905

		—			32,905

Shareholder Loans		5,074			—

Total long-term		91,510			91,510
Accrued interest payable—term loan		260			260

	$	91,770		$	91,770

The conversion feature embedded in the Notes was not required to be bifurcated on the restructuring closing date and separately measured as a derivative liability, as we have sufficient authorized and unissued common shares to satisfy conversion of the Notes among other criteria that were met. Further, stockholders owning greater than 50% of our common stock agreed to the conversion, and as a result, on August 8, 2012, the Notes were converted into equity.

The Notes

The Investors in the Private Placement include the Term Lenders and the Related Party Lenders. The Term Lenders purchased $34.5 million aggregate principal amount of Notes in exchange for the cancellation of (i) $33.0 million in outstanding principal under the Term Loan Agreement, $3.0 million of which represents accrued but unpaid interest that was capitalized under the Term Loan Agreement on March 22, 2012, and (ii) a prepayment premium of $1.5 million triggered by the cancellation of the outstanding debt described above. The remaining $5.0 million aggregate principal amount of Notes was purchased by the holders of the Related Party Lenders in exchange for the cancellation of outstanding debt.

The Notes had an interest at the rate of 1% per annum, compounded annually, and were convertible into shares of our common stock, par value $0.001 per share. The conversion price of the Notes was generally $5.00 per share, except that the Notes issued to the Term Lenders in exchange for the cancellation of the Interest Amount had a conversion price of $4.35 per share, in each case as adjusted for any stock split, reverse stock split, stock dividend, recapitalization, reclassification, combination or other similar transaction. Under the terms of the Notes, the principal and all accrued but unpaid interest automatically converted into shares of Common Stock upon stockholder approval of the Private Placement, which approval was obtained at the Company’s 2012 Annual Meeting of Stockholders on August 8, 2012.

The Purchase Agreement contains customary representations, warranties, covenants and closing conditions by, among and for the benefit of the parties thereto. The Purchase Agreement also provides for indemnification of the Investors in the event that any Investor incurs losses, liabilities, costs and expenses related to a breach of the representations and warranties by the Company under the Purchase Agreement or the other transaction documents or any action instituted against an Investor or its affiliates due to the transactions contemplated by the Purchase Agreement or other transaction documents, subject to certain limitations.

Series D-1 Preferred Stock

On April 11, 2012, we filed a certificate of designation, or Certificate, for our Series D-1 Preferred Share with the Secretary of State of the State of Delaware. The Series D-1 Preferred Share was issued and sold to Tennenbaum, or Holder, in exchange for cancellation of $100 dollars in outstanding principal under the Term Loan Agreement.

The Certificate authorizes one share of Series D-1 Preferred Share, which is non-voting and is not convertible into other shares of our capital stock, or Common Stock. However, following stockholder approval of the Private Placement, if it occurs, the holder of the Series D-1 Preferred Share has the right to designate certain members of the Board as follows:

•

four directors to the Board (each director to the Board designated and elected pursuant by the Holder, a “Series D-1 Director”, and all such directors, or the Series D-1 Directors at any time while the Holder (together with its affiliates) beneficially owns in the aggregate at least 45% of the then issued and outstanding shares of Common Stock (assuming (x) the exercise in full of all warrants then exercisable by the Holder and any affiliates thereof and (z) conversion or exercise, as applicable, of any other securities of the Company that by their terms are convertible or exercisable into shares of Common Stock that are held by the Holder, collectively, or the Fully Diluted Common Stock;

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three Series D-1 Directors at any time while the Holder (together with its affiliates) beneficially owns in the aggregate at least 30% and less than 45% of the Fully Diluted Common Stock;

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two Series D-1 Directors at any time while the Holder (together with its affiliates) beneficially owns in the aggregate at least 10% and less than 30% of the Fully Diluted Common Stock; or

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one Series D-1 Director at any time while the Holder (together with its affiliates) beneficially owns in the aggregate at least three percent and less than 10% of the Fully Diluted Common Stock.

The Certificate further provides that we must obtain the Holder’s consent to, among other things, (i) take any action that alters or changes the rights, preferences or privileges of the Series D-1 Preferred; (ii) convert us into any other organizational form; (iii) change the size of the Board; (iii) appoint or remove the chairman of the Board; or (iv) establish, remove or change the authority of any committee of the Board or appoint or remove members thereof.

The Holder is not entitled to any dividends from us. However, upon any liquidation, dissolution or winding up excluding the sale of all or substantially all of the assets or capital stock of us and the merger or consolidation into or with any other entity or the merger or consolidation of any other entity into or with us, or a Liquidation Event, the Holder is entitled to a liquidation preference, prior to any distribution of our assets to the holders of Common Stock, in an amount equal to $100 payable in cash. After payment to the Holder of the full preferential amount, the Holder will have no further right or claim to our remaining assets.

The Series D-1 Preferred Share is redeemable for $100 (i) at the written election of the Holder, or (ii) at the election of us at any time after the earlier to occur of the following: (x) the Holder (together with its affiliates) beneficially owns in the aggregate less than three percent (3%) of the Fully Diluted Common Stock at any time following the stockholder approval of the Private Placement, if it occurs, or (y) a Liquidation Event.

Off-Balance Sheet Arrangements

At September 30, 2012, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance, special purpose or variable interest entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. We do not have any off-balance sheet arrangements that are currently material or reasonably likely to be material to our consolidated financial position or results of operations.

Recent Accounting Pronouncements

See Note 2(w) in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on April 16, 2012 for a full description of the recent accounting pronouncements including the date of adoption and effect on results of operations and financial condition.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Not applicable.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) that are designed to provide reasonable assurance that the information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Our management evaluated (under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer) our disclosure controls and procedures, and concluded that, because we have identified a material weakness with respect to our internal controls over financial reporting as of December 31, 2011, our disclosure controls and procedures were not effective as of September 30, 2012, to provide reasonable assurance that the information required to be disclosed by us in reports that we file or submit under the Exchange Act, is recorded, processed, summarized, and reported within the time periods specified in Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Controls

During our most recent fiscal quarter, the Company made the following changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting:

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Hiring of additional finance staff; and

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Establishment of Disclosure Committee.

Limitations of Disclosure Controls and Procedures and Internal Control Over Financial Reporting

Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

We are not a party to any material legal proceeding. From time to time, we may be subject to various claims and legal actions arising in the ordinary course of business.

Item 1A. Risk Factors

Our business faces significant risks, some of which are set forth below to enable readers to assess, and be appropriately apprised of, many of the risks and uncertainties applicable to the forward-looking statements made in this Quarterly Report on Form 10-Q. You should carefully consider these risk factors as each of these risks could adversely affect our business, operating results and financial condition. If any of the events or circumstances described in the following risks actually occurs, our business may suffer, the trading price of our common stock could decline and our financial condition or results of operations could be harmed. Given these risks and uncertainties, you are cautioned not to place undue reliance on forward-looking statements. These risks should be read in conjunction with the other information set forth in this Quarterly Report on Form 10-Q. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us, or that we currently believe to be immaterial, may also adversely affect our business.

We have marked with an asterisk (*) those risks described below that reflect substantive changes from the risks described in our Annual Report on Form 10-K for the year ended December 31, 2011, filed with the SEC on April 16, 2012.

We have received a letter regarding an informal inquiry by the SEC, and cooperation with such governmental inquiry may cost significant amounts of money and require a substantial amount of management resources.

On March 28, 2011, we received a letter from the SEC informing us that the SEC was conducting an informal inquiry, or the SEC Informal Inquiry, and requesting that we preserve certain categories of records in connection with the SEC Informal Inquiry. In a follow up discussion with the SEC on March 30, 2011, the SEC informed us that the inquiry related to allegations of improper revenue recognition and potential violations of the Foreign Corrupt Practices Act of 1977, as amended, by the former Veraz Networks Inc. business during periods prior to completion of our business combination with Dialogic Corporation. Our Board of Directors, or the Board, appointed a committee to review these issues, with the aid of counsel, and to make recommendations to the Board as to what, if any, remedial actions would be appropriate. The committee engaged Sheppard Mullin Richter & Hampton LLP, or Sheppard Mullin, as outside counsel to the committee, The Board has taken the remedial actions recommended by Sheppard Mullin and the committee and we have updated and improved our compliance procedures. In addition, we produced documents to the Department of Justice, or DOJ, relating to the SEC Informal Inquiry. With our counsel, we continue to fully cooperate with the SEC and DOJ, in connection with the SEC Informal Inquiry. We have incurred and may continue to incur significant costs related to the SEC Informal Inquiry, which will have a material adverse effect on our financial condition and results of operations. Further, the SEC Informal Inquiry has caused and may continue to cause a diversion of management’s time and attention which could also have a material adverse effect on our financial condition and results of operations.

The SEC Informal Inquiry may turn into a formal investigation and result in charges filed against us and in fines or penalties.

The SEC and/or DOJ may decide to turn the SEC Informal Inquiry into a formal investigation. Should they do so, criminal or civil charges could be filed against us and we could be required to pay significant fines or penalties in connection with such investigation or other governmental investigations. Any criminal or civil charges by the SEC or other governmental agency or any fines or penalties imposed by the SEC could materially harm our business, results of operations, financial position and cash flows.

We have not sustained profits and our losses could continue. Without sufficient additional capital to apply to repay our indebtedness, we may be required to significantly scale back our operations, significantly reduce our headcount, seek protection under the provisions of the U.S. Bankruptcy Code, and/or discontinue many of our activities which could negatively affect our business and prospects. Our current capital raising efforts may not be successful in raising additional capital on favorable terms, or at all.

We have experienced significant losses in the past and never sustained profits. For the nine months ended September 30, 2012 and for the years ended December 31, 2011, 2010 and 2009, we recorded net losses of $33.1 million, $54.8 million, $46.7 million and $37.6 million, respectively. As of September 30, 2012, we had $10.7 million in current bank indebtedness and $64.2 million in debt with related parties, net of discount. If we fail to comply with the covenants under the Term Loan Agreement and the Revolving Credit Agreement, the maturity date of our outstanding indebtedness may be accelerated.

While we believe that our current cash resources, together with anticipated product and services revenues, will be sufficient to fund our operations, including interest payments, in 2012, they will not be sufficient to fund both our operations and repayment of principal on our outstanding indebtedness in 2013 or beyond. Further, we do not anticipate having sufficient cash and cash equivalents

to repay the debt should the Revolving Credit Lender or the Term Lenders accelerate the maturity date of outstanding debt, and we would be forced to seek alternative sources of financing. In light of these circumstances, we will need to seek additional capital through public or private debt or equity financings or development financings.

