Dialogic Inc. - FORM 10-Q - November 14, 2011

Dialogic Inc. - FORM 10-Q - November 14, 2011

Attached files

Attached files

Dialogic Inc. Reports

file	filename
EXCEL - IDEA: XBRL DOCUMENT - Dialogic Inc.	Financial_Report.xls
EX-31.1 - SECTION 302 CEO CERTIFICATION - Dialogic Inc.	d239728dex311.htm
EX-32.1 - SECTION 906 CEO AND CFO CERTIFICATION - Dialogic Inc.	d239728dex321.htm
EX-31.2 - SECTION 302 CFO CERTIFICATION - Dialogic Inc.	d239728dex312.htm

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

September 30, 2011 For the quarterly period ended September 30, 2011

¨	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 October 31, 2011, 31,392,490 shares of the registrant’s common stock were outstanding.

DIALOGIC INC

FORM 10-Q

For the Quarterly Period Ended September 30, 2011

INDEX


	PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS
	Unaudited Condensed Consolidated Balance Sheets	3
	Unaudited Condensed Consolidated Statements of Operations	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		27
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK		48
ITEM 4. CONTROLS AND PROCEDURES		49

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS		50
ITEM 1A. RISK FACTORS		50
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS		67
ITEM 3. DEFAULTS UPON SENIOR SECURITIES		67
ITEM 4. (REMOVED AND RESERVED)		67
ITEM 5. OTHER INFORMATION		67
ITEM 6. EXHIBITS		68
SIGNATURE		70

DIALOGIC INC.

Unaudited Condensed Consolidated Balance Sheets

(in thousands)


	September 30, 2011			December 31, 2010
ASSETS
Current Assets:
Cash and cash equivalents	$	8,982		$	24,559
Restricted cash		1,602			650
Accounts receivable, net		45,522			57,931
Inventories		21,081			27,102
Prepaid expenses		3,671			5,703
Other current assets		4,503			7,695

Total current assets		85,361			123,640
Property and equipment, net		8,705			10,262
Intangible assets, net		36,658			46,904
Goodwill		31,223			31,614
Deferred debt issuance costs, net		1,123			3,307
Other assets		1,497			1,393

Total assets	$	164,567		$	217,120

LIABILITIES AND STOCKHOLDERS’ (DEFICIT) EQUITY
Current liabilities:
Bank indebtedness	$	11,617		$	12,783
Accounts payable		17,442			23,552
Accrued liabilities		22,251			23,765
Deferred revenue		13,939			17,209
Income taxes payable		1,848			2,010
Short-term debt, related parties		89,875			—
Interest payable, related parties		3,258			2,953

Total current liabilities		160,230			82,272
Long-term liabilities:
Long-term debt, related parties		4,566			93,811
Accrued restructuring		2,667			—
Income taxes payable		2,286			2,416
Deferred revenue		1,928			2,423

Total liabilities		171,677			180,922

Commitments and contingencies
Stockholders’ (deficit)equity:
Common shares and additional paid-in capital		221,263			218,783
Accumulated other comprehensive loss		(22,213	)		(22,071	)
Accumulated deficit		(206,160	)		(160,514	)

Total stockholders’ (deficit) equity		(7,110	)		36,198

Total liabilities and stockholders’ (deficit) equity	$	164,567		$	217,120

See accompanying notes to Unaudited Condensed Consolidated Financial Statements

DIALOGIC INC.

Unaudited Condensed Consolidated Statements of Operations

(in thousands except per share data)


	Three Months Ended September 30,						Nine Months Ended September 30,
	2011			2010			2011			2010
Revenue:
Products	$	36,604		$	37,243		$	118,428		$	115,051
Services		10,817			2,517			29,644			8,270

Total revenue		47,421			39,760			148,072			123,321

Cost of revenue:
Products		13,700			15,092			45,237			40,699
Services		5,358			2,121			16,215			6,666

Total cost of revenue		19,058			17,213			61,452			47,365

Gross profit		28,363			22,547			86,620			75,956

Operating expenses:
Research and development, net		13,540			10,273			42,262			30,741
Sales and marketing		12,664			11,176			41,829			33,453
General and administrative		9,391			8,147			27,552			19,811
Acquisition costs		—			1,213			—			2,128
Restructuring charges		1,674			549			6,421			549

Total operating expenses		37,269			31,358			118,064			86,682

Loss from operations		(8,906	)		(8,811	)		(31,444	)		(10,726	)
Interest and other income (expense), net		(3	)		13			(3	)		538
Interest expense		(4,695	)		(5,346	)		(13,227	)		(14,366	)
Foreign exchange loss, net		(51	)		(99	)		(384	)		(98	)

Loss before income taxes		(13,655	)		(14,243	)		(45,058	)		(24,652	)
Income tax (benefit) provision		(557	)		258			588			709

Net loss		(13,098	)		(14,501	)		(45,646	)		(25,361	)
Change in redemption value of preferred shares		—			3,047			—			3,047

Net loss attributable to common shareholders	$	(13,098	)	$	(17,548	)	$	(45,646	)	$	(28,408	)

Net loss per share—basic and diluted	$	(0.42	)	$	(2.29	)	$	(1.46	)	$	(3.71	)

Weighted average shares outstanding used in computing net loss per share, basic and diluted		31,344			7,652			31,283			7,652

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,
	2011			2010
Cash flows from operating activities:
Net loss	$	(45,646	)	$	(25,361	)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
Depreciation and amortization		14,062			15,313
Stock-based compensation		2,328			1,654
Amortization of debt issuance costs		2,208			3,119
Payment-in-kind interest expense on long-term debt		630			5,404
Bad debt expense, net		96			442
Other non-cash charges		230			661
Net changes in operating assets and liabilities:
Accounts receivable		11,829			3,135
Inventories		5,905			(738	)
Prepaid expenses and other current assets		5,116			323
Accounts payable and accrued liabilities		(4,971	)		(5,222	)
Deferred revenue		(2,952	)		1,247
Income taxes payable		(209	)		78
Interest payable, related parties		305			2,608

Net cash (used in) provided by operating activities		(11,069	)		2,663

Cash flows from investing activities:
Restricted cash		(952	)		—
Purchases of property and equipment		(2,315	)		(1,842	)
Purchases of intangible assets		(129	)		(114	)
Other assets		(103	)		(171	)

Net cash used in investing activities		(3,499	)		(2,127	)

Cash flows from financing activities:
Proceeds from the exercise of stock options		157			—
Debt issuance fees		—			(3,562	)
Proceeds from (repayments of) bank indebtedness, net		(1,190	)		641

Net cash used in financing activities		(1,033	)		(2,921	)

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

Net decrease in cash and cash equivalents		(15,577	)		(2,385	)
Cash and cash equivalents at beginning of period		24,559			3,973

Cash and cash equivalents at end of period	$	8,982		$	1,588

Supplemental disclosure of cash flow information:
Cash paid:
Interest	$	10,024		$	6,643

Income taxes	$	1,287		$	553

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

Change in redemption value of preferred shares	$	—		$	3,047

See accompanying notes to Unaudited Condensed Consolidated Financial Statements

Dialogic Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Note 1 – The Company

Dialogic Inc. (“Dialogic” or “Company”) is a leading provider of communications platforms and technology that enable developers and service providers to build and deploy innovative applications without concern for the complexities of the communication medium or network. The Company provides reliable, cost-effective and secure communications solutions that enable enterprises and service providers to shift to Internet Protocol (“IP”) based communications while still maintaining existing Time Division Multiplexing (“TDM”) networks. Additionally, the Company provides multimedia engines for video, voice, conferencing and facsimile solutions. Enterprises rely on the Company’s innovative IP, transitional hybrid and flexible TDM boards, software and gateway products to enable the integration of new IP technologies into existing communications networks. Representative applications that are enabled by the Company’s technology include: Unified Communications/Unified Messaging, Short Message Service (“SMS”)/Video SMS, Mobile Video Messaging, Voicemail/Videomail, interactive voice response and interactive voice and video response solutions, and Audio and Video Conferencing. The Company also provides voice infrastructure solutions for established and emerging wireline and wireless service providers. Service providers use the Company’s products to transport, convert and manage data and voice traffic over both TDM and IP networks while enabling Voice Over Internet Protocol and other multimedia services. The Company sells into the enterprise and service provider communications market both directly and indirectly through distribution partners such as telecommunications equipment vendors, value added resellers (“VARs”) and other channel partners.

Acquisition

On October 1, 2010, the transaction contemplated by the Acquisition Agreement, dated May 12, 2010, (the “Acquisition Agreement”), by and between Dialogic (formerly Veraz Networks, Inc.) and Dialogic Corporation, was consummated, and, accordingly, Dialogic Corporation became a wholly owned subsidiary of Dialogic (the “Arrangement”). On October 1, 2010, the Company also effected: (1) an amendment to Dialogic’s amended and restated certificate of incorporation to change the name from “Veraz Networks, Inc.” to “Dialogic Inc.” (the “Name Change Amendment”); and (2) an amendment to Dialogic’s amended and restated certificate of incorporation to effect a reverse stock split of the issued and outstanding shares of Dialogic common stock, pursuant to which each five shares of common stock outstanding became one share of common stock (the “Reverse Stock Split Amendment”).

The Arrangement was accounted for as a reverse acquisition under the purchase method of accounting whereby Dialogic Corporation was considered the accounting acquirer in accordance with accounting principles generally accepted in the United States of America, or U.S. GAAP, for accounting and financial reporting purposes. As such, on the acquisition date of October 1, 2010, the assets and liabilities of the former Veraz Networks, Inc. were assessed at fair value and the assets and liabilities of Dialogic Corporation were carried over at the historical cost. For the three and nine months ended September 30, 2010, the unaudited condensed consolidated statements of operations and statements of cash flows include the historical results of Dialogic Corporation. For all reporting periods following the consummation of the Arrangement, the statements of operations and statements of cash flows include the results of the former Veraz Networks, Inc. since the date of acquisition of October 1, 2010.

All common stock share and per share data presented in the accompanying unaudited condensed consolidated financial statements reflect the legal capital of the former Veraz Networks, Inc. and the common stock share and per share amounts reflect the shares outstanding of the former Dialogic Corporation retroactively adjusted for the exchange ratios in the Acquisition Agreement to reflect the number of shares received in the business combination.

The Reverse Stock Split Amendment and the Name Change Amendment became effective after the close of markets on October 1, 2010 and the common stock of Dialogic Inc. began trading on The NASDAQ Global Market on a post-reverse-split basis on October 4, 2010 under the new symbol “DLGC”.

Note 2 – Basis of Presentation

The 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, 2011 and for the three and nine months ended September 30, 2011 and 2010 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 Dialogic’s Annual Report on Form 10-K for the year ended December 31, 2010.

Dialogic Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. GAAP, and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). They do not include all of the financial information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, the unaudited condensed consolidated financial statements and notes have been prepared on the same basis as the audited consolidated financial statements in Dialogic’s Annual Report on Form 10-K for the year ended December 31, 2010, and include adjustments (consisting of normal recurring adjustments) necessary for the fair presentation of Dialogic’s financial position as of September 30, 2011, results of operations for the three and nine months ended September 30, 2011 and 2010, and cash flows for the nine months ended September 30, 2011 and 2010. Certain reclassifications have been made to prior periods to conform with the current period presentation.

Note 3 – Summary of Significant Accounting Policies

The significant accounting policies of the Company are as follows:

(a) Risks and Uncertainties

The accompanying unaudited condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern. For the nine months ended September 30, 2011, the Company incurred a net loss of $45.6 million and used cash in operating activities of $11.1 million. As of September 30, 2011, the Company’s cash and cash equivalent balance was $9.0 million, of which approximately $7.6 million was held by our subsidiaries outside of the U.S. and could be subject to tax implications if repatriated to the U.S. Its current bank indebtedness was $11.6 million and its debt with related parties, including accrued interest, was $97.7 million. As discussed in Note 9, the related party term loan lenders have waived their right to accelerate the maturity date of the long-term debt under any circumstances prior to January 15, 2012, including in the event the Company does not maintain compliance with its debt covenants. As of September 30, 2011, the Company was not in compliance with any of the covenants under its term loan. As a result, the lenders will have the right to accelerate the maturity date of the long-term debt on January 15, 2012. Accordingly, the term loan debt has been classified as a current liability in the accompanying unaudited condensed consolidated financial statements. The Company does not anticipate having sufficient cash and cash equivalents to repay the debt should the related party term loan lenders accelerate the maturity date and would be forced to seek alternative sources of financing. There can be no assurances that alternative financing will be available on acceptable terms or at all. This could harm the Company by:

•

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

•

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

•

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

•

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

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

•

Deferral of purchases and orders by customers;

•

Negative impact from increased financial pressures on distributors and resellers of its product; and

•

Negative impact from increased financial pressures on key suppliers.

In order for the Company to meet its debt repayment requirements, 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 than what the Company currently operates under. Any equity financing transaction could result in additional dilution to the Company’s existing stockholders. The accompanying unaudited condensed consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

(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, warranty obligations, the valuation of deferred tax assets, stock-based compensation, income tax uncertainties, impairment testing of goodwill and intangible assets, revenue recognition and the fair value of assets acquired and

Dialogic Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

liabilities assumed at the date of acquisition for businesses acquired. The unaudited condensed consolidated 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 unaudited condensed 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.

(c) Concentrations and Credit risk

Cash and cash equivalents are maintained with several financial institutions. Deposits held with banks may exceed the amount of insurance provided on such deposits. Generally, these deposits may be redeemed upon demand and therefore bear minimal risk.

Credit risk results from the possibility that a loss may occur from the failure of another party to perform according to the terms of the contract. The Company’s financial assets that are exposed to credit risk consist primarily of cash and accounts receivable. Cash is placed with major financial institutions. Concentration of credit risk with respect to accounts receivable is mitigated by the Company’s credit evaluation process, credit insurance on certain receivables and the dispersion of the Company’s customers among different geographical locations around the world. The carrying amount of these financial assets, as presented in the consolidated balance sheet, represents the Company’s credit exposure at the reporting date.

As of September 30, 2011 and December 31, 2010, accounts receivable aggregating approximately $10.7 million and $11.9 million 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 revenues in the three and nine months ended September 30, 2011. One customer accounted for 12% of revenues in the three and nine months ended September 30, 2010. One customer accounted for 12% and 11% of accounts receivable at September 30, 2011 and December 31, 2010, respectively.

(d) Revenue Recognition

Revenue Recognition Criteria

Revenue derived from the sale of products and services is recognized when all of the following criteria are met:

(i)

Persuasive evidence of an arrangement exists — The Company’s customary practice is to have a written contract, which is signed by both the customer and the Company, or a purchase order or other written or electronic order documentation for those customers who have previously negotiated a standard arrangement with the Company.

(ii)

Delivery has occurred — Delivery of hardware and software products generally occurs at the point of shipment when title and risk of loss have passed to the customer. However, some arrangements require evidence of customer acceptance of the hardware and software products that have been sold. In such cases, delivery of the software, hardware and services is not considered to have occurred until evidence of acceptance is received from the customer or the Company has completed its contractual requirements. Revenue from sales of standalone services, including training courses, is recognized when the services are completed. In certain arrangements involving subsequent sales of hardware and software products to expand a customers’ networks, the revenue recognition on these arrangements after the initial arrangement has been accepted, typically occurs at the point of shipment, since the Company has historically experienced successful implementations of these expansions and customer acceptance, although contractually required, does not represent a significant risk.

(iii)

The fee is fixed or determinable — The Company sells its products through its direct sales force and channel partners. In certain cases where the sales price cannot be reliably determined due to frequent sales price reductions or returns cannot be estimated, the related fee is considered to be not fixed or determinable and revenue is deferred until such price reduction or return rights cease.

Arrangement fees are generally due within one year or less from date of acceptance, or the date of delivery if no acceptance. Some arrangements may have payment terms extending beyond these customary payment terms and therefore the arrangement fees may not be considered to be fixed or determinable. For multiple element arrangements with payment terms that are not considered to be fixed or determinable, revenue is recognized as payments become due, based on relative selling price, after delivery and acceptance of the software, hardware, and services, and assuming all other revenue recognition criteria are satisfied. For arrangements with contingent revenue provisions (a portion of the relative selling price of a delivered item is contingent upon the delivery of additional items or meeting other specified performance conditions),

Dialogic Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

revenue recognized on delivered items is limited to the non-contingent amount. The Company defers the cost of inventory when products have been shipped, but have not yet been recognized as revenue, and expenses those costs in full in the same period that the deferred revenue is recognized as revenue (generally upon customer acceptance). In arrangements for which revenue recognition is limited to amounts due or non-contingent amounts, all related inventory costs are expensed in full in the same period that the revenue is initially recognized, but no later than acceptance; this will initially result in lower or negative product margins and cause higher margins in subsequent periods, as compared to similar arrangements with customary payment terms.

(iv)

Collectability is probable — Collectability is assessed on a customer-by-customer basis. The Company evaluates the financial position, payment history, and ability to pay of new customers, and of existing customers that substantially expand their commitments. If it is determined prior to revenue recognition that collectability is not probable, recognition of the revenue is deferred and recognized upon receipt of cash, assuming all other revenue recognition criteria are satisfied. In arrangements for which revenue recognition is limited to amounts of cash received because of collectability concerns, all related inventory costs are expensed at the date of acceptance or delivery if no acceptance is required; this will initially result in lower or negative product margins and cause higher margins in subsequent periods, as compared to similar arrangements with customary payment terms.

Revenue received from maintenance contracts is presented as deferred revenue and is recognized into revenue on a straight-line basis over the term of the contract. License fee revenue is recognized upon delivery of the license or software and when all performance criteria are met. Revenue derived from the sale of products is generally recognized when title and risk of loss has been transferred to the customer. In addition, product, maintenance contract and license fee revenues are recognized when persuasive evidence of an arrangement exists, amounts are fixed or can be determined, and ability to collect is probable.

Revenue Reserves and Adjustments

Sales incentives which are offered on some of the Company’s products are recorded as a reduction of revenue as there are no identifiable benefits received. The Company records a provision for estimated sales returns and allowances as a reduction from sales in the same period during which the related revenue is recorded. These estimates are based on historical sales returns and allowances, analysis of credit memo data and other known factors.

The Company has agreements with certain distributors which allow for stock rotation rights. The stock rotation rights permit the distributors to return a defined percentage of their purchases in exchange for orders of an equal or greater amount. The Company recognizes an allowance for stock rotation rights based on historical experience. The provision is recorded as a reduction in revenues in the consolidated statements of operations.

The Company also has agreements with certain distributors that allow for price adjustments. The Company recognizes an allowance for these price adjustments based on historical experience. The price adjustments are recorded as a reduction in revenue in the period during which the related revenue is recognized and are included in the accompanying consolidated statements of operations.

Revenues are primarily recognized net of sales taxes. Revenues include amounts billed to customers for shipping and handling. Shipping and handling fees represented less than 1% of revenues in each of the nine months ended September 30, 2011 and 2010. Shipping and handling costs are included in cost of revenues.

Multiple Element Arrangements

In October 2009, the Financial Accounting Standards Board (“FASB”) amended the accounting standards for revenue recognition to remove tangible products containing software components and non-software components that function together to deliver the product’s essential functionality from the scope of industry specific software revenue recognition guidance. In October 2009, the FASB also amended the standards for multiple deliverable revenue arrangements to:

provide updated guidance on whether multiple deliverables exist, how the deliverables in an arrangement should be separated, and how the arrangement consideration should be allocated among its elements;

ii.

require an entity to allocate revenue where no vendor specific objective evidence exists (“VSOE”) by using third party evidence of selling price (“TPE”) or estimated selling prices (“ESP”); and

iii.

eliminate the use of the residual method and require an entity to allocate revenue using the relative selling price method.

This new accounting guidance became applicable to the Company beginning the first quarter of its fiscal year 2011. The Company adopted this guidance for transactions that were entered into or materially modified on or after January 1, 2011 using the prospective basis of adoption. The Company’s products typically have both software and non-software components that function together to deliver the products’ essential functionality. Although the Company’s products are primarily marketed based on the software elements contained therein, the hardware sold generally cannot be used apart from the software. Therefore, the Company considers its principal hardware products to be subject to this new accounting guidance. Many of the Company’s sales involve multiple-element

Dialogic Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

arrangements that include product, maintenance and various professional services. The adoption of the guidance discussed above affects the Company’s multiple-element arrangements when they contain tangible products (hardware) with software elements, which comprise the majority of the Company’s revenue transactions. The Company may enter into sales transactions that do not contain tangible hardware components, such as software-only add-on sales, which will continue to be subject to the previous software revenue recognition guidance in ASC 985-605.

The multiple-deliverable revenue guidance requires that the Company evaluate each deliverable in an arrangement to determine whether such deliverable would represent a separate unit of accounting.

The delivered item constitutes a separate unit of accounting when it has stand-alone value to the customer and there are no refunds or return rights for the delivered elements. If the arrangement includes a general refund or return right relative to the delivered item and the delivery and performance of the undelivered items are considered probable and substantially in the Company’s control, the delivered element constitutes a separate unit of accounting. In instances when the aforementioned criteria are not met, the deliverable is combined with the undelivered elements and revenue recognition is determined for the combination as a single unit of accounting. Most of the Company’s products and services qualify as separate units of accounting because they are sold separately or the customer could resell them on a standalone basis and, accordingly, revenue is recognized when the applicable revenue recognition criteria are met.

The total arrangement fees are allocated to all the deliverables based on their respective relative selling prices. The relative selling price is determined using VSOE, when available. The Company generally uses VSOE to derive the selling price for its maintenance and professional services deliverables. VSOE for maintenance is based on contractual stated renewal rates while professional services are based on historical pricing for standalone professional service transactions. When VSOE cannot be established, the Company attempts to determine the TPE for the deliverables. TPE is determined based on competitor prices for similar deliverables when sold separately by the competitors. Generally the Company’s product offerings differ from those of its competitors and comparable pricing of its competitors is often not available. Therefore, the Company is typically not able to determine TPE. When the Company is unable to establish selling price using VSOE or TPE, the Company uses ESP in its allocation of arrangement fees. The ESP for a deliverable is determined as the price at which the Company would transact if the products or services were sold on a standalone basis. The ESP for each deliverable is determined using average historical discounted selling prices based on several factors, including but not limited to, marketing strategy, customer considerations and pricing practices in a region. The Company uses ESP to derive the relative selling price for its product deliverables.

The impact of applying the relative selling price method in the allocation of revenue, compared to previous revenue recognition methodologies, decreased revenues for the three and nine months ended September 30, 2011 by approximately $1.7 million and nil, respectively. In terms of the timing and pattern of revenue recognition, the new accounting guidance for revenue recognition is not expected to have a significant effect on revenues in periods after the initial adoption when applied to multiple element arrangements. However, as the Company’s marketing and product strategies evolve, the Company may modify its pricing practices in the future, which could result in changes in selling prices, including both VSOE and ESP which could impact future revenues.

For transactions entered into prior to the first quarter of fiscal year 2011, the Company recognized revenue based on the software revenue recognition guidance in place during the period in which the order was received. When an arrangement involved multiple elements, such as hardware and software products, maintenance and/or professional services, the Company allocated the entire sales price to each respective element based on VSOE of the fair value for each element. When arrangements contained multiple elements and VSOE of fair value existed for all undelivered elements but not for the delivered elements, the Company recognized revenue for the delivered elements using the residual method. The Company based its determination of VSOE of the fair value of the undelivered elements based on substantive renewal rates of maintenance and support agreements, and on independently sold and negotiated service arrangements. In limited circumstances when arrangements containing multiple elements where VSOE of fair value did not exist for an undelivered element, the Company deferred revenue for the delivered and undelivered elements until VSOE of fair value existed for the undelivered elements or all elements had been delivered.

(e) Deferred Revenue

Deferred revenue represents fixed or determinable amounts billed to or collected from customers for which the related revenue has not been recognized because one or more of the revenue recognition criteria have not been met. Advances paid by customers prior to the delivery of product and services are classified as deferred revenue. Revenue from maintenance contracts is presented as deferred revenue and is recognized into revenue on a straight-line basis over the term of the contract. The current portion of deferred revenues represents deferred revenue that is expected to be recognized as revenue within 12 months from the balance sheet date. The long-term portion of deferred revenues represents deferred revenue that is expected to be recognized as revenue beyond 12 months from the balance sheet date, which are primarily maintenance support contracts.

Dialogic Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(f) Income Taxes

The Company accounts for income taxes using the asset and liability approach, which requires the recognition of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in the Company’s financial statements or tax returns. The measurement of current and deferred tax liabilities and assets are based on provisions of the enacted tax law. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be more likely than not realized. As a result of recent cumulative losses and uncertainty regarding future taxable income, the Company determined based on all available evidence, that there was substantial uncertainty as to the realizability of recorded net deferred tax assets in future periods and, accordingly, has a full valuation allowance on all deferred tax assets.

The Company classifies interest and penalties related to uncertain tax positions as a component of income tax expense in the consolidated statement of operations. Income taxes payable are recorded for uncertain tax positions whenever there is a difference between amounts reported by the Company in its tax returns and the amounts the Company believes it would likely pay in the event of an examination by the taxing authorities. Liabilities for uncertain tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in the recognition or measurement are reflected in the period in which the change occurs.

(g) Comprehensive Income (Loss)

Comprehensive income (loss) consists of two components, net income (loss) and other comprehensive income (loss). Other comprehensive income (loss) includes gains and losses that are recorded as an element of stockholders’ (deficit) equity but are excluded from net income (loss). The Company’s comprehensive losses for the three and nine months ended September 30, 2011 and 2010 were as follows (in thousands):


	Three Months Ended September 30,						Nine Months Ended September 30,
	2011			2010			2011			2010
Net loss	$	(13,098	)	$	(14,501	)	$	(45,646	)	$	(25,361	)
Foreign currency translation adjustments		(267	)		—			(142	)		—

Total comprehensive loss	$	(13,365	)	$	(14,501	)	$	(45,788	)	$	(25,361	)

(h) New Accounting Pronouncements

In May, 2011, the FASB issued Accounting Standards Update (“ASU”) No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS. The amendments in this ASU generally represent clarification of Topic 820, but also include instances where a particular principle or requirement for measuring fair value or disclosing information about fair value measurements has changed. This update results in common principles and requirements for measuring fair value and for disclosing information about fair value measurements in accordance with GAAP and International Financial Reporting Standards (“IFRS”). The amendments are effective for interim and annual periods beginning after December 15, 2011 and are to be applied prospectively. Early application is not permitted. The Company will adopt ASU 2011-04 effective January 1, 2012 and this adoption is not expected to have a material impact on the Company’s condensed consolidated financial statements.