However, there are no assurances that those efforts will be successful or that additional capital will be available on terms that do not adversely affect our existing stockholders or restrict our operations, if it is available at all. If we raise additional funds through the issuance of debt securities, these securities could have rights that are senior to holders of our common stock and could include different financial covenants, restrictions and financial ratios other than what we currently operate under. The conversion of the Notes resulted in substantial dilution to our stockholders and any additional equity financing would also likely be substantially dilutive to our stockholders, particularly in light of the prices at which our common stock has been recently trading. In addition, if we raise additional funds through the sale of equity securities, new investors could have rights senior to our existing stockholders. The terms of any future financings may restrict our ability to raise additional capital, which could delay or prevent the further development or marketing of our products and services. Our need to raise capital before the repayment of our debt becomes due may require us to accept terms that may harm our business or be disadvantageous to our current stockholders, particularly in light of the current illiquidity and instability in the global financial markets.

In the event of an acceleration of our obligations under the Term Loan Agreement or Revolving Credit Agreement and our failure to pay the amounts that would then become due, the Revolving Credit Lender or Term Lenders could seek to foreclose on our assets. As a result of this, we would likely need to seek protection under the provisions of the U.S. Bankruptcy Code and/or our affiliates might be required to seek protection under the provisions of applicable bankruptcy codes. In that event, we could seek to reorganize our business, or we or a trustee appointed by the court could be required to liquidate our assets. In either of these events, whether the stockholders receive any value for their shares is highly uncertain. If we needed to liquidate our assets, we might realize significantly less from them than the value that could be obtained in a transaction outside of a bankruptcy proceeding. The funds resulting from the liquidation of our assets would be used first to pay off the debt owed to secured creditors, including the Term Lenders, Revolving Credit Lender, followed by any unsecured creditors, before any funds would be available to pay our stockholders. If we are required to liquidate under the federal bankruptcy laws, it is unlikely that stockholders would receive any value for their shares.

Our substantial level of indebtedness could adversely affect our ability to react to changes in our business, and the terms of our debt facilities limit our ability to take a number of actions that our management might otherwise believe to be in our best interests. In addition, if we fail to comply with our covenants, the maturity date of our outstanding indebtedness could be accelerated.

Our level of indebtedness could have significant consequences to us and our investors, such as:

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requiring substantial amounts of cash to be used for debt service, rather than other purposes, including operations;

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limiting our ability to plan for, or react to, changes in our business and industry;

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limiting our ability to obtain additional financing we may need to fund future working capital, capital expenditures, product development, acquisitions or other corporate requirements;

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requiring the dedication of a substantial portion of our cash flow from operations to the payment of principal and interest on our debt, which would reduce the availability of cash flow to fund working capital, capital expenditures, product development, acquisitions and other corporate requirements;

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increasing the risk of our failing to satisfy our obligations with respect to our debt instruments and/or to comply with the financial and operating covenants;

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influencing investor, vendor, and customer perceptions about our financial stability and limiting our ability to obtain financing, obtain optimal payment terms and discounts with vendors or maintain and acquire customers;

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limiting our ability to meet payment obligations as set out in our agreements; and

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increasing our vulnerability to adverse economic conditions in our industry or the economy in general.

In addition, the instruments governing our debt contain financial and other restrictive covenants, which limit our operating flexibility and could prevent us from taking advantage of business opportunities. If we fail to comply with these covenants it could result in events of default under our debt instruments that, if not cured or waived, could result in an acceleration of our debt. In the event of an acceleration of our obligations under our debt instruments, we do not anticipate having sufficient cash and cash equivalents to repay such debt and we would be forced to seek alternative sources of financing. If we fail to pay amounts that become due under our debt instruments, our lenders could seek to foreclose on our assets, as a result of which we would likely need to seek protection under the provisions of the U.S. Bankruptcy Code as described above.

We are dependent on revenue from mature products, including TDM products. Our success depends in large part on continued migration to IP network architecture for sales of our newer IP and IP enabled products portfolio. If the migration to IP networks does not occur or if it occurs more slowly than we expect or if sales of our newer products do not develop as expected our operating results would be harmed.

Currently, we derive a significant portion of our product revenue from TDM media processing boards. These products connect to and interact with an enterprise or service provider-based circuit switched network and support some or all of a suite of media processing features, including echo cancellation, DTMF detection, voice play and record, conferencing, fax, modem, speech integration, and monitoring. This business has been declining as networks increasingly deploy IP-based technology. This technology migration resulted in a decrease in sales of our TDM products over the last several years. If we are unable to develop substantial revenue from our newer IP-based product lines, our business and results of operations will suffer. Although we have developed a migration path to IP -based products, the TDM products remain a sizable portion of our revenue. If our migration path to IP products is unsuccessful, we may not be able to mitigate the revenue loss due to the decrease in sales of our TDM products. Moreover, decisions made with regard to product maintenance and discontinuations may result in less revenue from our TDM products.

Our IP and IP-enabled products are used by service providers and enterprises to deliver telecommunications over IP networks. Our success depends on the continued migration of customers to a single IP network architecture, which depends on a number of factors outside of our control. For example, service providers may not see the value in our new mobile backhaul bandwidth optimization products or session bandwidth controller and may decide to delay or forgo making purchases altogether. Further, existing networks include switches and other equipment that may have remaining useful lives of 20 or more years, and therefore may continue to operate reliably for a lengthy period of time. Other factors that may delay or speed the migration to IP networks include service providers’ concerns regarding initial capital outlay requirements, available capacity on legacy networks, competitive and regulatory issues, and the implementation of an enhanced services business and video model. As a result, customers may defer investing in products, such as ours, that are designed to migrate telecommunications systems to IP networks. If the migration to IP networks does not occur for these or other reasons, or if it occurs more slowly than we expect, our operating results will be harmed.

*If we fail to maintain compliance with the continued listing requirements of The NASDAQ Global Market, our common stock may be delisted and the price of our common stock and our ability to access the capital markets could be negatively impacted.

Our common stock is currently listed on The NASDAQ Global Market. To maintain the listing of our common stock on The NASDAQ Global Market we are required to meet the continued listing requirements of The NASDAQ Global Market, or the NASDAQ Listing Standards, including, but not limited to, a minimum closing bid price of $1.00 per share, or the Bid Price Rule, and a market value of publicly held shares of at least $15.0 million, or the Market Value Rule.

On March 5, 2012, we announced that we had received a letter, dated February 28, 2012, from the NASDAQ Listing Qualifications Staff, or the Staff, notifying us that, for the last 30 consecutive business days, the bid price for our common stock had closed below the minimum $1.00 per share requirement for continued listing on The NASDAQ Global Market pursuant to the Bid Price Rule. On October 2, 2012, the Staff notified the Company that it had determined that for the last 10 consecutive business days, from September 17, 2012 to September 28, 2012, the closing bid of the Company’s common stock had been above the minimum $1.00 per share price. Accordingly, the Company has regained compliance with the Bid Price Rule and this matter is now closed.

On March 5, 2012, we also announced that we had received a letter, dated February 28, 2012, from the Staff notifying us that, for the last 30 consecutive business days, the market value of our publicly held shares had been below the minimum $15.0 million requirement for continued listing on The NASDAQ Global Market pursuant to the Market Value Rule. In accordance with the NASDAQ Listing Standards, we were given 180 calendar days, or until August 27, 2012, to regain compliance with the Market Value Rule. We regained compliance and on May 7, 2012, we received a letter from the Staff indicating that the Staff had determined that, for a minimum of the last 10 consecutive business days, from April 20, 2012 to May 4, 2012, the market value of our publicly held shares has been $15.0 million or greater and that this matter is now closed.

On July 2, 2012, we announced that we had received a letter, dated June 27, 2012, from the Staff notifying us that, for the last 30 consecutive business days, the market value of the Company’s publicly held shares has been below the minimum $15.0 million requirement for continued listing on The NASDAQ Global Market pursuant to the Market Value Rule. In accordance with the NASDAQ Listing Standards, we were given 180 calendar days, or until December 24, 2012, to regain compliance with the Market Value Rule. To regain compliance, the market value of our public held shares must close at $15.0 million or more for a minimum of 10 consecutive business days.

If we do not regain compliance with the Market Value Rule by December 24, 2012, and are not eligible for an additional compliance period at that time, the Staff will provide us a written notification that our common stock is subject to delisting. At that time, we may either apply for listing on The NASDAQ Capital Market, provided we meet the initial inclusion and continued listing requirements of that market, or appeal the Staff’s delisting determination to a Hearings Panel, or the Panel. We would remain listed pending the Panel’s decision. There can be no assurance that, if we do appeal the delisting determination by the Staff to the Panel, that such appeal would be successful.

If we continue to fail to comply with the NASDAQ Listing Standards, we may consider transferring to The NASDAQ Capital Market, provided we meet the initial inclusion and continued listing requirements of that market, which is a lower tier market, or our common stock may be delisted and traded on the over-the-counter bulletin board network. Moving our listing to The NASDAQ Capital Market could adversely affect the liquidity of our common stock. If our common stock were to be delisted by NASDAQ, we could face significant material adverse consequences, including:

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a limited availability of market quotations for our common stock;

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a reduced amount of news and analyst coverage for us;

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a decreased ability to issue additional securities or obtain additional financing in the future;

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reduced liquidity for our stockholders;

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potential loss of confidence by partners and employees; and

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loss of institutional investor interest and fewer business development opportunities.

We cannot take certain fundamental actions without the consent of the Holder of the Series D-1 Preferred Share.

For as long as the Series D-1 Preferred Share is outstanding, the Holder will be have a number of rights, including the right to approve certain changes to the size and composition of the Board and its committees. It is possible that the interests of the Holder and the holders of our common stock may be inconsistent, resulting in the inability to obtain the consent of the Holder to matters that may be in the best interests of the common stockholders.

*The price of our common stock has been highly volatile due to factors that will continue to affect the price of our stock.

As adjusted for the stock split mentioned above, our common stock traded as high as $6.80 and as low as $2.25 per share during the twelve months ended September 30, 2012. Some of the factors leading to this volatility include:

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fluctuations in our quarterly revenue and operating results;

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announcements of product releases by us or our competitors;

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announcements of acquisitions and/or partnerships by us or our competitors;

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increases in outstanding shares of our common stock upon exercise or conversion of derivative securities such as stock options and restricted stock units and the subsequent sale of such stock relating to the payment of taxes;

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delays in producing finished goods inventory for shipment;

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market conditions in the telecommunications industry;

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issuance of new or changed securities analysts’ reports or recommendations;

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deviations in our operating results from the estimates of analysts;

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additions or departures of key personnel;

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the small public float of our outstanding common stock in the marketplace; and

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concerns about our degree of leverage, our liquidity and our ability to comply with the covenants under our Term Loan Agreement and Revolving Credit Agreement and to pay debt service when due.

The price of our common stock may continue to be volatile in the future.

The demand for our solutions depends in large part on continued capital spending in the telecommunications equipment industry. A decline in demand, or a decrease or delay in capital spending by service providers, could have a material adverse effect on our results of operations.

We are exposed to the risks associated with the volatility of the U.S. and global economies, including specifically the continued volatility in certain global markets, such as Portugal, Italy, Greece, Russia and Spain where we have historically successfully sold our products. The difficulty in obtaining credit in these markets and decreased visibility regarding whether or when there will be sustained growth periods for sales of our products in these and other markets and uncertainty regarding the amount of sales, since our customers may rely on lending arrangements and/or have limited resources to finance capital technology expenditures, may have an adverse

effect on our business and operations. In addition, it is expected that this recent economic turmoil and the resulting economic uncertainty will result in decreased consumer spending, which will likely reduce the need for our products from customers. Slow or negative growth in the global economy may continue to materially and adversely affect our business, financial condition, and results of operations for the foreseeable future. Our results of operations would be further adversely affected if we were to experience lower-than-anticipated order levels, cancellations of orders in backlog, extended customer delivery requirements, or pricing pressure as a result of the slowdown.

In addition to the potential decline in capital spending resulting from the volatility markets, capital spending in the telecommunications equipment industry has in the past, and may in the future, fluctuate significantly based on numerous factors, including:

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capital spending levels of service providers;

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competition among service providers;

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pricing pressures in the telecommunications equipment market;

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end user demand for new services;

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service providers’ emphasis on generating revenues from traditional infrastructure instead of migrating to emerging networks and technologies;

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lack of or evolving industry standards;

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consolidation in the telecommunications industry; and

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changes in the regulation of telecommunications services.

We cannot make assurances of the rate or extent to which the telecommunications equipment industry will grow, if at all. Demand for our solutions and our IP products in particular will depend on the magnitude and timing of capital spending by service providers as they extend and migrate their networks. Furthermore, industry growth rates may not be as forecast, resulting in spending on product development well ahead of market requirements. The telecommunications equipment industry from time to time has experienced, and appears to be currently experiencing, a downturn. In response to the current downturn, service providers have slowed their capital expenditures, and may also cancel or delay new developments, reduce their workforces and inventories and take a cautious approach to acquiring new equipment and technologies, which could have a negative impact on our business. A continued downturn in the telecommunications industry may cause our operating results to fluctuate from period to period, which also may increase the volatility of the price of our common stock and harm our business.

*Although we have undertaken a concerted effort to reduce costs, including restructuring efforts, to streamline our operations and to reduce our overall cash burn rate, we have not had sustained profits and our losses could continue.

For the nine months ended September 30, 2012 and for the year ended December 31, 2011, we used cash of $7.9 million and $10.5 million, respectively, to fund our operating activities. We have made significant efforts to reduce costs and reduce headcount and streamline operations for the last several years and continued to focus on reducing costs during 2012. We successfully reduced quarterly operating costs from $38.6 million to $25.9 million (excluding restructuring charges) per quarter between the first quarter of 2011 and the third quarter of 2012. However, we may not be able to continue to reduce spending as planned and unanticipated costs may occur. Any restructuring efforts to focus on key products may not prove successful due to a variety of factors, including risks that a smaller workforce may have difficulty successfully completing research and development efforts and adequately monitoring our development and commercialization efforts. In addition, we may, in the future, decide to restructure operations and further reduce expenses by taking such measures as additional reductions in our workforce and reductions in other spending. Any restructuring places a substantial strain on remaining management and employees and on operational resources, and there is a risk that our business will be adversely affected by the diversion of management time to the restructuring efforts. There can be no assurance that following any restructuring we will have sufficient cash resources to allow us to fund our operations or repay our outstanding indebtedness as planned.

We have no internal hardware manufacturing capabilities and depend exclusively upon contract manufacturers to manufacture our hardware products. Our failure to successfully manage our relationships with our contract manufacturers would impair our ability to deliver our products in a manner consistent with required volumes or delivery schedules, which would likely cause us to fail to meet the demands of our customers and damage our customer relationships.

We outsource the manufacturing of all of our hardware products to two subcontractors, namely Plexus Corporation and Flextronics (Israel) Limited. These contract manufacturers provide comprehensive manufacturing services, including the assembly of our products and the procurement of materials and components. Each of our contract manufacturers also builds products for other companies and may not always have sufficient quantities of inventory available or may not allocate their internal resources to fill our orders on a timely basis. Moreover, although the reduction in number of our contract manufacturers has consolidated product builds and reduced costs, it increases the risk of a greater number of orders being unfulfilled should problems occur at either subcontractor.

We have supply contracts in place with each of these subcontractors and have done our best to negotiate terms which protect our business. However, all of these contracts can be terminated by subcontractors following a reasonable notice period pursuant to the terms of each individual contract. In addition the credit limits provided to us by our subcontractors are subject to change within contractual limits and should the credit limits be revised downwards this may negatively impact our cash flow and negatively impact our competitive position.

We do not have internal manufacturing capabilities to meet our customers’ demands and cannot assure you that we will be able to develop or contract for additional manufacturing capacity on acceptable terms on a timely basis or at all if it is needed. An inability to manufacture our products at a cost comparable to our historical costs could impact our gross margins or force us to raise prices, affecting customer relationships and our competitive position.

Qualifying a new contract manufacturer and commencing commercial scale production is expensive and time consuming and could result in a significant interruption in the supply of our products. If our contract manufacturers are not able to maintain our high standards of quality, increase capacity as needed, or are forced to shut down a factory, our ability to deliver quality products to our customers on a timely basis may decline, which would damage our relationships with customers, decrease our revenues and negatively impact our growth.

Our disclosure controls and internal control over financial reporting do not guarantee the absence of error or fraud.

Disclosure controls are procedures designed to ensure that information required to be disclosed in reports filed under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls are also designed to ensure that the information is accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Internal controls over financial reporting, or Internal Controls, are procedures which are designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. GAAP and includes those policies and procedures that: (1) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. GAAP, and that receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on its financial statements.

Management, with the participation of our principal executive officer and principal financial officer, has conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework set forth in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission as of December 31, 2011. Based on this evaluation, management concluded that the material weakness identified in connection with its evaluation of our internal controls as of December 31, 2010 had not yet been remediated. The material weakness identified as of December 31, 2010 related to a lack of sufficient accounting and finance personnel with technical accounting expertise to apply accounting requirements to non-routine and complex transactions and to perform in-depth analysis and review of accounting matters within the timeframes set by management for finalizing financial statements. While management did hire several new accounting and finance personnel during 2011 and did establish certain new processes and controls as more fully described below, as a result of the timing of when these controls were put in place in the fourth quarter of 2011, management determined that these controls were not in place for a sufficient period of time to conclude that they were operating effectively. Accordingly, management has concluded that we did not maintain effective internal control over financial reporting as of December 31, 2011 based on criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control — Integrated Framework .

Management has taken measures to remediate the material weakness previously identified. These measures are broadly grouped into the following categories: (a) improving finance staff, (b) implementing appropriate internal control processes and procedures, and (c) training.

Further, management has engaged an outside consultant to further review the design effectiveness of our internal controls and perform sufficient testing to determine the operating effectiveness of internal control over financial reporting for the year ending December 31, 2012.

Our management, including our Chief Executive Officer and Chief Financial Officer, do not expect that our disclosure controls or Internal Controls will prevent all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is

based in part upon certain assumptions about the likelihood of future events, and we cannot make assurances that any design will succeed in achieving our stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

We face intense competition from the leading telecommunications networking companies in the world as well as from emerging companies. If we are unable to compete effectively, we might not be able to achieve sufficient market penetration, revenue growth, or profitability.

Competition in the market for our products is intense. This market has historically been dominated by established telephony equipment providers such as Alcatel-Lucent. We also face competition from other telecommunications and networking companies, including Acme Packet, Inc., Audiocodes Ltd., Cisco Systems, Inc. Genband Inc., Radisys Corporation , Metaswitch Networks and Sonus Networks, Inc., among others. While some of the established competitors are exiting the market, we are seeing increasingly intense competition from Huawei Technologies Co. Ltd., which leverages its broad product portfolio and significant financial resources to compete with us for our switching business.

Many of our current and potential competitors have significantly greater selling and marketing, technical, manufacturing, financial, governmental, and other resources available to them, allowing them to offer a more diversified bundle of products and services. In some cases, our competitors have undercut the pricing of our products or provided more favorable financing terms, which has made us uncompetitive or forced us to reduce our average selling prices, negatively impacting our margins. Further, some of our competitors sell significant amounts of other products to our current and prospective customers. In addition, some potential customers when selecting equipment vendors to provide fundamental infrastructure products prefer to purchase from larger, established vendors. Our competitors’ broad product portfolios, coupled with already existing relationships, may cause our customers or potential customers to buy our competitors’ products or harm our ability to attract new customers.

To compete effectively, we must deliver innovative products that:

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offer edge-based connection and security infrastructure products for IP networks;

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enable fixed and mobile value-added services, including video-based services;

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provide extremely high reliability, compression rates, and voice quality;

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scale and deploy easily and efficiently;

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interoperate with existing network designs and other vendors’ equipment;

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support existing and emerging industry, national, and international standards;

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provide effective network management;

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are accompanied by comprehensive customer support and professional services; and

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provide a cost-effective and space efficient solution for service providers.

Some of our competitors and potential competitors may have a number of significant advantages over us, including:

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a longer operating history;

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greater name recognition and marketing power;

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preferred vendor status with our existing and potential customers;

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significantly greater financial, technical, marketing and other resources, which allow them to respond more quickly to new or changing opportunities, technologies and customer requirements; and

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lower cost structures.