Note 4 – Dialogic Corporation Acquisition

Background

On October 1, 2010, Dialogic completed its business combination with Dialogic Corporation in accordance with the terms of the Acquisition Agreement, pursuant to which the Dialogic Corporation became a wholly owned subsidiary of Dialogic. In accordance with the Acquisition Agreement, the Company acquired all of Dialogic Corporation’s outstanding common and preferred shares in exchange for an aggregate of 22,116,155 shares of Dialogic’s common stock.

The Arrangement was accounted for as a reverse acquisition under the purchase method of accounting whereby Dialogic Corporation was considered the accounting acquirer in accordance with U.S. GAAP for accounting and financial reporting purposes. As such, on the acquisition date of October 1, 2010, the assets and liabilities of the former Veraz Networks, Inc. were remeasured at fair value and the assets and liabilities of Dialogic Corporation were carried over at their historical cost. For the three and nine months ended September 30, 2010, the accompanying unaudited condensed consolidated statements of operations and cash flows include the historical results of Dialogic Corporation. For all reporting periods following the consummation of the Arrangement, the accompanying unaudited condensed consolidated statements of operations and statements of cash flows of the former Veraz Networks, Inc. are included from the date of acquisition of October 1, 2010.

Dialogic Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Supplementary pro forma information

The following pro forma financial information reflects the condensed consolidated results of operations as if the business combination with Dialogic had taken place on January 1, 2010. The pro forma financial information is not necessarily indicative of the results of operations as it would have been, had the transaction been reflected on the assumed date. No effect has been given for synergies that may have been realized through the acquisition. The pro forma financial information also includes the business combination accounting effects resulting from the acquisition, including amortization charges from acquired intangible assets, stock-based compensation charges for unvested stock options and restricted stock-based awards assumed, adjustments to interest expense for borrowings and the elimination of merger costs incurred in 2010. Amounts are shown in thousands except per share amounts.


	Three Months Ended September 30, 2010			Nine Months Ended September 30, 2010
Revenues	$	53,113		$	167,448

Net loss	$	(14,228	)	$	(35,308	)

Basic and diluted loss per share	$	(0.46	)	$	(1.14	)

Weighted average shares		31,035			31,035

Note 5 – Goodwill and Intangible Assets

Goodwill at September 30, 2011 and December 31, 2010 was $31.2 million and $31.6 million, respectively. During the quarter ended March 31, 2011, the Company decreased goodwill by $0.4 million as a result of fair value adjustments to certain liabilities assumed in the business combination with Dialogic Corporation. 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.

The following is a summary of intangible assets as of September 30, 2011 and December 31, 2010 (in thousands):


	September 30, 2011
	Gross carrying amount		Accumulated amortization			Net carrying amount
Indefinite-lived intangibles:
Trade names	$	10,000	$	—		$	10,000
Finite-lived intangibles:
Technology		58,239		(40,610	)		17,629
Customer relationships		38,312		(29,741	)		8,571
Software licenses		3,489		(3,389	)		100
Other		1,227		(869	)		358

Total intangibles	$	111,267	$	(74,609	)	$	36,658


	December 31, 2010
	Gross carrying amount		Accumulated amortization			Net carrying amount
Indefinite-lived intangibles:
Trade names	$	10,000	$	—		$	10,000
Finite-lived intangibles:
Technology		58,239		(34,817	)		23,422
Customer relationships		38,312		(25,981	)		12,331
Software licenses		3,477		(2,998	)		479
Other		1,254		(582	)		672

Total intangibles	$	111,282	$	(64,378	)	$	46,904

Dialogic Inc.

Notes to Unaudited Condensed Consolidated Financial Statements


	Technology		Customer Relationships		Software Licenses		Other
Weighted average remaining amortization period (in years)		5.4		7.8		1.8		2.2

Note 6 – Fair Value Measurement

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; and

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 available-for-sale securities assets at fair value on a recurring basis and has determined that these financial assets are level 1 in the fair value hierarchy. The following table sets forth the Company’s financial assets that were measured at fair value on a recurring basis as of September 30, 2011 and December 31, 2010 (in thousands):


	Fair Value at Reporting Date Using
	September 30, 2011		Quoted prices in active markets for identical assets (level 1)		Significant other observable inputs (level 2)		Significant unobservable inputs (level 3)
Assets:
Money market funds	$	64	$	64	$	—	$	—


	Fair Value at Reporting Date Using
	December 31, 2010		Quoted prices in active markets for identical assets (level 1)		Significant other observable inputs (level 2)		Significant unobservable inputs (level 3)
Assets:
Money market funds	$	6,912	$	6,912	$	—	$	—

The carrying amounts of cash, cash equivalents, accounts receivable, bank indebtedness, 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 stockholder loans approximates the carrying value, due to the fact that the fixed interest rate on the stockholder loans is comparable to current interest rates on unsecured debt. The fair value of the short-term debt and revolving credit facility approximates the carrying amount since interest is based on market based variable rates and because of their short-term maturities. The fair value of the Company’s debt is estimated by discounting in the future cash flows for such instruments at rates currently offered to the Company for similar debt instruments of comparable maturities.

Dialogic Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Note 7 – Balance Sheet Components

The following tables provide details of selected balance sheet items as of September 30, 2011 and December 31, 2010 (in thousands):


	September 30, 2011			December 31, 2010
Inventories:
Raw material and components	$	9,751		$	10,079
Work in process		6,952			10,913
Finished products		4,378			6,110

Total inventories	$	21,081		$	27,102

Property and equipment, net:
Computer equipment and software	$	41,177		$	40,126
Furniture and fixtures		3,764			3,720
Machinery and equipment		12,666			12,169
Leasehold improvements		4,673			4,565

		62,280			60,580
Accumulated depreciation		(53,575	)		(50,318	)

Total property and equipment, net	$	8,705		$	10,262


	September 30, 2011		December 31, 2010
Accrued liabilities:
Accrued compensation and benefits	$	8,939	$	11,687
Accrued restructuring expenses		2,527		1,690
Accrued royalty expenses		1,556		1,447
Accrued external sales agent commissions		1,222		1,378
Deferred rent		1,432		1,639
Other accrued expenses		6,575		5,924

Total accrued liabilities	$	22,251	$	23,765

Note 8 – Bank Indebtedness

In connection with the reverse acquisition completed on October 1, 2010, the Company entered into a Consent and Thirteenth Amendment dated October 1, 2010 (“Thirteenth Amendment”), relating to the credit agreement dated as of March 5, 2008, as amended (“RCA”), with Wells Fargo Foothill Canada ULC, as administrative agent and as a lender (“Revolving Credit Lender”).

Revolving Credit Agreement

Revolving Credit Amount and Maturity. The Company has a working capital facility, the RCA, with the Revolving Credit Lender. In connection with the reverse acquisition, the RCA maturity date was amended and extended to September 30, 2013. The Company may borrow, repay and reborrow revolving credit loans from time to time provided that the aggregate principal amount of revolving credit loans outstanding at any time does 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, which is referred to as the “borrowing base.”

Dialogic Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

As of September 30, 2011 and December 31, 2010, the borrowing base under the RCA amounted to $12.5 million and $16.3 million, the Company had borrowed $11.6 and $12.8 million, and the unused line of credit totaled $13.4 million and $12.2 million, of which $0.9 million and $3.5 million was available for additional borrowings, respectively.

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. In certain instances if the Company terminates and prepays the revolving credit loans, such event may trigger a prepayment premium equal to 0.5% if such event occurs on or after October 1, 2011 and prior to October 1, 2012.

Interest Rates and Fees. At the Company’s election, revolving credit loans may bear interest at a rate equal to the prime rate plus 2.5% or at a rate equal to reserve-adjusted one-, two- or three- month LIBOR plus 4%. 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%. The Company 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.

Guarantors. The revolving credit loans are guaranteed by Dialogic as well as Dialogic Corporation, Cantata Technology, Inc., Dialogic Distribution Ltd., Dialogic Networks (Israel) Ltd. and Veraz Networks LTDA, all wholly owned subsidiaries of the Company (collectively, the “Revolving Credit Guarantors”).

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

Other Terms. The Company and its 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 RCA contains customary events of default, including a change in control of the Company.

Revolving Credit Agreement Covenants

The following summarizes the RCA’s financial covenants and compliance status as defined in the RCA at September 30, 2011 and December 31, 2010:

•

Minimum Cash Balance — Defined as maintaining at least $3.0 million in controlled non-restricted cash and cash equivalent accounts, (as defined between the lender and borrower) located in either the United States or Canada through December 31, 2011.

•

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 $28.5 million for the four quarters ending September 30, 2011, which is the first test period for this covenant; $30.0 million for the four quarters ending December 31, 2011, March 31, 2012 and June 30, 2012; $32.5 million for the four quarters ending September 30, 2012, December 31, 2012, March 31, 2013 and June 30, 2013; and $35.0 million for the four quarters ending September 30, 2013.

At September 30, 2011, the Company was in default under the RCA. Specifically, the Company had breached all of the covenants under the Term Loan Agreement (as described in Note 9) as of September 30, 2011 which constitutes a breach under the terms of the RCA, and the Minimum EBITDA covenant under the RCA. The original maturity date of the loan was September 30, 2013. On July 26, 2011, the Company executed a Limited Waiver and Sixteenth Amendment to Credit Agreement with the Revolving Credit Lender, whereby the Revolvong Credit Lender agreed not to accelerate the maturity date of any loans outstanding under the RCA during the Limited Waiver Period (which was defined as the earliest of (i) January 15, 2012; (ii) the occurrence of any additional Event of Default (including the violation of the financial covenants described above prior to January 15, 2012) or (iii) the occurrence of any Termination Event (as defined in the Term Loan Agreement). However, as of September 30, 2011, additional Events of Default had occurred and, accordingly, the Revolving Credit Lender currently has the right to accelerate the maturity date of the principal and the accrued interest under the RCA to be immediately due and payable and exercise all its remedies, including realizing against the collateral the Company has pledged to secure the loans outstanding under the RCA. During the nine months ended September 30, 2011, the Company amortized an additional $0.4 million of deferred debt issuance costs related to the accelerated amortization as a result of the breach of the covenants under the Term Loan Agreement.

Dialogic Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

On November 14, 2011, the Company executed a Forbearance Agreement with the Revolving Credit Lender whereby the Revolving Credit Lender agreed to forbear from exercising its right to accelerate the maturity date and its right to realize on its collateral before the earliest of (i) January 6, 2012; (ii) the occurrence of any additional Event of Default, which for this purpose includes the exercise by any third party of any rights or remedies against the Company or any of the Revolving Credit Guarantors; or (iii) the occurrence of any Termination Event.

Note 9 –Debt and Related Party Transactions

In connection with the reverse acquisition on October 1, 2010, the Company entered into a second amended and restated credit agreement dated as of October 1, 2010, as amended (“Term Loan Agreement”), with Obsidian, LLC (“Obsidian”), as agent, and Special Value Expansion Fund, LLC, Special Value Opportunities Fund, LLC and Tennebaum Opportunities Partners V, LP, as lenders (collectively the “Term Lenders”). Tennebaum Capital Partners, LLC (“Tennebaum”), a private equity firm, manages the funds of the Term Lenders. Tennebaum also owns approximately 6.5% of the Company’s common stock as of September 30, 2011 and has held such interests in Dialogic Corporation since 2006. During the nine months ended September 30, 2011 and the year ended December 31, 2010, a Managing Partner for Tennebaum also served as a member of the Company’s Board of Directors. The Company incurred costs of $2.6 million paid in October 2010 to the Term Lenders in connection with the Term Loan Agreement, which was capitalized as debt issuance costs as of October 1, 2010.

As of September 30, 2011 and December 31, 2010, the Company had debt outstanding under the Term Loan Agreement (“Term Loan”) in the amount of $89.9 million and interest payable of $3.3 and $3.0 million, respectively. For the three and nine months ended September 30, 2011, the Company recorded interest expense of $4.2 million and $11.4 million, respectively, related to the Term Loan. The Company recorded $0.7 million and $1.7 million, respectively, including $0.5 million and $1.0 million in accelerated amortization of debt issuance costs related to the Term Loan, for the three and nine months ended September 30, 2011 and $1.4 million and $3.0 million, respectively, for the three and nine months ended September 30, 2010, of amortization charges for deferred debt issuance costs. For the nine months ended September 30, 2011 and 2010, the Company paid cash of $9.5 million and $6.1 million, respectively, related to interest expense on the Term Loan.

The following table summarizes the debt at September 30, 2011 and December 31, 2010 (in thousands):


	September 30, 2011		December 31, 2010
Term Loan (1)	$	89,875	$	89,875
Shareholder loans		3,000		3,000
Accrued interest payable - term loans		3,258		2,953
Accrued interest payable - shareholder loans		1,566		936

Total debt, related parties	$	97,699	$	96,764

(1)

Presented as short-term in the accompanying condensed consolidated financial statements as of September 30, 2011.

Term Loan Agreement

Principal Amount and Maturity. A term loan in the principal amount of $89.9 million was outstanding at each of September 30, 2011 and December 31, 2010 under the Term Loan Agreement with an original maturity date of September 30, 2013.