If we are unable to compete successfully against our current and future competitors, we could experience reduced gross profit margins, price reductions, order cancellations, and loss of customers and revenues, each of which would adversely impact our business. Furthermore, existing or potential competitors may establish cooperative relationships with each other or with third parties or adopt aggressive pricing policies to gain market share.

As a result of increased competition, we could encounter significant pricing pressures and/or suffer losses in market share. These pricing pressures could result in significantly lower average selling prices for its products. We may not be able to offset the effects of any price reductions with an increase in the number of customers, cost reductions or otherwise.

Our quarterly operating results have fluctuated significantly in the past and may continue to fluctuate in the future, which could lead to volatility in the price of our common stock.

Our quarterly revenues and operating results have fluctuated significantly in the past and they may continue to fluctuate in the future due to a number of factors, many of which are outside of our control and any of which may cause our stock price to fluctuate. From our experience, customer purchases of telecommunications equipment have been unpredictable and these purchases are made as customers build out their networks, rather than regular, recurring purchases. The primary factors that may affect our quarterly revenues and results include the following:

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fluctuation in demand for our products and the timing and size of customer orders;

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the length and variability of the sales cycle for our products;

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new product introductions and enhancements by our competitors and us;

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our ability to develop, introduce, and ship new products and product enhancements that meet customer requirements in a timely manner;

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the mix of products sold such as between NGN sales and sales of bandwidth optimization products or between service provider and enterprise markets;

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our ability to obtain sufficient supplies of sole or limited source components;

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our ability to attain and maintain production volumes and quality levels for our products;

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costs related to acquisitions of complementary products, technologies, or businesses;

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changes in our pricing policies, the pricing policies of our competitors, and the prices of the components of our products;

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the timing of revenue recognition, amount of deferred revenues, and receivables collections;

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difficulties or delays in deployment of customer IP networks that would delay anticipated customer purchases of additional products and services;

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general economic conditions, as well as those specific to the telecommunications, networking, and related industries;

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consolidation within the telecommunications industry, including acquisitions of or by our customers; and

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the failure of certain of our customers to successfully and timely reorganize their operations, including emerging from bankruptcy.

In addition, we may be unable to recognize all of the revenue associated with certain customer contracts in the same period as the costs associated with those contracts are expensed, which could cause our quarterly gross margins, particularly of IP gross margins, to fluctuate significantly. Further, U.S. GAAP may require that revenue related to certain customer contracts be delayed for periods of a year or more. This delay may cause spikes in our revenue in quarters when it is recognized and may result in deferred revenue to revenue conversion taking longer than anticipated.

A significant portion of our operating expenses are fixed in the short term. If revenues for a particular quarter are below expectations, we may not be able to reduce operating expenses proportionally for that quarter. Therefore, any such revenue shortfall would likely have a direct negative effect on our operating results for that quarter. For these and other reasons, we believe that quarter-to-quarter comparisons of our operating results are not a good indication of our future performance.

We believe it possible that in some future quarters, our operating results may be below the expectations of public market analysts and investors, which may adversely affect our stock price. A decline in the market price of our common stock could cause our stockholders to lose some or all of their investment and may adversely impact our ability to attract and retain employees and raise capital. In addition, such a decline in our stock price may cause stockholders to initiate securities class action lawsuits. Whether or not meritorious, litigation brought against us could result in substantial costs and diversion of time and attention of our management. Our insurance to cover claims of this sort, if brought, may not be adequate.

The ownership of our common stock is highly concentrated, and your interests may conflict with the interests of our existing stockholders.

Our executive officers, directors (or former directors), and certain of our affiliates beneficially owned or controlled approximately 63% of our outstanding common stock (assuming exercise of outstanding warrants to purchase our common stock) as of August 8, 2012.

Accordingly, these stockholders, acting as a group, could have significant influence over the outcome of corporate actions requiring stockholder approval, including the election of directors, any merger, consolidation or sale of all or substantially all of our assets or any other significant corporate transaction. The significant concentration of stock ownership may adversely affect the trading price of our common stock due to investors’ perception that conflicts of interest may exist or arise.

The largest customers in the telecommunications industry have substantial negotiating leverage, which may require that we agree to terms, and conditions that are less advantageous to us than the terms and conditions of our existing customer relationships, or risk limiting our ability to sell our products to these large service providers, thereby harming our operating results.

Large telecommunications service providers have substantial purchasing power and leverage negotiating contractual terms and conditions relating to their purchase of our products. As we seek to sell more products to these large telecommunications providers, we may be required to agree to less favorable terms and conditions to complete such sales, which may result in lower margins, affect the timing of the recognition of the revenue derived from these sales, and the amount of deferred revenues, each of which may have an adverse effect on our business and financial condition.

In addition, our future success depends in part on our ability to sell our products to large service providers operating complex networks that serve large numbers of subscribers and transport high volumes of traffic. The telecommunications industry historically has been dominated by a relatively small number of service providers. While deregulation and other market forces have led to an increasing number of service providers in recent years, large service providers continue to constitute a significant portion of the market for telecommunications equipment. If we fail to sell additional IP products to our large customers or to expand our customer base to include additional customers that deploy our products in large-scale networks serving significant numbers of subscribers, our revenue growth will be limited.

Consolidation or downturns in the telecommunications industry may affect demand for our products and the pricing of our products, which could limit our growth and may harm our business.

The telecommunications industry, which includes all of our customers, has experienced increased consolidation in recent years, and we expect this trend to continue. Consolidation among our customers and prospective customers may cause delays or reductions in capital expenditure plans and/or increased competitive pricing pressures as the number of available customers’ declines and their relative purchasing power increases in relation to suppliers. The occurrence of any of these factors, separately or in combination, may lead to decreased sales or slower than expected growth in revenues and could harm our business and operations.

The telecommunications industry is cyclical and reactive to general economic conditions. In the recent past, worldwide economic downturns, pricing pressures, and deregulation have led to consolidations and reorganizations. These downturns, pricing pressures and restructurings have been causing delays and reductions in capital and operating expenditures by many service providers. These delays and reductions, in turn, have been reducing demand for telecommunications products like ours. A continuation or subsequent recurrence of these industry patterns, as well as general domestic and foreign economic conditions and other factors that reduce spending by companies in the telecommunications industry, could harm our operating results in the future.

If we fail to anticipate and meet specific customer requirements, or if our products fail to interoperate with our customers’ existing networks or with existing and emerging industry, national, and international standards, we may not be able to retain our current customers or attract new customers.

We must effectively anticipate and adapt our business, products and services in a timely manner to meet customer requirements. We must also meet existing and emerging industry, national and international standards to meet changing customer demands. Prospective customers may require product features and capabilities that are not included in our current product offerings. The introduction of new or enhanced products also requires that we carefully manage the transition from our older products to minimize disruption in customer ordering patterns and ensure that adequate supplies of our new products can be delivered to meet anticipated customer demand. If we fail to develop products and offer services that satisfy customer requirements, or if we fail to effectively manage the transition from our older products to our new or enhanced products, our ability to create or increase demand for our products would be seriously harmed and we may lose current and prospective customers, thereby harming our business.

Many of our customers will require that our products be designed to interface with their existing networks or with existing or emerging industry, national, and international standards, each of which may have different and unique specifications. Issues caused by a failure to achieve homologation to certain standards or an unanticipated lack of interoperability between our products and these existing networks may result in significant warranty, support, and repair costs, divert the attention of our engineering personnel from our hardware and software development efforts, and cause significant customer relations problems. If our products do not interoperate with our customers’ respective networks or applicable standards, installations could be delayed or orders for our products could be cancelled, which would seriously harm our gross margins and result in the loss of revenues and/or customers.

If we do not respond rapidly to technological changes or to changes in industry standards, our products could become obsolete.

The market for IP infrastructure products and services is characterized by rapid technological change, frequent new product introductions and evolving standards. We may be unable to respond quickly or effectively to these developments. We may experience difficulties with software development, hardware design, manufacturing, marketing, or certification that could delay or prevent our development, introduction, or marketing of new products and enhancements. The introduction of new products by our competitors, the market acceptance of products based on new or alternative technologies or the emergence of new industry standards could render our existing or future products obsolete. If the standards adopted are different from those that we have chosen to support, market acceptance of our products may be significantly reduced or delayed. If our products become technologically obsolete, we may be unable to sell our products in the marketplace and generate revenues, and our business could be adversely affected. Because our products are sophisticated and designed to be deployed in complex environments and in multiple locations, they may have errors or defects that we find only after full deployment. If these errors lead to customer dissatisfaction or we are unable to establish and maintain a support infrastructure and required support levels to service these complex environments, our business may be seriously harmed.

Because of the nature of some of our products, they can only be fully tested when substantially deployed in very large networks with high volumes of traffic. Some of our customers have only recently begun to commercially deploy our products or deploy our products in larger configurations and they may discover errors or defects in the software or hardware, the products may not operate as expected, or our products may not be able to function in the larger configurations required by certain customers. If we are unable to correct errors or other performance problems that may be identified after full deployment of our products, we could experience:

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cancellation of orders or other losses of or delays in revenues;

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loss of customers and market share;

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harm to our reputation;

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a failure to attract new customers or achieve market acceptance for our products;

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increased services, support, and warranty costs and a diversion of development resources;

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increased insurance costs and losses to our business and service provider customers; and

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costly and time-consuming legal actions by our customers.

If we experience warranty failures that indicate either manufacturing or design deficiencies, we may suffer damages.

If we experience warranty failures we may be required to recall units in the field and/or stop producing and shipping such products until the deficiency is identified and corrected. In the event of such warranty failures, our business could be adversely affected resulting in reduced revenue, increased costs and decreased customer satisfaction. Because customers often delay deployment of a full system until they have tested the products and any defects have been corrected, we expect these revisions may cause delays in orders by our customers for our systems. Because our strategy is to introduce more complex products in the future, this risk will intensify over time. Service provider customers have discovered errors in our products. If the costs of remediating problems experienced by our customers exceed our expected expenses, which historically have not been significant, these costs may adversely affect our operating results.

In addition, because our products are deployed in large and complex networks around the world, our customers expect us to establish a support infrastructure and maintain demanding support standards to ensure that their networks maintain high levels of availability and performance. To support the continued growth of our business, our support organization will need to provide service and support at a high level throughout the world. This will include hiring and training customer support engineers both at our primary corporate locations as well as our smaller offices in new geographies, such as Central and South America and Russia. If we are unable to provide the expected level of support and services to our customers, we could experience:

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loss of customers and market share;

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a failure to attract new customers in new geographies;

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increased services, support, and warranty costs and a diversion of development resources; and

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network performance penalties.

The long and variable sales and deployment cycles for our products may cause our operating results to vary materially, which could result in a significant unexpected revenue shortfall in any given quarter.

Our products, particularly IP switching products, have lengthy sales cycles, which typically extend from three to twelve months and may take up to two years. A customer’s decision to purchase our products often involves a significant commitment of the customer’s resources and a product evaluation and qualification process that can vary significantly in length. The length of our sales cycles also varies depending on the type of customer to which we are selling, the product being sold and the type of network in which our product will be utilized. We may incur substantial sales and marketing expenses and expend significant management effort during this time, regardless of whether we make a sale.

Even after making the decision to purchase our products, our customers may deploy our products slowly. Timing of deployment can vary widely among customers and among product types. The length of a customer’s deployment period will impact our ability to recognize revenue related to such customer’s purchase and may also directly affect the timing of any subsequent purchase of additional products by that customer. As a result of these lengthy and uncertain sales and deployment cycles for our products, it is difficult for us to predict the quarter in which our customers may purchase additional products or features from us, and our operating results may vary significantly from quarter to quarter, which may negatively affect our operating results for any given quarter.

We rely on channel partners for a significant portion of our revenue. Our failure to effectively develop and manage these third-party distributors, systems integrators, and resellers specifically and our indirect sales channel generally, or disruptions to the processes and procedures that support, our indirect sales channels, could adversely affect our ability to generate revenues from the sale of our products.

We rely on third-party distributors, systems integrators, and resellers for a significant portion of our revenue. Our revenues depend in large part on the performance of these indirect channel partners. Although many aspects of our partner relationships are contractual in nature, our arrangements with our indirect channel partners are not exclusive. Accordingly, important aspects of these relationships depend on the continued cooperation between the parties.

Many factors out of our control could interfere with our ability to market, license, implement or support our products with any of our partners, which in turn could harm our business. These factors include, but are not limited to, a change in the business strategy of one of our partners, the introduction of competitive product offerings by other companies that are sold through one of our partners, potential contract defaults by one of our partners, or changes in ownership or management of one of our distribution partners. Some of our competitors may have stronger relationships with our distribution partners than we do, and we have limited control, if any, as to whether those partners implement our products rather than our competitors’ products or whether they devote resources to market and support our competitors’ products rather than our offerings. In addition, we recognize a portion of our revenue based on a sell-through model using information provided by our partners and recognize a significant portion on a sell-in basis, particularly when selling in to established VARs, independent software vendors, technology equipment manufacturers and other partners with whom we have a significant history. If those partners provide us with inaccurate or untimely information, the amount or timing of our revenues could be adversely impacted and our operating results may be harmed.

Moreover, if we are unable to leverage our sales and support resources through our distribution partner relationships, we may need to hire and train additional qualified sales and engineering personnel. We cannot assure you, however, that we will be able to hire additional qualified sales and engineering personnel in these circumstances, and our failure to do so may restrict our ability to generate revenue or implement our products on a timely basis. Even if we are successful in hiring additional qualified sales and engineering personnel, we will incur additional costs and our operating results, including our gross margin, may be adversely affected. The loss of or reduction in sales by these resellers could reduce our revenues. If we fail to maintain relationships with these third-party resellers, fail to develop new relationships with third-party resellers in new markets, fail to manage, train, or provide incentives to existing third-party resellers effectively or if these third party resellers are not successful in their sales efforts, sales of our products may decrease and our operating results would suffer.

Maintaining and improving our financial controls and the requirements of being a public company may strain our resources, divert management’s attention and affect our ability to attract and retain qualified board members.

As a public company, we are subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act and NASDAQ Listing Standards. The requirements of these rules and regulations will increase our legal and financial compliance costs, make some activities more difficult, time-consuming or costly and may also place undue strain on our personnel, systems and resources. The Exchange Act requires, among other things, that we file annual, quarterly and current reports with respect to our business and financial condition. The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal control over financial reporting. As a public company, our systems of internal controls over financial reporting will be required to be periodically assessed and reported on by management and may be subject to annual audits by our independent auditors. During the course of our evaluation, we may identify areas requiring improvement, and may be required to design enhanced processes

and controls to address issues identified through this review. This could result in significant delays and cost to us and require us to divert substantial resources, including management time, from other activities. As of December 31, 2011, we have identified a material weakness in our Internal Controls. This material weakness has not been cured as of September 30, 2012. Moreover, effective internal controls are necessary for us to produce reliable financial reports and are important to help prevent fraud. As a result, our failure to satisfy the requirements of Section 404 on a timely basis could result in the loss of investor confidence in the reliability of our financial statements, which in turn could harm the market value of our common stock. Any failure to maintain effective internal controls also could impair our ability to manage our business and harm our financial results.

Under the Sarbanes-Oxley Act and NASDAQ Listing Standards, we are required to maintain an independent board. We also expect these rules and regulations will make it more difficult and more expensive for us to maintain directors’ and officers’ liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to maintain coverage. If we are unable to maintain adequate directors’ and officers’ insurance, our ability to recruit and retain qualified directors, especially those directors who may be deemed independent for purposes of NASDAQ Listing Standards, and officers will be significantly curtailed.

Our international operations expose us to additional political and economic risks not faced by businesses that operate only in the United States.

We are a multinational company based in the United States with branch offices and representative offices located in many countries around the world. Our logistics group is located in Israel, the United States and Ireland and we utilize various subcontractors in the United States and Israel. We have development locations in Canada, the United States, India, the United Kingdom and Israel and we have sales offices in many other countries, including China, India, Brazil, Russia, Israel, Singapore, Malaysia, Australia, Hong Kong, Japan, the United Kingdom, France, Spain, the Netherlands and Slovenia. Approximately half of our sales are generated in markets outside of the Americas and we see our largest market growth occurring in foreign countries such as India, Brazil, Russia and China. As a result of all these international activities we are subject to worldwide economic and market condition risks generally associated with global trade, such as fluctuating exchange rates, tariff and trade policies, domestic and foreign tax policies, foreign governmental regulations, political unrest, wars and other acts of terrorism and changes in other economic conditions. In addition our insurance on receivables applies to a lesser base of accounts due to the difficulties in obtaining coverage for accounts in some of these regions.

We may face risks associated with our international sales that could impair our ability to grow our revenues.

For the nine months ended September 30, 2012 and September 30, 2011, revenue from outside of the Americas was approximately $66.3 million and $81.8 million, respectively, or 54% and 55% of our total revenues, respectively. We intend to continue selling into our existing international markets and expand into additional international markets where we currently do not do business. If we are unable to continue to sell products effectively in these existing international markets and expand into additional new international markets, our ability to grow our business will be adversely affected. Some factors that may impact our ability to maintain our international operations and sales and/or cause our results from operations in these international markets to differ from expectations include:

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difficulty enforcing contracts and collecting accounts receivable in foreign jurisdictions, leading to longer collection periods;

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certification and qualification requirements relating to our products, including, by way of example, export licenses that must be obtained from the U.S. Department of Commerce;

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the impact of recessions in economies outside the United States;

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unexpected changes in foreign regulatory requirements, including import and export regulations, and currency exchange rates;

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certification and qualification requirements for doing business in foreign jurisdictions including both specific requirements imposed by the foreign jurisdictions and protectionist trade legislation in either the United States or other countries, such as a change in the current tariff structures, export compliance laws, trade restrictions resulting from war or terrorism, or other trade policies could adversely affect our ability to sell or to manufacture in international markets as well as U.S. federal and state agency restrictions imposed by the Buy American Act or the Trade Agreement Act that may apply to our products manufactured outside the United States;

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inadequate protection for intellectual property rights in certain countries;

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less stringent adherence to ethical and legal standards by prospective customers in certain foreign countries, including compliance with the Foreign Corrupt Practices Act of 1977, as amended;

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potentially adverse tax or duty consequences;

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unfavorable foreign exchange movements, particularly the continued devaluation of the U.S. dollar, which could result in decreased revenues; and

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political and economic instability.

Additionally, as many of our customers are conducting business in emerging markets that can be unpredictable at times due to rapidly changing political and economic conditions, the judgment of management is a significant factor in determining whether an increase in the allowance for uncollectible accounts is warranted. Management considers various factors in making such judgments, including the customer-specific circumstances as well as the general political environment, economic conditions and other relevant matters in determining the collectability of the receivables. We will record a reversal of the allowance if there is significant improvement in collection rates. Historically, the allowance has been adequate to cover the actual losses from uncollectible accounts. Such reversals may negatively impact our results of operations.

If we lose the services of one or more members of our current executive management team or other key employees, or if we are unable to attract additional executives or key employees, we may not be able to execute on our business strategy.

Our future success depends in large part upon the continued service of our executive management team and other key employees. To be successful, we must also hire, retain and motivate key employees, including those in managerial and technical, finance, marketing, and sales positions. In particular, our product generation efforts depend on hiring and retaining qualified engineers. Experienced management and technical, sales, finance, marketing and support personnel in the telecommunications and networking industries are in high demand and competition for their talents is intense.

The loss of services of any of our executives, one or more other members of our executive management or sales team or other key employees, could seriously harm our business.

We and our contract manufacturers rely on single or limited sources for the supply of some components of our products and if we fail to adequately predict our manufacturing requirements or if our supply of any of these components is disrupted, we will be unable to ship our products on a timely basis, which would likely cause us to fail to meet the demands of our customers and damage our customer relationships.

We and our contract manufacturers currently purchase several key components of our products, including commercial digital signal processors, from single or limited sources. We purchase these components on a purchase order basis. If we overestimate our component requirements, we could have excess inventory, which would increase our costs and result in write-downs harming our operating results. If we underestimate our requirements, we may not have an adequate supply, which could interrupt manufacturing of our products and result in delays in shipments and revenues.