Voluntary and Mandatory Prepayments. The Term Loan may be prepaid, in whole or in part, from time to time, subject to payment of, if prepaid after the first but prior to the second anniversary of the closing date, a premium of 5% and, if prepaid after the second anniversary of the closing date, a premium of 2%.

The Company is required to offer to prepay the Term Loan out of the net proceeds of certain asset sales (including asset sales by the Company) at 100% of the principal amount of Term Loan prepaid, plus the prepayment premiums described above, subject to the Company’s right to reinvest some or all of the net proceeds in its business in lieu of prepayment. The Company is also required to prepay the Term Loans out of net proceeds from certain equity issuances, at 50% plus the prepayment premiums.

Interest Rates. The term loans bear interest, payable quarterly in cash, at a rate per annum equal to LIBOR (but in no event less than 2%) plus an applicable margin. The margin, which is currently 11%, is based on the Company’s consolidated net leverage ratio. Upon the occurrence and continuance of an event of default, the Term Loan will bear interest at a default rate equal to the applicable interest rate plus 2%. The aggregate interest rate was 15% at September 30, 2011 and 13% at December 31, 2010.

Dialogic Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Guarantors. The Term Loan is guaranteed by Dialogic as well as Dialogic Corporation, Dialogic Networks (Israel) Ltd., and Veraz Networks LTDA, all wholly owned subsidiaries of the Company (collectively, the “Term Loan Guarantors”), with the exception of certain subsidiaries organized under the laws of countries other than the United States or Canada and certain immaterial U.S. subsidiaries that the Company has covenanted to wind-down and dissolve.

Security. The term loans are secured by a pledge of all of the assets of the Company and of the Term Loan Guarantors, including all intellectual property, accounts receivable, inventory and capital stock in the Company’s direct and indirect subsidiaries (except for certain subsidiaries organized under the laws of countries other than the United States or Canada). The security interest of the Term Lenders in inventory, accounts receivable and related property of the Company and the Term Loan Guarantors is subordinated to the security interest of the Revolving Credit Lender in those assets.

Other Terms. The Company and its 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.

Term Loan Agreement Covenants

The following summarizes the financial covenants as defined in the Term Loan Agreement at September 30, 2011 and December 31, 2010:

•

Minimum Liquidity — Defined as liquidity consisting principally of cash and cash equivalents as adjusted, of at least $30.0 million as of September 30, 2011, December 31, 2011, March 31, 2012 and September 30, 2012; and $35.0 million as of September 30, 2012 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 $28.5 million for the four quarters ending September 30, 2011, which is the first test period for this covenant; $30.0 million for the four quarters ending December 31, 2011, March 31, 2012 and June 30, 2012; $32.5 million for the four quarters ending September 30, 2012, December 31, 2012, March 31, 2013 and June 30, 2013; $35.0 million for the four quarters ending September 30, 2013.

•

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 2 to 1 for the four quarters ending September 30 2011, which is the first test period for this covenant, December 31 2011, March 31, 2012 and June 30, 2012, and 2.5:1 ratio for the four quarters ending September 30, 2012 and thereafter.

•

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 3.65 to 1 for the four quarters ending September 30, 2011, which is the first test period for this covenant; ratio of 3.5 to 1 for the four quarters ending December 31 2011, March 31, 2012 and June 30, 2012; ratio of 3.0 to 1 for the four quarters ending September 30, 2012, December 31, 2012, March 31, 2013 and June 30, 2013; ratio of 2.5:1 for the four quarters ending September 30, 2013.

As of September 30, 2011, the Company was not in compliance with any of the covenants under the Term Loan Agreement. In the event that the Company breaches any of the financial covenants under the Term Loan Agreement, the Term Lenders could accelerate the maturity date of the principal and the accrued interest to be immediately due and payable. At September 30, 2011, this amounted to $89.9 million for the Term Loan and $3.3 million in accrued interest payable. In March 2011, the Company obtained a letter from the Term Loan Lenders confirming that they will not under any circumstance accelerate the maturity date of the Term Loan prior to January 15, 2012. Accordingly, the $89.9 million debt has been classified as a current liability in the accompanying September 30, 2011 unaudited condensed consolidated balance sheet.

Stockholder Loans

At each of September 30, 2011 and December 31, 2010, the Company had $3.0 million in long-term debt payable to certain stockholders of the Company, including the Company’s Chief Executive Officer and members of the Company’s Board of Directors, bearing interest at an annual rate of 20% compounded monthly in form of Payment-in-Kind (“PIK”) interest and repayable nine

Dialogic Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

months from the original maturity date of the Term Loan Agreement, which would be in March 2014. During the three and nine months ended September 30, 2011, the Company recorded interest expense of $0.2 million and $0.6 million, respectively, related to these stockholder loans. There are no covenants or cross default provisions associated with these stockholder loans. Total accrued interest as of September 30, 2011 and December 31, 2010 was $1.6 million and $0.9 million, respectively.

In the event that the Company consummates an equity financing before the stockholder loans are repaid, the noteholders, at their option, may convert all of the stockholder loan amounts, including accrued PIK interest payable, into equity at the same rate and terms agreed to with other investors. The stockholder loan convertible option will apply solely to the first equity financing event consummated after October 1, 2010.

Note 10 – Restructuring Charges

In a continued effort to consolidate certain operations across all organizations, the Company incurred employee termination costs for severance and benefits aggregating to $1.7 million and $2.9 million during the three and nine months ended September 30, 2011, respectively, resulting from the termination of approximately 36 and 58 individuals during the three and nine month periods ended September 30, 2011. During the second quarter of 2011, the Company vacated its Salem, New Hampshire facility and accrued $0.1 million in non-cancellable lease obligations. In addition, the Company vacated a portion of its New Jersey facilities during the first quarter of 2011 and has accrued $3.5 million for the non-cancellable lease obligations and related costs associated with the vacated space.

Restructuring activity for the nine months ended September 30, 2011 was as follows (in thousands):


	Employee Termination/ Severance and Related Costs			Facilities Costs			Total
Balance at December 31, 2010	$	1,690		$	—			1,690
Charges to operations		2,875			3,546			6,421
Payments made during the period		(2,519	)		(398	)		(2,917	)

Balance at September 30, 2011	$	2,046		$	3,148		$	5,194

As of September 30, 2011, approximately $2.5 million of accrued restructuring expenses was included as a component of current accrued liabilities and $2.7 million was classified as long-term liabilities in the accompanying unaudited condensed consolidated balance sheets. As of December 31, 2010, $1.7 million was included in the Company’s current accrued liabilities. The Company expects to pay $0.9 million in employee related costs through December 31, 2011 and the remaining costs of $1.1 million during the fiscal year ending December 31, 2012. The Company expects to pay $0.2 million in facilities costs through December 2011 and the remaining amounts totaling $3.0 million over the lease periods ending in 2015. During the three and nine months ended September 30, 2010, the Company incurred employee termination costs for severance and benefits aggregating to $0.5 million.

Dialogic Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Note 11 – Stock-Based Compensation

Stock-Based Compensation

The following table summarizes the effects of stock-based compensation (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2011		2010		2011		2010
Cost of revenues	$	89	$	—	$	245	$	—
Research and development		239		—		565		—
Sales and marketing		234		—		775		—
General and administrative		198		1,654		743		1,654

Total stock-based compensation expense	$	760	$	1,654	$	2,328	$	1,654

During the quarter ended September 30, 2010, the Company recognized approximately $1.7 million of stock based compensation expense relating to 325,200 liability based awards. The expense resulted from the change in the value of the liability awards, arising primarily during the quarter, from the closing of the reverse acquisition transaction referred to in Note 4.

Stock Award Activity

A summary of the Company’s stock award activity and related information for the nine months ended September 30, 2011 is set forth in the following table (in thousands except for exercise price amounts):


	Number of Shares Available for Grant			Number of Options Outstanding			Weighted Average Exercise Price		Weighted Average Contractual Life (In Years)		Aggregate Intrinsic Value
	(in 000's)			(in 000's)							(in 000's)
Balance at December 31, 2010		604			2,250		$	5.93
Authorized		1,935			—
Restricted stock units granted		(570	)		—
Restricted stock units cancelled and forfeited		26			—
Options granted		(750	)		750		$	3.76
Options exercised		—			(105	)	$	1.43
Options cancelled and forfeited		303			(303	)	$	7.81

Balance at September 30, 2011		1,548			2,592		$	5.26		6.27	$	208

Options vested and expected to vest at September 30, 2011					2,476		$	5.33		6.12	$	208
Options exercisable at September 30, 2011					1,667		$	5.74		4.65	$	208

The total intrinsic value of options exercised was $0.3 million and zero during the nine months ended September 30, 2011 and 2010, respectively.

As of September 30, 2011, the balance of $2.7 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 2.9 years. As of September 30, 2011, the balance of $2.7 million of total unrecognized compensation costs related to non-vested restricted stock units granted to employees and directors is expected to be recognized over a weighted average period of 1.6 years.

Dialogic Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Stock Options

During the three months and nine months ended September 30, 2011 and 2010, the Company granted the following stock options:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2011		2010		2011		2010
Options granted (in 000's)		350		—		750		—
Weighted-average grant date fair value per share	$	1.98		—	$	2.86		—

During the three months ended September 30, 2011 and 2010, the stock-based compensation expense on stock options amounted to $0.3 million and $1.7 million, respectively. During the nine months ended September 30, 2011 and 2010, the stock-based compensation expense on stock options amounted to $1.2 million and $1.7 million, respectively.

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 based on the historical and implied volatility of comparable companies from a representative peer group based on industry and market capitalization data. A peer group is used in the determination of volatility because the Company has only one year of historic stock prices. 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, 2011 and 2010, respectively:


	Three Months Ended September 30,					Nine Months Ended September 30,
	2011			2010		2011			2010
Expected term (in years)		6.00			—		6.00			—
Risk -free interest rate		1.16	%		—		1.67	%		—
Volatility		95.00	%		—		89.00	%		—
Dividend yield		—			—		—			—

Restricted Stock Awards

Due to the acquisition on October 1, 2010, the Company assumed the former Veraz Networks, Inc. restricted stock award plan which resulted in 296,000 restricted stock units (“RSUs”) being assumed. During the three and nine months ended September 30, 2011, the Company granted zero and 570,130 RSUs, respectively. For the three months and nine months ended September 30, 2010, Dialogic Corporation did not have a restricted stock award plan.

Dialogic Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Restricted stock activity for the period December 31, 2010 to September 30, 2011 was as follows:


	Number of Shares (in 000's)			Weighted Average Grant Date Fair Value
Nonvested at December 31, 2010		274		$	4.97
Granted		570		$	5.12
Vested		(113	)	$	4.17
Forfeited or expired		(26	)	$	4.74

Nonvested at September 30, 2011		705		$	4.82

For the three and nine months ended September 30, 2011, the stock-based compensation expense on restricted stock based awards amounted to $0.4 million and $1.1 million, respectively.

As of September 30, 2011, 704,782 shares of restricted stock awards were outstanding and unvested, with an aggregate intrinsic value of $3.4 million. As of December 31, 2010, 274,000 shares of restricted stock based awards were outstanding and unvested, with an aggregate intrinsic value of $1.4 million. During the three and nine months ended September 30, 2011, the aggregate intrinsic value of vested restricted stock awards was $0.2 million and $0.5 million, respectively.

Generally, RSUs 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.

Stock Purchase Plan

On June 29, 2006 the stockholders approved the 2006 Employee Stock Purchase Plan (“2006 ESPP”) and reserved 480,281 shares of common stock for issuance thereunder. In May, 2011, the 2006 ESPP was amended by the Company’s stockholders to increase the shares available for issuance thereunder by 500,000 shares. As of September 30, 2011, no shares have been issued under this plan and 980,281 shares remained available for issuance under the 2006 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 2006 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 2006 ESPP commenced on June 1, 2011. No employees elected to purchase shares under the ESPP through September 30, 2011.

Note 12 – Net Loss per Share

Net loss per share is computed by dividing the net loss by the weighted average number of shares of common stock outstanding during the period. The Company has outstanding stock options and RSUs, 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.

Dialogic Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Basic and diluted net loss per share were calculated as follows (in thousands, except per share data):


	Three Months Ended September 30,						Nine Months Ended September 30,
	2011			2010			2011			2010
Numerator:
Net loss	$	(13,098	)	$	(14,501	)	$	(45,646	)	$	(25,361	)
Change in redemption value of preferred shares		—			(3,047	)		—			(3,047	)

Net loss attributable to common shareholders	$	(13,098	)	$	(17,548	)	$	(45,646	)	$	(28,408	)

Denominator:
Basic and diluted weighted-average shares:
Weighted-average shares used in computing basic and diluted net loss per share		31,344			7,652			31,283			7,652

Net loss per share - basic and diluted	$	(0.42	)	$	(2.29	)	$	(1.46	)	$	(3.71	)

Pursuant to the terms of the Acquisition Agreement, Dialogic acquired all of the outstanding common and preferred shares of Dialogic Corporation in consideration of the issuance of shares of Dialogic common stock. The Dialogic Corporation shareholders received an aggregate of 22.1 million of Dialogic common stock, of which 14.5 million shares were received by the Class A, B and C preferred shareholders. The holders of Class A, B and C preferred shares had the right to demand redemption of their shares from Dialogic Corporation at specified dates. The redemption price was determined to be the higher of the original subscription price or fair value as determined by the Board of Directors. According to the Acquisition Agreement, on October 1, 2010 Dialogic’s Class A, B and C preferred shares were redeemed and converted into common shares of 7.2 million, 4.2 million and 3.1 million, respectively, at the applicable conversion factors in the Acquisition Agreement. The authoritative accounting guidance for redeemable stock requires the Company to record the shares at full redemption value at each balance sheet date as redemption of those securities is not solely within the control of the Company. In the absence of retained earnings or additional paid-in capital, increases to the redemption value of the securities are charged to paid-in capital (common stock). During the three and nine months ended September 30, 2010, the Company recorded increases in the redemption values of the redeemable equity totaling $3.0 million.