We currently do not have long-term supply contracts with all of our component suppliers and many of them are not required to supply us with products for any specified periods, in any specified quantities, or at any set price, except as may be specified in a particular purchase order. Because the key components and assemblies of our products are complex, difficult to manufacture and require long lead times, in the event of a disruption or delay in supply, or inability to obtain products, we may not be able to develop an alternate source in a timely manner, at favorable prices, or at all. In addition, during periods of capacity constraint, we are disadvantaged compared to better capitalized companies, as suppliers may in the future choose not to do business with us or may require higher prices or less advantageous terms. A failure to find acceptable alternative sources could hurt our ability to deliver high-quality products to our customers and negatively affect our operating margins. In addition, reliance on our suppliers exposes us to potential supplier production difficulties or quality variations. Our customers rely upon our ability to meet committed delivery dates, and any disruption in the supply of key components would seriously adversely affect our ability to meet these dates and could result in legal action by our customers, loss of customers, or harm our ability to attract new customers, any of which could decrease our revenues and negatively impact our growth.

Failure to manage expenses and inventory risks associated with meeting the demands of our customers may adversely affect our business or results of operations.

To ensure that we are able to meet customer demand for our products, we place orders with our contract manufacturers and suppliers based on our estimates of future sales. If actual sales differ materially from these estimates because of inaccurate forecasting or as a result of unforeseen events or otherwise, our inventory levels and expenses may be adversely affected and our business and results of operations could suffer. In addition, to remain competitive, we must continue to introduce new products and processes into our manufacturing environment. There cannot be any assurance, however, that the introduction of new products will not create obsolete inventories related to older products.

If we are not able to obtain necessary licenses of third-party technology at acceptable prices, or at all, our products could become obsolete.

We have incorporated third-party licensed technology into our current products. From time to time, we may be required to license additional technology from third parties to develop new products or product enhancements. Third party licenses may not be available or continue to be available to us on commercially reasonable terms or at all. The inability to maintain or re-license any third party licenses required in our current products, or to obtain any new third-party licenses to develop new products and product enhancements, could require us to obtain substitute technology of lower quality or performance standards or at greater cost, and delay or prevent us from making these products or enhancements, any of which could seriously harm the competitiveness of our products.

Failures by our strategic partners or by us in integrating our products with those provided by our strategic partners could seriously harm our business.

Our solutions include the integration of products supplied by strategic partners, who offer complementary products and services. We expect to further integrate our IP Products with such partner products and services in the future. We rely on these strategic partners in the timely and successful deployment of our solutions to our customers. If the products provided by these partners have defects or do not operate as expected, if we do not effectively integrate and support products supplied by these strategic partners, or if these strategic partners fail to be able to support products, we may have difficulty with the deployment of our solutions, which may result in:

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a loss of or delay in recognizing revenues;

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increased services, support, and warranty costs and a diversion of development resources; and

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network performance penalties.

In addition to cooperating with our strategic partners on specific customer projects, we also may compete in some areas with these same partners. If these strategic partners fail to perform or choose not to cooperate with us on certain projects, in addition to the effects described above, we could experience:

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a loss of customers and market share; and

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a failure to attract new customers or achieve market acceptance for our products.

If we are unable to protect our intellectual property, we may lose a valuable competitive advantage or be forced to endure costly litigation.

We are a technology dependent company, and our success depends on developing and protecting our intellectual property. We rely on a combination of patent, copyright, trademark, and trade secret laws and restrictions on disclosure to protect our intellectual property rights. At the same time, our products are complex and are often not patentable in their entirety. We also license intellectual property from third parties and rely on those parties to maintain and protect their technology. We cannot be certain that our actions will protect our proprietary rights. Due to the nature of some of our patents and our industry, we may be unable to detect whether our patents or other IP are being infringed by third parties. Any patents owned by us may be invalidated, reexamined, circumvented or challenged. Any of our patent applications may be challenged and not issued with the scope of the claims we seek, if at all. Our current level of indebtedness and need to raise additional capital could impact our existing and future patent and IP rights in various ways, including by resulting in some of our existing patents and patent applications being abandoned or sold, causing us to file for fewer future patent applications and/or to delay filing certain future patent applications, or causing us to be unable to enforce our patent and other IP rights to an extent that would otherwise be desired.

Changes in either patent laws or in interpretations of patent laws in the United States and other countries may materially diminish the value of our intellectual property or narrow the scope of our patent protection. For example, the Leahy-Smith America Invents Act, or the Leahy-Smith Act, was signed into law in September 2011 and includes a number of changes to United States patent law, including changes related to how patent applications are prosecuted, and may also affect patent defense, litigation, and enforcement. The U.S. Patent and Trademark Office is currently developing regulations and procedures to govern administration of the Leahy-Smith Act, and many of the substantive changes to patent law associated with the Leahy-Smith Act will not become effective until up to 18 months after its enactment. Accordingly, it is not clear what impact the Leahy-Smith Act will have on the operation of our business and the protection and enforcement of our intellectual property. However, the Leahy-Smith Act and its implementation could increase the uncertainties and costs surrounding the prosecution of our patent applications and the enforcement or defense of our issued patents, all of which could have a material adverse effect on our business and financial condition.

If we are unable to adequately protect our technology, or if we are unable to continue to obtain or maintain licenses for protected technology from third parties, it could have a material adverse effect on our results of operations and significant impairment of intangible assets. In addition, some of our products are now designed, manufactured and sold outside of the United States and Canada. Despite the precautions we take to protect our intellectual property, this international exposure may reduce or limit protection of our intellectual property, which is more prone to design piracy outside of the United States and Canada. We also rely on trade secrets to protect our technology, especially where we do not believe patent protection is appropriate or obtainable. However, trade secrets are difficult to maintain and do not protect technology against independent developments made by third parties.

Possible third-party claims of infringement of proprietary rights against us could have a material adverse effect on our business, results of operation or financial condition.

The telecommunications industry generally and the market for IP telephony products in particular are characterized by a relatively high level of litigation based on allegations of infringement of proprietary rights. We have received in the past, and may receive in the future, inquiries from other patent holders and may become subject to claims that we infringe their intellectual property rights. We cannot assure you that we do not or might not infringe third party patents. Any parties claiming that our products infringe

upon their proprietary rights, regardless of the merits of the claims and/or the underlying rights, could cause us to take action that results in expenditures of time and money to defend or settle the claims on our behalf and/or that of our customers or contract manufacturers. We may also be required to indemnify our customers and contract manufacturers for damages they suffer as a result of such infringement claims, if proven or settled. These claims, and any resulting settlement, licensing arrangement or lawsuit, if successful, could subject us to significant royalty payments or liability for damages and invalidation of our proprietary rights. Any potential intellectual property litigation also could force us to do one or more of the following:

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stop selling, importing, incorporating, or using our products that use the challenged intellectual property in some or all regions where we would otherwise sell, import, incorporate or use such products;

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obtain from the owner of the infringed intellectual property right a license to sell or use the relevant technology, which license may not be available on reasonable terms, in certain territories, or at all; or

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redesign those products that use any allegedly infringing technology.

Any lawsuits regarding intellectual property rights, regardless of their success, would be time consuming, expensive to resolve, and would divert our management’s time and attention.

Regulation of the telecommunications industry could harm our operating results and future prospects.

The telecommunications industry is highly regulated and our business and financial condition could be adversely affected by the changes in the regulations relating to the telecommunications industry. Currently, there are few laws or regulations that apply directly to access to, or delivery of, voice services on IP networks. We could be adversely affected by regulation of IP networks and commerce in any country, including the United States, where we operate. Such regulations could include matters such as VoIP or using IP, encryption technology, and access charges for service providers. The adoption of such regulations could decrease demand for our products, and at the same time increase the cost of selling our products, which could have a material adverse effect on our business, operating result, and financial condition.

Compliance with regulations and standards applicable to our products may be time consuming, difficult and costly, and if we fail to comply, our product sales will decrease.

To achieve and maintain market acceptance, our products must continue to meet a significant number of regulations and standards. In the United States, our products must comply with various regulations defined by the Federal Communications Commission and Underwriters Laboratories. As these regulations and standards evolve, and if new regulations or standards are implemented, we will be required to modify our products or develop and support new versions of our products, and this will increase our costs. The failure of our products to comply, or delays in compliance, with the various existing and evolving industry regulations and standards could prevent or delay introduction of our products, which could harm our business. User uncertainty regarding future policies may also affect demand for telecommunications products, including our products. Moreover, distribution partners or customers may require us, or we may otherwise deem it necessary or advisable, to alter our products to address actual or anticipated changes in the regulatory environment. Our inability to alter our products to address these requirements and any regulatory changes could have a material adverse effect on our business, financial condition, and operating results.

Failure of our hardware products to comply with evolving industry standards and complex government regulations may prevent our hardware products from gaining wide acceptance, which may prevent us from growing our sales.

The market for network equipment products is characterized by the need to support industry standards as different standards emerge, evolve, and achieve acceptance. We will not be competitive unless we continually introduce new products and product enhancements that meet these emerging standards. Our products must comply with various domestic regulations and standards defined by agencies such as the Federal Communications Commission, in addition to standards established by governmental authorities in various foreign countries and the recommendations of the International Telecommunication Union. If we do not comply with existing or evolving industry standards or if we fail to obtain timely domestic or foreign regulatory approvals or certificates, we will not be able to sell our products where these standards or regulations apply, which may harm our business.

Production and marketing of products may subject us to environmental and other regulations. Legislation may be passed requiring our products to use environmentally friendly components, with periodic updates and modification to the requirements. For example, the European Union has adopted the Restriction of the use of certain Hazardous Substances in electrical and electronic equipment (RoHS) Directive (2002/95/EC), the RoHS recast (2011/65/EU, effective 1 Jan 2013) and periodic addition and removal of exemption to the requirements. Similar legislation has been enacted in China, Korea, and Japan and is being developed in other countries, including the United States (H.R. 2420). Our products currently meet the requirements in countries where this type of legislation is in place.

In addition, legislation may be passed that makes us responsible for the safe disposal of products at their end of life. The regulations may be a ‘take-back system’ whereby the customer can return the product to us and we must recycle/dispose of it in an environmentally safe manner or a ‘funded system’ whereby we contribute to a fund for recycling/disposing of the product by a third party. The European Union has adopted the Waste Electrical and Electronic Equipment, or WEEE Directive (2002/96/EC), which mandates funding, collection, treatment, recycling, and recovery of WEEE by producers. This legislation applies to ‘Covered Products,’ which currently include consumer electronics products. As such, our products are not subject to the current legislation. However, the catalogue of “Covered Products” may be extended and our products may become subject to such regulations. To the extent that the definition of “Covered Products” is expanded to include any products we sell, we would have to undertake considerable expense to comply. Similar legislation has been enacted by several states in the United States, China, Korea, and Japan, and is being developed in other countries.