Note 13 – 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 the Office of the Chief Scientist (“OCS”). In return for the OCS’s participation, the Company’s Israeli subsidiary 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 based on 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. During the three and nine months ended September 30, 2011, the Company received $0.4 million and $1.3 million, respectively, in grants. 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, net of royalties paid 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 was $0.3 million and zero for the three months ended September 30, 2011 and 2010, respectively, and $0.9 million and zero for the nine months ended September 30, 2011 and 2010, respectively. As of September 30, 2011 and December 31, 2010, the royalty payable amounted to $0.9 million and $0.8 million, respectively. The maximum amount of the contingent liability related to the grants received net of royalties paid and payable (excluding interest) to the Israeli Government was approximately $17.1 million and $17.3 million as of September 30, 2011 and December 31, 2010, respectively.

Dialogic Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(b) Indemnification Obligations

Agreements between the Company and its customers under which its customers purchase or license products generally have indemnification provisions under which the Company selling or licensing the products is obliged to defend third party claims against the customer arising as a result of the Company’s products infringing or misappropriating third party intellectual property rights. Depending on the customer and the nature of the agreement, these claims may or may not have a monetary limitation and generally would not cover indirect, special or punitive damages. These clauses are always contingent on the Company selling or licensing the products being allowed to have full authority to defend or settle the claim with the customer’s assistance and subject to industry standard carve-outs such as the Company not being responsible for infringement arising as a result of the Company’s products being combined with third party technology or arising as a result of the Company or a third parties modification of the Company product concerned. In some agreements, the Company selling or licensing the product to the customer has accepted indemnification obligations related to damages caused by the Company’s product or employees which result in death or personal injury or damages as to property. Generally when these provisions are included they are reciprocal and subject to various limitations and carve-outs. The Company has received no indemnification claims in any of the years included in these accompanying unaudited condensed consolidated financial statements, and the Company has no current expectation of significant claims related to existing contractual indemnification obligations.

The Company enters into agreements in the ordinary course of business with, among others, customers, systems integrators, resellers, service providers, lessors, sub-contractors, sales representatives, and parties to other transactions with the Company, with respect to certain matters. Most of these agreements require the Company to indemnify the other party against third party claims alleging that its product infringes a patent or copyright. Certain of these agreements require the Company to indemnify the other party against losses arising from: a breach of representations or covenants, claims relating to property damage, personal injury or acts or omissions of the Company, its employees, agents, or representatives. In addition, from time to time the Company has made certain guarantees regarding the performance of its products to its customers.

The duration and scope of these indemnities, commitments, and guarantees varies, and in certain cases, is indefinite.

(c) 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. At September 30, 2011 and December 31, 2010, the maximum potential amount of future payments the Company could be required to make under the guarantees, amounted to $1.5 million and $1.6 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.

Note 14 – 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 table sets forth revenues by major product group and geographic areas, and long-lived assets and goodwill by geographic area (in thousands):

Dialogic Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(a) Revenues by major product group


	Three Months Ended September 30,				Nine Months Ended September 30,
	2011		2010		2011		2010
Products	$	36,604	$	37,243	$	118,428	$	115,051
Services		10,817		2,517		29,644		8,270

Total revenues	$	47,421	$	39,760	$	148,072	$	123,321

(b) Revenues were derived from customers located in the following geographic areas


	Three Months Ended September 30,				Nine Months Ended September 30,
	2011		2010		2011		2010
Americas
United States	$	17,072	$	20,664	$	59,556	$	62,898
Other		3,526		217		8,220		451

Total Americas		20,598		20,881		67,776		63,349
Europe, Middle East, Africa		16,651		9,734		51,193		32,675
Asia Pacific		10,172		9,145		29,103		27,297

Total revenues	$	47,421	$	39,760	$	148,072	$	123,321

(c) Long-lived assets and goodwill by geographic area are as follows


	September 30, 2011		December 31, 2010
Americas:
United States	$	37,384	$	41,214
Canada		36,969		44,974
Other foreign countries		2,233		2,592

Total long-lived assets	$	76,586	$	88,780

Note 15 – Income Taxes

The Company recorded an income tax benefit of $0.6 million and a provision of $0.3 million for the three months ended September 30, 2011 and 2010, respectively. The Company recorded an income tax provision of $0.6 million and $0.7 million for the nine months ended September 30, 2011 and 2010, respectively. For the three months ended September 30, 2011 and 2010, the Company’s effective tax rate was approximately 4.1% and -1.8%, respectively. For the nine months ended September 30, 2011 and 2010, the Company’s effective tax rate was approximately -1.3% and -2.9%, respectively. The effective tax rate is significantly different from the statutory rate as the Company is not benefiting from current losses. The tax provision during the nine months ended September 30, 2011 was primarily attributable to the Company’s profitable foreign operations which was partly offset by a decrease in a reserve for uncertain tax positions. The tax provision during the nine months ended September 30, 2010 was primarily attributable to a reserve for uncertain tax positions and profitable foreign operations.

The Company’s net deferred tax assets were zero at both September 30, 2011 and December 31, 2010. As a result of its history of cumulative losses and uncertainty regarding future taxable income, Dialogic has determined, based on all available evidence, that there is substantial uncertainty as to the realizability of the deferred tax assets in future periods and accordingly, Dialogic maintained a full valuation allowance against its net deferred tax assets as of September 30, 2011.

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 2010.

Dialogic Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Unrecognized tax benefits represent uncertain tax positions for which reserves have been established. As of September 30, 2011 and December 31, 2010, the total liability for unrecognized tax benefits was $2.7 million and $3.2 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, 2011, the unrecognized tax benefits decreased by $0.5 million due to the expiration of the statute of limitations.

Note 16 – Settlement Agreement

In August 2008, the Company’s subsidiary Cantata Technology, Inc. (“Cantata”) filed a complaint against InterMetro Communications, Inc. (“InterMetro”) before the District Court for the District of Massachusetts USDC Civil Action No. 08-11371(PBS). InterMetro filed a counterclaim against Cantata and instituted a third party claim against the Company. A settlement agreement (“Settlement Agreement”) was reached in the matter and signed on January 29, 2010, the terms of which are confidential. In January 2010, the Company recorded the gain on the settlement, $0.5 million as other income in the accompanying 2010 unaudited condensed consolidated statements of operations. However under the Settlement Agreement, all counterclaims against Cantata and third party claims against Dialogic were dropped. The Settlement Agreement was entered by the District Court under seal and the case was officially closed on February 19, 2010.

Note 17 – Supplemental information

(a) Supplemental statement of operations information (in thousands):

Depreciation and amortization expenses are included in the following captions in the consolidated statements of operations:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2011		2010		2011		2010
Depreciation expense
Cost of sales	$	91	$	26	$	293	$	77
Research and development		437		300		1,299		847
Sales and marketing		15		7		96		23
General and administrative		664		862		1,998		2,668

Total depreciation expense	$	1,207	$	1,195	$	3,686	$	3,615

Amortization expense
Cost of sales	$	2,055	$	2,259	$	6,179	$	6,826
Sales and marketing		1,254		1,581		3,789		4,751
General and administrative		147		45		408		121

Total amortization expense	$	3,456	$	3,885	$	10,376	$	11,698

Interest expense
Bank indebtedness	$	176	$	65	$	541	$	517
Long-term debt, related parties		3,716		3,778		10,476		10,730
Amortization of debt issuance costs (including acceleration)		801		1,503		2,208		3,119

Total interest expense	$	4,693	$	5,346	$	13,225	$	14,366

(b) Valuation and qualifying accounts (in thousands):


	Balance at December 31, 2010		Additions charged to revenues or expenses		Deductions			Balance at September 30, 2011
Accounts receivable allowances	$	3,721	$	308	$	(212	)	$	3,817
Inventory obsolescence	$	7,000	$	1,449	$	(2,049	)	$	6,400
Warranty reserve	$	384	$	113	$	(184	)	$	313
Distributor price adjustments	$	2,707	$	8,225	$	(8,718	)	$	2,214
Sales returns and related reserves	$	2,040	$	8,064	$	(8,824	)	$	1,280

Dialogic Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Note 18 – SEC Investigation

On March 28, 2011, the Company received a letter from the SEC informing it that the SEC was conducting an informal inquiry (the “SEC Inquiry”) and requesting that the Company preserve certain categories of records in connection with the SEC 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 Foreign Corrupt Practices Act violations of the former Veraz Networks Inc. business during periods prior to completion of its business combination with Dialogic Corporation. 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 Company is cooperating fully with the SEC Inquiry and intends to continue to do so. 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.

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, 2010, in our Annual Report on Form 10-K, filed with the Securities and Exchange Commission on March 31, 2011. 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

Dialogic Inc. is a leading provider of communications platforms and technology that enable developers and service providers to build and deploy innovative applications without concern for the complexities of the communication medium or network. We provide reliable, cost-effective and secure communications solutions that enable enterprises and service providers to shift to Internet Protocol, or IP, based communications while still maintaining existing Time Division Multiplexing, or TDM, networks. Additionally, we provide multimedia engines for video, voice, conferencing and facsimile solutions. Enterprises rely on our innovative IP, transitional hybrid and flexible TDM boards, software and gateway products to enable the integration of new IP technologies into existing communications networks. Representative applications that are enabled by our technology include: Unified Communications/Unified Messaging, Short Message Service, or SMS, and Video SMS, Mobile Video Messaging, Voicemail/Videomail, interactive voice response and interactive voice and video response solutions, and Audio and Video Conferencing. We also provide voice infrastructure solutions for established and emerging wireline and wireless service providers. Service providers use our products to transport, convert and manage data and voice traffic over both TDM and IP networks while enabling Voice Over Internet Protocol and other multimedia services. We sell into the enterprise and service provider communications market both directly and indirectly through distribution partners such as telecommunications equipment vendors, value added resellers, or VARs, and other channel partners.

Business Combination with Dialogic Corporation

On October 1, 2010, we completed our business combination with Dialogic Corporation, a British Columbia Corporation, in accordance with the terms of an acquisition agreement dated May 12, 2010, or the Acquisition Agreement. Pursuant to the Acquisition Agreement, we acquired all of Dialogic Corporation’s outstanding common and preferred shares in exchange for an aggregate of approximately 22.1 million shares of our common stock, after giving effect to the stock split described below and, accordingly Dialogic Corporation became our wholly-owned subsidiary. All outstanding options to purchase Dialogic Corporation common shares were cancelled and new options to purchase our common stock were granted. Each option to purchase Dialogic Corporation common shares became an option to acquire that number of shares of our common stock equal to the product obtained by multiplying the number of shares in the capital of Dialogic Corporation subject to the option by 0.9, rounded down to the nearest whole share of our common stock. Each option to purchase our common shares has a purchase price per share of our common stock equal to the exercise price per share (in U.S. dollars) for the Dialogic Corporation option immediately prior to October 1, 2010 divided by 0.9, rounded up to the nearest whole cent. After taking into account the issuance of stock options to purchase our common stock in exchange for Dialogic Corporation options, as of October 1, 2010, the former Dialogic Corporation stockholders and option holders held approximately 70% and our existing stockholders held approximately 30% of our outstanding securities. As of October 1, 2010, there were approximately 31 million shares of our common stock issued and outstanding, after taking into account the effect of the one-for-five reverse stock split approved by the our stockholders on September 30, 2010 and effected on October 1, 2010. As of October 1, 2010, we changed our name from Veraz Networks, Inc. to Dialogic Inc. and on October 4, 2010, our common stock began trading on The NASDAQ Global Market under the symbol “DLGC”. Our business combination with Dialogic Corporation was accounted for as a reverse acquisition under the purchase method of accounting whereby Dialogic Corporation was considered the accounting acquirer in accordance with U.S. generally accepted accounting principles or U.S. GAAP.

All common stock share and per share data presented have been retroactively restated to give effect to the reverse stock split. Also, all common stock and per share data reflects the legal capital of the former Veraz Networks, Inc. retroactively adjusted for the exchange ratios in the Acquisition Agreement to reflect the number of shares received in the business combination.

Existing Debt Obligations

We have related party long-term debt under a Term Loan Agreement and Shareholder Loans, and bank indebtedness with a Revolving Credit Agreement.

Term Loan Agreement

In connection with the consummation of the business combination between us and Dialogic Corporation, we entered into a second amended and restated credit agreement dated as of October 1, 2010, as amended, or the Term Loan Agreement, with Obsidian, LLC, as agent, and Special Value Expansion Fund, LLC, Special Value Opportunities Fund, LLC and Tennebaum Opportunities Partners V, LP, as lenders, or, collectively, the Term Lenders.

Principal Amount and Maturity. At September 30, 2011 and December 31, 2010, term loan in the principal amount of $89.9 million were outstanding under the Term Loan Agreement, or the Term Loan, with an original maturity of September 30, 2013.