If we fail to comply with these regulations, we may not be able to sell our products in jurisdictions where these regulations apply, which would have a material adverse effect on our results of operations.

Future interpretations of existing accounting standards could adversely affect our operating results.

U.S. GAAP is subject to interpretation by the Financial Accounting Standards Board, the SEC, and various other bodies formed to promulgate and interpret appropriate accounting principles; especially for multiple-element arrangements. A change in these principles or interpretations could have a significant effect on our reported financial results, and could affect the reporting of transactions consummated before the announcement of a change. Due to the various risk factors and other specific requirements under U.S. GAAP for multiple-element arrangement revenue recognition, we must have very precise terms in our arrangements to recognize revenue when we initially deliver products or perform services. Negotiation of mutually acceptable terms and conditions can extend our sales cycle, and we sometimes accept terms and conditions that do not permit revenue recognition at the time of delivery.

Our ability, as well as our contract manufacturers’ ability, to meet customer demand depends largely on our ability to obtain raw materials and a reduction or disruption in the availability of raw materials could negatively impact our business.

The continued global economic contraction has caused many of our component suppliers to reduce their manufacturing capacity. As the global economy improves, our component suppliers are experiencing and will continue to experience supply constraints until they expand capacity to meet increased levels of demand. These supply constraints may adversely affect the availability and lead times of components for our products. Increased lead times mean we may have to forsake flexibility in aligning its supply to customer demand changes and increase our exposure to excess inventory since we may have to order material earlier and in larger quantities. Further, supply constraints will likely result in increased overall procurement costs as we attempt to meet customer demand requirements. In addition, these supply constraints may affect our ability, as well as our contract manufacturers’ ability, to meet customer demand and thus result in missed sales opportunities and a loss of market share, negatively impacting revenues and our overall operating results.

Our failure to develop and introduce new products on a timely basis could harm our ability to attract and retain customers.

Our industry is characterized by rapidly changing technology, frequent product introductions and ongoing demands for greater speed and functionality. Therefore, we must continually design, develop and introduce new products with improved features to be competitive. To introduce these products on a timely basis we must:

•

design innovative and performance-improving features that differentiate our products from those of our competitors;

•

identify emerging technological trends in our target markets, including new standards for our products;

•

accurately define and design new products to meet market needs;

•

anticipate changes in end-user preferences with respect to our customers’ products;

•

rapidly develop and produce these products at competitive prices;

•

respond effectively to technological changes or product announcements by others; and

•

provide effective technical and post-sales support for these new products as they are deployed.

If we are not able to introduce such products on a timely basis, we may not be able to attract and retain customers, which could decrease our revenues and negatively impact our growth.

Not all new product designs ramp into production, and even if ramped into production, the timing of such production may not occur as we or our customers had estimated, or the volumes derived from such projects may not be as significant as we had estimated, each of which could have a substantial negative impact on our anticipated revenues and profitability.

Our revenue growth expectations for our next-generation products are highly dependent upon successful ramping of our design wins. In some cases there is little time between when a design win is achieved and when production level shipments begin. With many new design wins, customers may require us to provide enhanced features not on its immediate roadmap. In addition, customers may require significant time to port their own applications to our products. Adding features to our products to meet customer requests as well as porting of customer specific applications can take six to 12 months. After that, there is an additional time lag from the start of production ramp to peak revenue. Not all product designs ramp into production and, even if a product ramps into production, the volumes derived from such products and associated projects may be less than we had originally estimated. Customer projects related to design wins are sometimes canceled or delayed, or can perform below original expectations, which can adversely impact anticipated revenues and profitability. In particular, the volumes and time to production ramp associated with new design wins depend on the adoption rate of new technologies in its customers’ end markets, especially in the telecommunications networking sector. Program delays or cancellations could be more frequent during times of meaningful economic downturn.

Our business depends on conditions in the telecommunications networks and commercial systems markets. Demand in these markets can be cyclical and volatile, and any inability to sell products to these markets or forecast customer demand due to unfavorable or volatile market conditions could have a material adverse effect on our revenues and gross margin.

We derive our revenues from a number of diverse end markets, some of which are subject to significant cyclical changes in demand. In 2011, and up to September 30, 2012, we derived our revenues from both the enterprise and service provider markets, and we believe that our revenues will continue to be derived primarily from these two markets. In many instances, our products are building blocks for its customers’ products and as such, our customers are not the end-users of our products. If our customers experience adverse economic conditions in the end markets into which they sell our products, we would expect a significant reduction in spending by our customers. Some of these end markets are characterized by intense competition, rapid technological change and economic uncertainty. Our exposure to economic cyclicality and any related fluctuation in customer demand in these end markets could have a material adverse effect on its revenues and financial condition.

Increased political, economic and social instability in the Middle East may adversely affect our business and operating results.

The continued threat of terrorist activity and other acts of war or hostility, including the wars in Afghanistan and Iraq, the current violence and potential war in Syria, the ongoing uncertainty related to Iran’s nuclear ambitions and threats against Israel and the ongoing Israeli-Palestinian conflict, create uncertainty throughout the Middle East and significantly increase the political, economic, and social instability in Israel, where some of our products are manufactured and where some of our key and other employees are located. Acts of terrorism, either domestically or abroad and particularly in Israel, or a resumption of the confrontation along the northern border of Israel or any open conflict between Israel and Iran, would likely create further uncertainties and instability. To the extent terrorism, or the political, economic or social instability results in a disruption of our operations or delays in our manufacturing or shipment of our products, then our business, operating results and financial condition could be adversely affected.

Our Dialogic ^® I-Gate ^® 4000 media gateways and our DCME products are exclusively manufactured for us by Flextronics, with the DCME products being manufactured by Flextronics through our relationship with ECI. The Flextronics manufacturing facility is located in Migdal-Haemek, Israel, which is located in northern Israel. While Flextronics has other locations across the world at which our manufacturing requirements may be fulfilled, any disruption to its Israeli manufacturing capabilities in Migdal-Haemek would likely cause a material delay in our manufacturing process. If we are forced or if we decide to switch the manufacture of our products to a different Flextronics facility, the time and expense of such switch along with the increased costs, if any, of operating in another location, would adversely affect our operations. In addition, while we expect that Flextronics will have the capacity to manufacture our products at facilities outside of Israel, there can be no assurance that such capacity will be available when we require it or upon terms favorable or acceptable to us. To the extent terrorism or political, economic or social instability results in a disruption of Flextronics’ manufacturing facilities in Israel or ECI operations in Israel as they relate to our business, then our business, operating results and financial condition could be adversely affected.

In addition, 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 price of our shares. Furthermore, several countries, principally in the Middle East, still restrict doing business with Israel, Israeli companies or companies with operations in Israel. Should additional countries impose restrictions on doing business with Israel, our business, operating results and financial condition could be adversely affected.

Our operations may be disrupted by the obligations of our personnel to perform military service.

Many of our employees in Israel, including certain key employees, are obligated to perform up to one month (in some cases more) of annual military reserve duty until they reach age 45 and, in emergency circumstances, could be called to active duty. Recently, there have been call-ups of military reservists, including several of our employees, 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 due to military service or the absence for extended periods of one or more of our key employees for military service. Such disruption could adversely affect our business and results of operations.

We have a material amount of intangible assets and goodwill which, if they become impaired, would result in an impairment loss.

Current accounting standards require that goodwill be evaluated for impairment at least annually and that long-lived assets such as intangible assets be evaluated periodically if there are any triggering events. We have $26.7 million of intangible assets, net and $31.2 million of goodwill as of September 30, 2012, that have originated from Dialogic Corporation’s acquisitions of Intel’s media and signaling business in 2006, EAS in 2007, and the NMS CP business acquired in 2008 and the transaction between us and Dialogic Corporation in 2010. While we have not had any impairment losses for our intangible assets and goodwill, any future impairment of our intangible assets or goodwill would have a negative impact on our operating results.

There are a number of trends and factors affecting our markets, including economic conditions in specific countries, regions and globally, which are outside our control. These trends and factors may result in increasing upward pressure on the costs of products and an overall reduction in demand.

There are trends and factors affecting our markets and our sources of supply that are beyond our control and may negatively affect our cost of sales. Such trends and factors include: adverse changes in the cost of raw commodities and increasing freight, energy, and labor costs in developing regions. Our business strategy has been to provide customers with faster time-to-market and greater value solutions to help them compete in an industry that generally faces downward pricing pressure. In addition, our competitors have in the past lowered, and may again in the future lower, prices to increase their market share, which would ultimately reduce the price we may realize from its customers. If we are unable to realize prices that allow us to continue to compete on this basis of performance, its profit margin, market share, and overall financial condition and operating results may be materially and adversely affected.

The deployment of advanced wireless networks may not proceed according to analyst projections and even if it does, the adoption of mobile video added services may not occur.

The successful deployment of advanced 3G and 4G wireless networks would significantly impact the deployment of video gateway infrastructure. Since our ability to increase revenue is partially dependent on video gateways and video media servers that attach to the advanced 3G and 4G wireless networks, delay in the deployment of 3G and 4G wireless networks would impact our ability to increase revenue. Additionally, even if the advanced wireless networks are deployed successfully, the use of mobile video value added services (including video ring tones, video with interactive voice response, video location based services and video chat) may not be widely adopted. If the deployment of advanced wireless networks does not proceed according to analyst projections or if mobile video added services are not widely adopted, the growth of our business could be negatively affected.

The success of our VoIP gateways is dependent upon the successful deployment of technology by other companies and any delay in the deployment of such technology would negatively impact the growth of our enterprise gateway business.

Our VoIP gateways are used to connect software-based IP private branch exchanges, or PBXs, such as Microsoft Office Communications Server, Microsoft Lync and IBM Sametime, which are currently in the process of being deployed, to existing legacy systems. Any delay in the deployment of the IP PBX could impact our revenues from products related to our VoIP gateways.

The conversion to certain new technology may result in some customers utilizing other products or developing their own technology.

We are in the process of converting certain of our media enabling components from a board based product to our Dialogic ^® PowerMedia™ Host Media Processing, or HMP, software product that can be deployed on the host central processing unit of the server. The cost of entry for an HMP based software product is significantly lower than that of a board based product. As a result, there is a risk that our board based customers may utilize alternative producers of media enabling components or develop their own software product. The loss of customers during this conversion would negatively impact our revenue and operating results.

As our product lines age, we may be required to redesign our products or make substantial purchases of end of life components.