Voluntary and Mandatory Prepayments. The Term Loan 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 make-whole amount that includes a 5% premium, (ii) if prepaid after the first but prior to the second anniversary of the closing date, a premium of 5% and (iii) if prepaid after the second anniversary of the closing date, a premium of 2%.

We are required to offer to prepay the Term Loan out of the net proceeds of certain asset sales (including asset sales by us) at 100% of the principal amount of Term Loan prepaid, plus the prepayment premiums described above, subject to our right to reinvest some or all of the net proceeds in its business in lieu of prepayment. We are also required to prepay the Term Loan out of net proceeds from certain equity issuances, at 50% plus the prepayment premiums. If we raise at least $50.0 million within the first year of the loan agreements, 100% of the net proceeds are to be applied against the Term Loan, with a prepayment premium of 2%.

Interest Rates. The Term Loan bears interest, payable in cash, at a rate per annum equal to LIBOR (but in no event less than 2%) plus an applicable margin. The margin, which is currently 11%, is based on our consolidated net leverage ratio. Upon the occurrence and continuance of an event of default, the Term Loan will bear interest at a default rate equal to the applicable interest rate plus 2%. At September 30, 2011, the interest rate was 15% on the aggregate of the Term Loan.

Guarantors. The Term Loan is guaranteed by Dialogic, Dialogic Corporation, Dialogic Networks (Israel) Ltd., and Veraz Networks LTDA, or, collectively the Term Loan Guarantors, with the exception of certain subsidiaries organized under the laws of countries other than the United States or Canada and certain immaterial U.S. subsidiaries that we have covenanted to wind-down and dissolve.

Security. The Term Loan is secured by a pledge of all of our assets and of the Term Loan Guarantors, including all intellectual property, accounts receivable, inventory and capital stock in our direct and indirect subsidiaries (except for certain subsidiaries organized under the laws of countries other than the United States or Canada). The security interest of the Term Lenders in inventory, accounts receivable and our related property and the Term Loan Guarantors is subordinated to the security interest of the Revolving Credit Lender in those assets.

Other Terms. We and our 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 our change in control without the Term Lenders consent.

Covenants. The following summarizes the financial covenants as defined in the Term Loan Agreement at September 30, 2011:

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Minimum Liquidity — Defined as liquidity consisting principally of cash and cash equivalents as adjusted, of at least $30.0 million as of September 30, 2011, December 31, 2011, March 31, 2012 and June 30, 2012; and $35.0 million as of September 30, 2012 and thereafter.

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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 $28.5 million for the four quarters ending September 30, 2011, which is the first test period for this covenant; $30.0 million for the four quarters ending December 31, 2011, March 31, 2012 and June 30 2012; $32.5 million for the four quarters ending September 30, 2012, December 31, 2012, March 31, 2013 and June 30, 2013; $35.0 million for the four quarters ending September 30, 2013.

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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 2 to 1 for the four quarters ending September 30 2011, which is the first test period for this covenant; December 31 2011, March 31, 2012 and June 30, 2012, and 2.5:1 ratio for the four quarters ending September 30, 2012 and thereafter.

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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 3.65 to 1 for the four quarters ending September 30, 2011, which is the first test period for this covenant; ratio of 3.5 to 1 for the four quarters ending December 31 2011, March 31, 2012 and June 30, 2012; ratio of 3:0 to 1 for the four quarters ending September 30, 2012, December 31, 2012, March 31, 2013 and June 30, 2013; ratio of 2.5:1 for the four quarters ending September 30, 2013.

As of September 30, 2011, we were not in compliance with any of the covenants under the Term Loan Agreement. In the event that we violate any of the financial covenants under the Term Loan Agreement, the Term Lenders could accelerate the maturity date of the principal and the accrued interest to be immediately due and payable. At September 30, 2011, this amounted to $89.9 million for the Term Loan and $3.3 million in accrued interest payable. In March 2011, we obtained a letter from the Term Loan Lenders confirming that they will not under any circumstance accelerate the maturity date of the Term Loan prior to January 15, 2012. Accordingly, the debt has been classified as a current liability in the accompanying unaudited September 30, 2011 condensed consolidated balance sheet.

Revolving Credit Agreement

We have a working capital facility under a credit agreement, dated as of March 5, 2008, as amended, or the Revolving Credit Agreement, with Wells Fargo Foothill Canada ULC, or the Revolving Credit Lender.

Revolving Credit Amount and Maturity. In connection with our business combination with Dialogic Corporation, the maturity date for the principal amount outstanding under the Revolving Credit Agreement, or the Revolving Credit Loans, was amended and extended to September 30, 2013. We may borrow, repay and reborrow Revolving Credit Loans from time to time provided that the aggregate principal amount of Revolving Credit Loans outstanding at any time does 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 us, which is referred to as the “borrowing base.”

As of September 30, 2011 and December 31, 2010, the borrowing base under the Revolving Credit Agreement amounted to $12.5 million and $16.3 million, respectively, we had borrowed $11.6 million and $12.8 million, respectively, and the unused line of credit totaled $13.3 and $12.2 million, respectively, of which $0.8 million and $3.5 million, respectively, was available for additional borrowings, respectively.

The commitment of the Revolving Credit Lender to make Revolving Credit Loans terminates and all outstanding Revolving Credit Loans are due on September 30, 2013. We may repay the Revolving Credit Loans at our option with 30 days’ notice to the Revolving Credit Lender.

Mandatory Prepayments. We are 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. In certain instances if we terminate and prepay the Revolving Credit Loans, such event may trigger a prepayment premium equal to (i) 1% if such event occurs prior to October 1, 2011 or (ii) 0.5% if such event occurs on or after October 1, 2011 and prior to October 1, 2012.

Interest Rates and Fees. The Revolving Credit Loans bear interest at a rate equal to, at our election, either (i) the prime rate plus 2.5% or (ii) the reserve-adjusted one-, two- or three- month LIBOR plus 4%. 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%. We pay the Revolving Credit Lender a monthly fee on the unused portion of the maximum amount available under the Revolving Credit Agreement, as well as a monthly collateral management fee.

Guarantors. The revolving credit loans are guaranteed by us, Dialogic Corporation, Cantata Technology, Inc., Dialogic Distribution Ltd., Dialogic Networks (Israel) Ltd. and Veraz Networks LTDA, or, collectively, the Revolving Credit Guarantors.

Security. The revolving credit loans are secured by a pledge of the assets of us and of the Revolving Credit Guarantors consisting of accounts receivable and inventory and related property. The security interest of the Revolving Credit Lenders is prior to the security interest of the Term Lenders in these assets, subject to the terms and conditions of an inter-creditor agreement.

Other Terms. We and our 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 our capital stock, entering into transactions with affiliates and making capital expenditures. The Revolving Credit Agreement contains customary events of default, including a change in our control.

Covenants. The following summarizes the Revolving Credit Agreement’s covenants and compliance status, as defined in the Revolving Credit Agreement, at September 30, 2011 and December 31, 2010:

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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 $28.5 million for the four quarters ending September 30, 2011, which is the first test period for this covenant; $30.0 million for the four quarters ending December 31, 2011, March 31, 2012 and June 30 2012; $32.5 million for the four quarters ending September 30, 2012, December 31, 2012, March 31, 2013 and June 30, 2013; and $35.0 million for the four quarters ending September 30, 2013.

At September 30, 2011, we were in default under the Revolving Credit Agreement. Specifically, we had breached all of the covenants under the Term Loan Agreement as of September 30, 2011, which constitutes a breach under the terms of the Revolving Credit Agreement, and the Minimum EBITDA covenant under the Revolving Credit Agreement. The original maturity date of the Revolving Credit Loan was September 30, 2013. On July 26, 2011, the we executed a Limited Waiver and Sixteenth Amendment to Credit Agreement with the Revolving Credit Lender, whereby the Revolving Credit Lender agreed not to accelerate the maturity date of any Revolving Credit Loans until the earliest of (i) January 15, 2012; (ii) the occurrence of any additional Event of Default or (iii) the occurrence of any Termination Event (as defined in the Term Loan Agreement). However, as of September 30, 2011, additional Events of Default had occurred and, accordingly, the Revolving Credit Lender currently has the right to accelerate the maturity date of the principal and the accrued interest under the Revolving Credit Agreement to be immediately due and payable and exercise all its remedies, including realizing against the collateral the Company has pledged to secure the loans outstanding under the Revolving Credit Agreement. During the nine months ended September 30, 2011, we amortized an additional $0.4 million of deferred debt issuance costs related to the breach of the Minimum Liquidity covenant.

On November 14, 2011, we executed a Forbearance Agreement with the Revolving Credit Lender whereby the Revolving Credit Lender agreed to forbear from exercising its right to accelerate the maturity date and its right to realize on its collateral before the earliest of (i) January 6, 2012; (ii) the occurrence of any additional Event of Default, which for this purpose includes the exercise by any third party of any rights or remedies against the Company or any of the Revolving Credit Guarantors; or (iii) the occurrence of any Termination Event.

Stockholder Loans

At each of September 30, 2011 and December 31, 2010, we had principal and accrued interest of $4.6 million and $3.9 million, respectively, in long-term debt payable to certain of our stockholders, or the Stockholder Loans, including our chief executive officer and members of our Board of Directors, bearing interest at an annual rate of 20% compounded monthly in form of a payment-in-kind. Or PIK, and repayable nine months from the maturity date of the Term Loan Agreement, which would be in March 2014. During each of the nine months ended September 30, 2011 and 2010, we recorded interest expense of $0.6 million related to the Stockholder Loans. There are no covenants or cross default provisions associated with the Stockholder Loans. Total accrued interest as of September 30, 2011 and December 31, 2010 was $1.6 million and $0.9 million, respectively.

If we consummate an equity financing before the Stockholder Loans are repaid, the noteholders, at their option, may convert all of the Stockholder Loan amount, including accrued PIK interest payable, into equity at the same rate and terms agreed to with other investors. This option to convert the Stockholder Loans will apply solely to the first equity financing event consummated after October 1, 2010.

Capital Resources

As of September 30, 2011, we had cash and cash equivalents of $9.0 million. Of our cash and cash equivalents of $9.0 million, approximately $7.6 million was held by our subsidiaries outside the U.S. and could be subject to tax implications if repatriated to the U.S. As of September 30, 2011, the aggregate principal amount of our outstanding indebtedness was $104.5 million, consisting of (i) $89.9 million under our Term Loan Agreement, (ii) $11.6 million under our Revolving Credit Agreement, and (iii) $3.0 million under the Stockholder Loans. As described in detail above, the amounts due under the Term Loan Agreement, Revolving Credit Agreement and Stockholder Loans have original maturity dates of September 13, 2013, September 30, 2013 and March 2014, respectively. However, because we are not in compliance with any of the covenants under the Term Loan Agreement and certain of the covenants under the Revolving Credit Agreement, the Term Lenders and Revolving Credit Lender may accelerate the maturity date of the Term Loan and Revolving Credit Loans, respectively, to be immediately due and payable. In March 2011, we obtained a letter from the Term Lenders confirming that they will not under any circumstances accelerate the maturity date of the Term Loan prior to January 15,

2012. On July 26, 2011, the Revolving Credit Lender agreed not to accelerate the maturity date of any Revolving Credit Loans until the earliest of (i) January 15, 2012; (ii) the occurrence of any additional Event of Default or (iii) the occurrence of any Termination Event (as defined in the Term Loan Agreement). However, as of September 30, 2011, additional Events of Default had occurred and, accordingly, the Revolving Credit Lender currently has the right to accelerate the maturity date of the principal and the accrued interest under the Revolving Credit Agreement to be immediately due and payable and exercise all its remedies, including realizing against the collateral we have pledged to secure the loans outstanding under the Revolving Credit Agreement. On November 14, 2011, we executed a Forbearance Agreement with the Revolving Credit Lender whereby the Revolving Credit Lender agreed to forbear from exercising its right to accelerate the maturity date and its right to realize on its collateral before the earliest of (i) January 6, 2012; (ii) the occurrence of any additional Event of Default, which for this purpose includes the exercise by any third party of any rights or remedies against the Company or any of the Revolving Credit Guarantors; or (iii) the occurrence of any Termination Event.

While we believe that our current cash resources, together with anticipated product and service revenues, would be sufficient to fund our operations, they are not sufficient to fund both our operations and payment of interest or repayment of principal on our outstanding indebtedness. In addition, we have based this estimate regarding the sufficiency of our cash resources on assumptions that may prove to be wrong, including assumptions with respect to the level of product and services revenues, and we could exhaust our available financial resources sooner than we currently expect. The sufficiency of our current cash resources, and our need for additional capital and the timing thereof, will depend on many factors, including primarily the amount of product and services revenues that we receive, as well as other factors set forth in Part II, Item 1A of this Quarterly Report on Form 10-Q.

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. 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.

We are currently seeking a number of financing and strategic alternatives and are in discussions with the Term Lenders and Revolving Credit Lender with respect to our current noncompliance with the covenants under the Term Loan Agreement and Revolving Credit Agreement, and the related potential acceleration of the maturity date of amounts outstanding under such agreements. There can be no assurance that we will be able to renegotiate the terms of and restructure our Term Loan and Revolving Credit Loans by their respective maturity dates on acceptable terms or at all, or that our lenders will agree to forbear exercising their remedies under such agreements beyond January 15 , 2012 in the case of the Term Lenders or January 6, 2012 in the case of the Revolving Credit Lender, or that we will be able to obtain sufficient financing or enter into other transactions to satisfy our existing debt obligations in a timely manner, or at all. We do not have sufficient cash resources to pay the amount that would become payable in the event of an acceleration of the Term Loan and Revolving Credit Loans, or either of them, and even if we could obtain additional financing, it is unlikely that we could obtain an amount sufficient to repay the Term Loan and Revolving Credit Loans in full. The Term Lenders and Revolving Credit Lender have security interests in all of our assets as described above and, in the event of an acceleration of our obligations under the Term Loan Agreement and Revolving Credit Agreement and our failure to pay the amounts that would then become due, the Term Lenders and Revolving Credit Lender 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.

In the event that we were to seek protection under the provisions of the U.S. Bankruptcy Code, 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 are required 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 our secured and unsecured creditors, including the Term Lenders, Revolving Credit Lenders and the holders of the Stockholder Loans, before any funds would be available to pay our stockholders, and it is uncertain if there would be any amounts available for our stockholders. If we are required to liquidate under the federal bankruptcy laws, it is highly unlikely that stockholders would receive any value for their shares.

In light of the circumstances described above, we are seeking to raise funds as soon as possible. We may seek to raise additional funds through public or private debt or equity financings or development financings. 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. Any additional equity financing would 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 soon 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.

We believe that we will continue as a going concern, and our financial statements have been prepared assuming that we will continue as a going concern, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from uncertainty related to our ability to continue as a going concern.

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. The accounting policies that we believe are the most critical to aid in fully understanding and evaluating our reported financial results, and which required the most subjective judgment by us, are the following:

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Revenue Recognition;

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Accounts Receivable and Allowance for Doubtful Accounts;

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Inventory Reserves;

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Impairment of Long-Lived Assets and Goodwill;

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Stock-Based Compensation;

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Accounting for Income Taxes; and

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Business Combinations.

Revenue Recognition

Revenue Recognition Criteria

Revenue derived from the sale of products and services is recognized when all of the following criteria are met:

(i)

Persuasive evidence of an arrangement exists — Our customary practice is to have a written contract, which is signed by both the customer and us, or a purchase order or other written or electronic order documentation for those customers who have previously negotiated a standard arrangement with us.

(ii)

Delivery has occurred — Delivery of hardware and software products generally occurs at the point of shipment when title and risk of loss have passed to the customer. However, some arrangements require evidence of customer acceptance of the hardware and software products that have been sold. In such cases, delivery of the software, hardware and services is not considered to have occurred until evidence of acceptance is received from the customer or we have completed our contractual requirements. Revenue from sales of standalone services, including training courses, is recognized when the services are completed. In certain arrangements involving subsequent sales of hardware and software products to expand a customers’ networks, the revenue recognition on these arrangements, after the initial arrangement has been accepted, typically occurs at the point of shipment since we have historically experienced successful implementations of these expansions and customer acceptance, although contractually required, does not represent a significant risk.

(iii)

The fee is fixed or determinable — We sell our products through our direct sales force and channel partners. In certain cases where the sales price cannot be reliably determined due to frequent sales price reductions or when returns cannot be estimated, the related fee is considered to be not fixed or determinable and revenue is deferred until such price reduction or return rights cease.

price, after delivery and acceptance of the software, hardware, and services, and assuming all other revenue recognition criteria are satisfied. For arrangements with contingent revenue provisions (a portion of the relative selling price of a delivered item is contingent upon the delivery of additional items or meeting other specified performance conditions), revenue recognized on delivered items is limited to the non-contingent amount. We defer the cost of inventory when products have been shipped, but have not yet been recognized as revenue, and expense those costs in full in the same period that the deferred revenue is recognized as revenue (generally upon customer acceptance). In arrangements for which revenue recognition is limited to amounts due or non-contingent amounts, all related inventory costs are expensed in full in the same period that the revenue is initially recognized, but no later than acceptance; this will initially result in lower or negative product margins and cause higher margins in subsequent periods, as compared to similar arrangements with customary payment terms.

(iv)

Collectability is probable — Collectability is assessed on a customer-by-customer basis. We evaluate the financial position, payment history, and ability to pay of new customers, and of existing customers that substantially expand their commitments. If it is determined prior to revenue recognition that collectability is not probable, recognition of the revenue is deferred and recognized upon receipt of cash, assuming all other revenue recognition criteria are satisfied. In arrangements for which revenue recognition is limited to amounts of cash received because of collectability concerns, all related inventory costs are expensed at the date of acceptance or delivery if no acceptance is required; this will initially result in lower or negative product margins and cause higher margins in subsequent periods, as compared to similar arrangements with customary payment terms.

Revenue Reserves and Adjustments

Sales incentives that are offered on some of our products are recorded as a reduction of revenue as there are no identifiable benefits received. We record a provision for estimated sales returns and allowances as a reduction from sales in the same period during which the related revenue is recorded. These estimates are based on historical sales returns and allowances, analysis of credit memo data and other known factors.

Sales returns and allowances are estimates based on historical sales returns and allowances, analysis of credit memo data, analysis of customer credit worthiness and other known factors.

We also have agreements with certain distributors which allow for stock rotation rights. The stock rotation rights permit the distributors to return a defined percentage of their purchases in exchange for orders of an equal or greater amount. We recognize an allowance for stock rotation rights based on historical experience. The provision is recorded as a reduction in revenues in the consolidated statements of operations.

We also have agreements with certain distributors that allow for price adjustments. We recognize an allowance for these price adjustments based on historical experience. The price adjustments are recorded as a reduction in revenue in the period during which the related revenue is recognized and are included in the accompanying statements of operations.

Revenues are recognized net of sales taxes. Revenues include amounts billed to customers for shipping and handling. Shipping and handling fees represented less than 1% of revenues in each of the nine months ended September 30, 2011 and 2010. Shipping and handling costs are included in cost of revenues.

Multiple Element Arrangements

In October 2009, the Financial Accounting Standards Board, or FASB, amended the accounting standards for revenue recognition to remove tangible products containing software components and non-software components that function together to deliver the product’s essential functionality from the scope of industry specific software revenue recognition guidance. In October 2009, the FASB also amended the standards for multiple deliverable revenue arrangements to:

(i)

(ii)

require an entity to allocate revenue where no vendor specific objective evidence, or VSOE, exists by using third party evidence of selling price, or TPE, or estimated selling prices, or ESP; and

(iii)

eliminate the use of the residual method and require an entity to allocate revenue using the relative selling price method.

This new accounting guidance became applicable to us beginning the first quarter of its fiscal year 2011. We adopted this guidance for transactions that were entered into or materially modified on or after January 1, 2011 using the prospective basis of adoption. Our

products typically have both software and non-software components that function together to deliver the products' essential functionality. Although our products are primarily marketed based on the software elements contained therein, the hardware sold generally cannot be used apart from the software. Therefore, we consider our principal hardware products to be subject to this new accounting guidance. Many of our sales involve multiple-element arrangements that include product, maintenance and various professional services. The adoption of the guidance discussed above affects our multiple-element arrangements when they contain tangible products (hardware) with software elements, which comprise the majority of our revenue transactions. We may enter into sales transactions that do not contain tangible hardware components, such as software-only add-on sales, which will continue to be subject to the previous software revenue recognition guidance in ASC 985-605.

The multiple-deliverable revenue guidance requires that we evaluate each deliverable in an arrangement to determine whether such deliverable would represent a separate unit of accounting.

The delivered item constitutes a separate unit of accounting when it has stand-alone value to the customer and there are no refunds or return rights for the delivered elements. If the arrangement includes a general refund or return right relative to the delivered item and the delivery and performance of the undelivered item are considered probable and substantially in our control, the delivered element constitutes a separate unit of accounting. In instances when the aforementioned criteria are not met, the deliverable is combined with the undelivered elements and revenue recognition is determined for the combination as a single unit of accounting. Most of our products and services qualify as separate units of accounting because they are sold separately or the customer could resell them on a standalone basis and, accordingly, revenue is recognized when the applicable revenue recognition criteria are met.

The total arrangement fees are allocated to all the deliverables based on their respective relative selling prices. The relative selling price is determined using VSOE, when available. We generally use VSOE to derive the selling price for its maintenance and professional services deliverables. VSOE for maintenance is based on contractual stated renewal rates while professional services are based on historical pricing for standalone professional service transactions. When VSOE cannot be established, we attempt to determine the TPE for the deliverables. TPE is determined based on competitor prices for similar deliverables when sold separately by the competitors. Generally our product offerings differ from those of our competitors and comparable pricing of our competitors is often not available. Therefore, we are typically not able to determine TPE. When we are unable to establish selling price using VSOE or TPE, we use ESP in our allocation of arrangement fees. The ESP for a deliverable is determined as the price at which we would transact if the products or services were sold on a standalone basis. The ESP for each deliverable is determined using average historical discounted selling prices based on several factors, including but not limited to, marketing strategy, customer considerations and pricing practices in a region. We use ESP to derive the relative selling price for our product deliverables.

The impact of applying the relative selling price method in the allocation of revenue, compared to previous revenue recognition methodologies, increased revenues for the three and nine months ended September 30, 2011 by approximately $1.7 million and nil, respectively. In terms of the timing and pattern of revenue recognition, the new accounting guidance for revenue recognition is not expected to have a significant effect on revenues in periods after the initial adoption when applied to multiple element arrangements. However, as our marketing and product strategies evolve, we may modify our pricing practices in the future, which could result in changes in selling prices, including both VSOE and ESP which could impact future revenues.

For transactions entered into prior to the first quarter of fiscal year 2011, we recognized revenue based on the software revenue recognition guidance in place during the period in which the order was received. When an arrangement involved multiple elements, such as hardware and software products, maintenance and/or professional services, we allocated the entire sales price to each respective element based on VSOE of the fair value for each element. When arrangements contained multiple elements and VSOE of fair value existed for all undelivered elements but not for the delivered elements, we recognized revenue for the delivered elements using the residual method. We based our determination of VSOE of the fair value of the undelivered elements based on substantive renewal rates of maintenance and support agreements, and on independently sold and negotiated service arrangements. In limited circumstances when arrangements containing multiple elements where VSOE of fair value did not exist for an undelivered element, we deferred revenue for the delivered and undelivered elements until VSOE of fair value existed for the undelivered elements or all elements had been delivered.

Accounts Receivable and Allowance for Doubtful Accounts

Generally, our receivables are recorded when billed and represent claims against third parties that will be settled in cash. The carrying value of the receivables, net of the allowance for doubtful accounts, represents their estimated net realizable value.

We maintain an allowance for doubtful accounts for estimated losses inherent in our accounts receivable portfolio. In establishing the required allowance, management considers historical losses, current receivable aging and evaluates individual customer receivables by considering our knowledge of a customer’s financial condition, credit history and current economic conditions. We write off trade receivables when they are deemed uncollectible. We review our allowance for doubtful accounts regularly. However, judgment is required to determine whether an increase or reversal of the allowance is warranted. We will record an increase of the allowance if there is a deterioration in past due balances, if economic conditions are less favorable than we had anticipated, or for customer-specific circumstances, such as bankruptcy. 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.

Inventory Reserves

Inventories are stated at the lower of cost or market, with cost being determined using the first-in, first-out method. In assessing the net realizable value of inventories, we are required to make judgments as to future demand requirements and compare these with the current or committed inventory levels. Once our inventory has been written down to its estimated net realizable value, our carrying value cannot be increased due to subsequent changes in demand forecasts. To the extent that a severe decline in forecasted demand occurs, or we experience a higher incidence of inventory obsolescence due to rapidly changing technology and customer requirements, we may incur significant charges for excess inventory.

Impairment of Long-lived Assets and Goodwill

Long-lived assets, such as property and equipment, and amortizable intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of would be separately presented in the balance sheet and reported at the lower of the carrying amount or fair value less costs to sell, and are no longer depreciated. The assets and liabilities of a disposal group classified as held for sale would be presented separately in the appropriate asset and liability sections of the balance sheet.

Intangible assets with indefinite useful lives are not amortized and are tested for impairment annually, or more frequently, if events or changes in circumstances indicate that the asset may be impaired. The impairment test compares the carrying amount of the intangible asset with its fair value, and an impairment loss is recognized for the excess, if any. The annual impairment testing is performed during the last quarter of the fiscal year.

Goodwill represents the excess of the purchase price over the fair value of the net assets acquired in a business acquisition. Goodwill is not subject to amortization and is tested for impairment annually or more frequently if events or circumstances indicate that the asset might be impaired. Impairment is identified by comparing the fair value of the reporting unit to which the goodwill relates to its carrying value. To the extent the carrying amount exceeds its fair value, we measure the amount of impairment by the excess of carrying value over the implied fair value of goodwill. The impairment is charged to income in the period in which it is determined. The annual impairment testing is performed during the last quarter of the fiscal year.

Considerable judgment is required to estimate discounted future operating cash flows. Judgment is also required in determining whether an event has occurred that may impair the value of intangible assets, long-lived assets and goodwill. Factors that could indicate an impairment may exist include significant underperformance relative to plan or long-term projections, changes in business strategy, significant negative industry or economic trends and a significant change in circumstances relative to a large customer. We must make assumptions about future cash flows, future operating plans, discount rates and other factors in the models and valuation reports. To the extent these future projections and estimates change, the estimated amounts of impairment could differ from current estimates. Our annual testing for impairment of goodwill and intangible assets with indefinite useful lives for 2010 and 2009 indicated that no impairment of goodwill or the intangibles existed.