We sell multiple product lines that have been in production for several years. In some instances the production of components that are used in the manufacturing of our products have been terminated or will be terminated. Such termination of production requires that we must either incur the additional costs of purchasing a significant amount of such components prior to their termination or we must invest in significant engineering efforts to redesign the product, either of which would adversely affect our operating results.

We anticipate that average selling prices for many of our products will decline in the future, which could adversely affect our operating results.

We expect that the price we can charge our customers for many of our products will decline as new technologies become available, as we transition to software based IP and as low cost regional providers take measures to achieve or maintain market share. If this occurs, our operating results will be adversely affected.

To respond to increasing competition and our anticipation that average-selling prices will decrease, we are attempting to reduce manufacturing costs of our new and existing products. If we do not reduce manufacturing costs and average selling prices decrease, our operating results will be adversely affected.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

Item 6. Exhibits.


Exhibit Number	Exhibit Description	Incorporated By Reference				Filed Herewith
Exhibit Number	Exhibit Description	Form	File No.	Exhibit	Filing Date	Filed Herewith

2.1	Share Exchange Agreement, dated October 30, 2002, by and among the Registrant, ECI Telecom Ltd., ECI Telecom — NGTS Inc., and Nexverse Networks, Inc.	S-1	333-138121	2.1	10/20/2006

2.2	Amendment No. 1 to the Share Exchange Agreement, dated December 31, 2002, by and among the Registrant, ECI Telecom Ltd., ECI Telecom — NGTS Inc., and Nexverse Networks, Inc.	S-1	333-138121	2.2	10/20/2006

2.3	Acquisition Agreement, dated May 12, 2010 by and between Registrant and Dialogic Corporation.	8-K	001-33391	2.1	5/14/2010

3.1	Amended and Restated Certificate of Incorporation of the Registrant.	S-1/A	333-138121	3.1	1/22/2007

3.2	Certificate of Amendment of Amended and Restated Certificate of Incorporation of Registrant.	S-1/A	333-138121	3.2	3/30/2007

3.3	Certificate of Amendment of Amended and Restated Certificate of Incorporation of Registrant.	8-K	001-33391	3.2	10/6/2010

3.4	Certificate of Amendment of Amended and Restated Certificate of Incorporation of Registrant.	8-K	001-33391	3.3	10/6/2010

3.5	Certificate of Amendment of Amended and Restated Certificate of Incorporation of Registrant.	8-K	001-33391	3.1	9/14/2012

3.6	Amended and Restated Bylaws of Registrant.	S-1	333-138121	3.4	10/20/2006

3.7	Amendment to Amended and Restated Bylaws of Registrant.	8-K	001-33391	3.4	10/6/2010

3.8	Certificate of Designation of Dialogic Inc. Series D-1 Preferred Stock.	8-K	001-33391	3.1	4/13/2012

4.1	Reference is made to Exhibits 3.1, 3.2, 3.3, 3.4, 3.5, 3.6 and 3.7.

4.2	Specimen stock certificate.	S-1/A	333-138121	4.2	3/30/2007

4.3	Amended and Restated Registration Rights Agreement, dated March 22, 2012, by and among Dialogic Inc. and the investors signatory thereto.	10-K	001-33391	4.3	3/31/2011

4.4	Amended and Restated Registration Rights Agreement, dated April 11, 2012, by and among Dialogic Inc. and the investors signatory thereto.	8-K	001-33391	4.1	4/13/2012

Exhibit

Number

Exhibit Description

Incorporated By Reference

Filed

Herewith

Form

File No.

Exhibit

Filing Date

10.6

Second Amendment to Third Amended and Restated Credit Agreement dated November 6, 2012, by and among Dialogic Inc., Dialogic Corporation, Obsidian LLC and the lenders signatory thereto.

8-K

001-33391

10.6

11/13/2012

10.7

Nineteenth Amendment to Credit Agreement dated November 13, 2012, by and among Dialogic Inc., Dialogic Corporation, Wells Fargo Foothill Canada ULC and the lender signatory thereto.

8-K

001-33391

10.7

11/13/2012

10.8

Consulting Agreement, dated August 9, 2012, between Nick Jensen and the Company.

10.9

Employment Agreement, dated August 9, 2012, between Kevin Cook and the Company.

31.1

Certification pursuant to Rule 13a-14(a)/15d-14(a).

31.2

Certification pursuant to Rule 13a-14(a)/15d-14(a).

32.1†

Certifications of Chief Executive Officer and Chief Financial Officer.

101.INS#

XBRL Instance Document

101.SCH#

XBRL Taxonomy Extension Schema Linkbase Document

101.CAL#

XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF#

XBRL Taxonomy Extension Definition Linkbase Document

101.LAB#

XBRL Taxonomy Extension Labels Linkbase Document

101.PRE#

XBRL Taxonomy Extension Presentation Linkbase Document

†

The certifications attached as Exhibit 32.1 accompany this Quarterly Report on Form 10-Q are not deemed filed with the Securities and Exchange Commission and are not to be incorporated by reference into any filing of Dialogic Inc., under the Securities Act of 1933, as amended, or the Securities Act, or the Securities Exchange Act of 1934, as amended, or the Exchange Act, whether made before or after the date of this Quarterly Report on Form 10-Q, irrespective of any general incorporation language contained in such filing.

Pursuant to applicable securities laws and regulations, the Registrant is deemed to have complied with the reporting obligation relating to the submission of interactive data files in such exhibits and is not subject to liability under any anti-fraud provisions of the federal securities laws as long as the Registrant has made a good faith attempt to comply with the submission requirements and promptly amends the interactive data files after becoming aware that the interactive data files fails to comply with the submission requirements. These interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act, are deemed not filed for purposes of section 18 of the Exchange Act and otherwise are not subject to liability under these sections.

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

EXHIBIT INDEX


Exhibit Number	Exhibit Description	Incorporated By Reference				Filed Herewith
Exhibit Number	Exhibit Description	Form	File No.	Exhibit	Filing Date	Filed Herewith

2.1	Share Exchange Agreement, dated October 30, 2002, by and among the Registrant, ECI Telecom Ltd., ECI Telecom — NGTS Inc., and Nexverse Networks, Inc.	S-1	333-138121	2.1	10/20/2006

2.2	Amendment No. 1 to the Share Exchange Agreement, dated December 31, 2002, by and among the Registrant, ECI Telecom Ltd., ECI Telecom — NGTS Inc., and Nexverse Networks, Inc.	S-1	333-138121	2.2	10/20/2006

2.3	Acquisition Agreement, dated May 12, 2010 by and between Registrant and Dialogic Corporation.	8-K	001-33391	2.1	5/14/2010

3.1	Amended and Restated Certificate of Incorporation of the Registrant.	S-1/A	333-138121	3.1	1/22/2007

3.2	Certificate of Amendment of Amended and Restated Certificate of Incorporation of Registrant.	S-1/A	333-138121	3.2	3/30/2007

3.3	Certificate of Amendment of Amended and Restated Certificate of Incorporation of Registrant.	8-K	001-33391	3.2	10/6/2010

3.4	Certificate of Amendment of Amended and Restated Certificate of Incorporation of Registrant.	8-K	001-33391	3.3	10/6/2010

3.5	Certificate of Amendment of Amended and Restated Certificate of Incorporation of Registrant.	8-K	001-33391	3.1	9/14/2012

3.6	Amended and Restated Bylaws of Registrant.	S-1	333-138121	3.4	10/20/2006

3.7	Amendment to Amended and Restated Bylaws of Registrant.	8-K	001-33391	3.4	10/6/2010

3.8	Certificate of Designation of Dialogic Inc. Series D-1 Preferred Stock.	8-K	001-33391	3.1	4/13/2012

4.1	Reference is made to Exhibits 3.1, 3.2, 3.3, 3.4, 3.5, 3.6 and 3.7.

4.2	Specimen stock certificate.	S-1/A	333-138121	4.2	3/30/2007

4.3	Amended and Restated Registration Rights Agreement, dated March 22, 2012, by and among Dialogic Inc. and the investors signatory thereto.	10-K	001-33391	4.3	3/31/2011

4.4	Amended and Restated Registration Rights Agreement, dated April 11, 2012, by and among Dialogic Inc. and the investors signatory thereto.	8-K	001-33391	4.1	4/13/2012

Exhibit

Number

Exhibit Description

Incorporated By Reference

Filed

Herewith

Form

File No.

Exhibit

Filing Date

10.6

Second Amendment to Third Amended and Restated Credit Agreement dated November 6, 2012, by and among Dialogic Inc., Dialogic Corporation, Obsidian LLC and the lenders signatory thereto.

8-K

001-33391

10.6

11/13/2012

10.7

Nineteenth Amendment to Credit Agreement dated November 13, 2012, by and among Dialogic Inc., Dialogic Corporation, Wells Fargo Foothill Canada ULC and the lender signatory thereto.

8-K

001-33391

10.7

11/13/2012

10.8

Consulting Agreement, dated August 9, 2012, between Nick Jensen and the Company.

10.9

Employment Agreement, dated August 9, 2012, between Kevin Cook and the Company.

31.1

Certification pursuant to Rule 13a-14(a)/15d-14(a).

31.2

Certification pursuant to Rule 13a-14(a)/15d-14(a).

32.1†

Certifications of Chief Executive Officer and Chief Financial Officer.

101.INS†

XBRL Instance Document

101.SCH†

XBRL Taxonomy Extension Schema Linkbase Document

101.CAL†

XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF†

XBRL Taxonomy Extension Definition Linkbase Document

101.LAB†

XBRL Taxonomy Extension Labels Linkbase Document

101.PRE†

XBRL Taxonomy Extension Presentation Linkbase Document

†

The certifications attached as Exhibit 32.1 accompany this Quarterly Report on Form 10-Q are not deemed filed with the Securities and Exchange Commission and are not to be incorporated by reference into any filing of Dialogic Inc., under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this Quarterly Report on Form 10-Q, irrespective of any general incorporation language contained in such filing.

Pursuant to applicable securities laws and regulations, the Registrant is deemed to have complied with the reporting obligation related to the submission of interactive data files in such exhibits and is not subject to liability under any anti-fraud provisions of the federal securities laws as long as the Registrant has made a good faith attempt to comply with the submission requirements and promptly amends the interactive data files after becoming aware that the interactive data files fails to comply with the submission requirements. These interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act, are deemed not filed for the purposes of section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

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