Stock-Based Compensation

We use a generally accepted valuation option-pricing model to determine the fair value of stock options granted to our employees. This fair value is then amortized on a straight-line basis over the requisite service periods of the awards, which is generally the vesting period. Our valuation models require the input of highly subjective assumptions, which represents our best estimate. The following are the key assumptions used to determine the stock-based compensation expense:

•

Expected Stock Price Volatility — The computation of expected volatility is based on the historical and implied volatility of comparable companies from a representative peer group based on such factors as industry and market capitalization data.

•

Expected Term of Option — The expected term was determined using the simplified method.

•

Expected Dividend Yield — The dividend yield assumption is based on our history and expectation of dividend payouts. We use a dividend yield of zero, as we have never paid cash dividends and do not expect to pay dividends in the future.

•

Expected Risk Free Interest Rate — The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for the expected term of the option.

•

Forfeiture Rate — The forfeiture rate is based on a review of recent forfeiture activity.

Accounting for Income Taxes

We account for income taxes using the asset and liability approach, which requires the recognition of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in our financial statements or tax returns. The measurement of current and deferred tax liabilities and assets are based on provisions of the enacted tax law. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be more likely than not realized. As a result of recent cumulative losses and uncertainty regarding future taxable income, we have determined based on all available evidence, that there was substantial uncertainty as to the realizability of recorded net deferred tax assets in future periods. Accordingly, we have recorded a valuation allowance for 100% of our deferred tax assets.

We account for uncertainty in income taxes using a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount which is more than 50% likely to be realized upon ultimate settlement. An uncertain tax position is considered effectively settled on completion of an examination by a taxing authority if certain other conditions are satisfied.

Business Combinations

Amounts paid for each acquisition are allocated to the assets acquired and liabilities assumed based on their relative fair values at the date of acquisition. Fair value for the October 1, 2010 business combination was determined using the Income Approach (discounted cash flow approach) valuation methodology. Such valuations require management to make significant estimates and assumptions, especially with respect to the identifiable intangible assets. Management makes estimates of fair value based upon assumptions believed to be reasonable and that of a market participant. These estimates are based on historical experience and information obtained from the management of the acquired companies and are inherently uncertain. The separately identifiable intangible assets generally include technology and customer relationships. We estimate the fair value of deferred revenue related to product support assumed in connection with acquisitions. The estimated fair value of deferred revenue is determined by estimating the costs related to fulfilling the obligations plus a normal profit margin. The estimated costs to fulfill the support contracts are based on the historical direct costs related to providing the support. We then allocate the purchase price in excess of net tangible assets acquired to identifiable intangible assets based on detailed valuations that use information and assumptions provided by management. We allocate any excess purchase price over the fair value of the net tangible and intangible assets acquired and liabilities assumed to goodwill.

Results of Operations (amounts in 000’s)

Comparison of Three Months Ended September 30, 2011 and 2010

Revenues (amounts in thousands)


	Three Months Ended September 30,
	2011					2010					Period-to-Period Change
	Amount		% of Total Revenue			Amount		% of Total Revenue			Amount			Percentage
Revenues:
Products	$	36,604		77	%	$	37,243		94	%	$	(639	)		(2	)%
Services		10,817		23			2,517		6			8,300			330

Total revenues	$	47,421		100	%	$	39,760		100	%	$	7,661			19	%

Revenues by geography:
Americas	$	20,598		43	%	$	20,881		53	%	$	(283	)		(1	)%
Europe, Middle East and Africa		16,651		35			9,734		24			6,917			71
Asia Pacific		10,172		22			9,145		23			1,027			11

Total revenues	$	47,421		100	%	$	39,760		100	%	$	7,661			19	%

Revenues

Total revenues of $47.4 million for the quarter ended September 30, 2011 increased by 19% or $7.6 million from $39.8 million in the quarter ended September 30, 2010. Our product revenues were 77% of total revenues at $36.6 million for the quarter ended September 30, 2011 as compared to 94% of total revenues, or $37.2 million in the same quarter in 2010, a decrease of 2% or $0.6 million. Our services revenues were 23% of total revenues at $10.8 million in the three months ended September 30, 2011 as compared to 6% of total revenues, or $2.5 million in the three months ended September 30, 2010, an increase of 330% or $8.3 million.

Included in the total revenue increase is $15.3 million revenue attributable to the Dialogic Corporation acquisition, or the acquisition, completed in the last quarter of 2010 and is comprised of $7.9 million in product revenue and $7.4 million in services revenues. Revenues, excluding the acquisition, were $32.1 million, for the quarter ended September 30, 2011, which represented a decrease of 19%, or $7.7 million, from $39.8 million in the quarter ended September 30, 2010. The decrease is generally attributable to reduced demand for TDM products whose revenue decreased by 32% or $9.1 million, which was partly offset by a 6% or $0.5 million, increase in IP product revenues and a 34%, or $0.9 million, increase in services revenues.

Product Revenue

Product revenues of $36.6 million for the quarter ended September 30, 2011 decreased by 2%, or $0.6 million, from $37.2 million in the quarter ended September 30, 2010. Our TDM products were 54% of product revenues at $19.8 million in the three months ended September 30, 2011 as compared to 76% of product revenues, or $28.5 million in the three months ended 2010, representing a decrease of 31%, or $8.7 million. Included in product revenues for 2011 is an increase of $7.9 million due to the acquisition which was completed in the last quarter of 2010.

Product revenues, excluding the acquisition, were $28.7 million for the quarter ended September 30, 2011 representing a decrease of $8.5 million, or 23%, from $37.2 million in the quarter ended September 30, 2010. The decline resulted from lower customer demand for our TDM products. Our TDM product revenues are expected to decline as there is a gradual conversion of the telecommunication networks to our IP technology.

Service Revenue

Service revenues of $10.8 million for the quarter ended September 30, 2011 increased by 330%, or $8.3 million, from $2.5 million in the quarter ended September 30, 2010. Included in service revenues for the quarter ended September 30, 2011 is an increase of $7.4 million due to the acquisition which was completed in the last quarter of 2010.

Service revenues, excluding the acquisition, were $3.4 million for the quarter ended September 30, 2011 which increased by 36%, or $0.9 million, from $2.5 million in the quarter ended September 30, 2010. The increase in service revenue was the result of growth in our installed base of customers for IP products and a related increase in IP maintenance revenue.

Revenues by geography

The $7.6 million increase in total revenues for the quarter ended September 30, 2011 as compared to the quarter ended September 30, 2010 is attributable to an increase in sales of $6.9 million the Europe, Middle East and Africa region, and $1.0 million in the Asia Pacific region, which was partially offset by a decrease of $0.3 million in the Americas regions over the same periods.

Total revenues, excluding the acquisition, decreased by $7.7 million for the quarter ended September 30, 2011 compared to the same period of 2010, resulting from a decrease in sales in the Americas and Europe, Middle East and Africa regions. The Americas declined by $5.8 million, and Europe, Middle East and Africa revenues decreased by $1.9 million. The decrease in revenues is due to the decline in demand for our TDM products.

Americas:

Total revenues in the Americas decreased by $0.3 million to $20.6 million in the third quarter of 2011 from $20.9 million in the same period of the prior year. Included in the 2011 revenues for the Americas is $5.5 million due to the acquisition, which is comprised of $1.6 million related to IP product revenues and $3.9 million of services revenues.

In the Americas, our IP product revenues, excluding the acquisition, increased by 10%, or $0.5 million, to $5.0 million in the third quarter of 2011 as compared to $4.5 million in the same period of the prior year. Our TDM product revenues decreased by 43%, or $6.3 million, to $8.4 million in the third quarter of 2011 as compared to $14.7 million in the same period of the prior year. Services revenues increased by $0.1 million in the third quarter of 2011 to $1.7 million as compared to $1.6 million in the same period of the prior year.

Europe, Middle East and Africa:

Total revenues in the Europe, Middle East and Africa region increased by $6.9 million to $16.6 million in the third quarter of 2011 from $9.7 million in the same period of the prior year. Included within the revenues for the Europe, Middle East and Africa region in the third quarter of 2011 is $8.8 million from the acquisition which is comprised of $5.5 million of IP product revenues, $0.4 million of TDM product revenues, and $2.9 million of services revenues.

In Europe, Middle East and Africa, our IP product revenues, excluding the acquisition, decreased by 39%, or $1.1 million, to $1.7 million in the third quarter of 2011 as compared to $2.8 million in the same period in 2010. Our TDM product revenues decreased by 19%, or $1.2 million, to $5.2 million in the third quarter of 2011 as compared to $6.4 million in the same period in 2010. Services revenues increased by $0.4 million in the third quarter of 2011 to $0.9 million as compared to $0.5 million in the same period in 2010.

Asia Pacific:

Total revenues in the Asia Pacific region increased by $1.0 million to $10.1 million in the third quarter of 2011 from $9.1 million in the same period of the prior year. Included within the revenues for the Asia Pacific region in the third quarter of 2011 is $1.0 million from the acquisition which is comprised of IP product revenues of $0.4 million and services revenues of $0.6 million.

In Asia Pacific, our IP product revenues, excluding the acquisition, increased by $1.2 million to $2.6 million in the third quarter of 2011 from $1.4 million in the same period of the prior year. Our TDM product revenues decreased by 22%, or $1.7 million, to $5.7 million in the third quarter of 2011 as compared to $7.4 million in the same period in 2010. Services revenues increased by $0.4 million in the third quarter of 2011 to $0.7 million as compared to $0.3 million in the third quarter of 2010.

Cost of Revenue and Gross Margin


	Three Months Ended September 30,
	2011					2010					Period-to-Period Change
	Amount		% of Total Related Revenue			Amount		% of Total Related Revenue			Amount			Percentage
Cost of Revenues:
Products	$	13,700		38	%	$	15,092		41	%	$	(1,392	)		(9	)%
Services		5,358		50			2,121		84			3,237			153

Total cost of revenues	$	19,058		40	%	$	17,213		43	%	$	1,845			11	%

Gross Profit:
Products	$	22,904		62	%	$	22,151		59	%	$	753			3	%
Services		5,459		50			396		16			5,063			1,279

Total gross profit	$	28,363		60	%	$	22,547		57	%	$	5,816			26	%

Cost of Revenue

Total cost of revenues of $19.1 million for the quarter ended September 30, 2011 increased by 11%, or $1.9 million, from $17.2 million in the quarter ended September 30, 2010. Included in cost of revenues in the third quarter of 2011 is an increase of $6.0 million due to the acquisition completed in the last quarter of 2010.

Cost of product revenues of $13.7 million for the quarter ended September 30, 2011 decreased by 9%, or $1.4 million, from $15.1 million in the quarter ended September 30, 2010. Included in cost of product revenues in the third quarter of 2011 is an increase of $3.1 million due to the acquisition completed in the last quarter of 2010.

Cost of product revenues, excluding the acquisition, decreased by $4.5 million in the quarter ended September 30, 2011 as compared to the quarter ended September 30, 2010. The decrease in the quarter ended September 30, 2011 compared to the same period of 2010 is attributable to a decrease in product revenues of $8.6 million and is comprised of $2.6 million in lower outsourced product manufacturing costs due to a decline in product quantities ordered, lower depreciation and amortization expense by $0.1 million, and lower operations overhead of $0.6 million due to reduced headcount, and decreases in inventory charges of $1.2 million in the third quarter of 2011 as compared to the same quarter in 2010.

Cost of services revenues of $5.4 million for the quarter ended September 30, 2011 increased by 153%, or $3.3 million, from $2.1 million in the quarter ended September 30, 2010. Included in the cost of services revenues is an increase of $2.9 million due to the acquisition completed in the last quarter of 2010. Cost of services includes the direct costs of customer support and consists primarily of payroll, related benefits and travel for our support personnel.

Cost of services, excluding the acquisition, was $2.5 million for the quarter ended September 30, 2011 compared to $2.1 million for the quarter ended September 30, 2010. The cost increase in the third quarter of 2011 as compared to the third quarter of 2010 primarily results from an increase in headcount as well as the reinstatement of our employees to full pay in 2011 from the salary reduction initiative in 2009.

Gross Profit

Gross profit of $28.4 million for the quarter ended September 30, 2011 increased by 26%, or $5.9 million, from $22.5 million in the quarter ended September 30, 2010. Included within the gross profit is an increase of $9.4 million due to the acquisition completed in the last quarter of 2010.

As a percentage of product revenue, product gross profit was 62% in the three months ended September 30, 2011 compared to 59% in the comparable period in 2010. The increase in product gross profit is primarily attributable to the effect of lower outsourced product manufacturing costs.

As a percentage of services revenue, services gross profit was 50% in the third quarter of 2011 as compared to 16% in comparable period in 2010. The acquisition contributed to the services gross profit increase as the former Veraz Networks Inc. had higher profit associated with its service revenues.

For the quarter ended September 30, 2011, gross profit, excluding the acquisition, decreased by 16%, or $3.5 million, from $22.5 million for the quarter ended September 30, 2010 to $19.0 million for the quarter ended September 30, 2011. The decrease is primarily a result of a decline in product cost of revenues driven by a decrease in product revenues.

As a percentage of sales, excluding the acquisition, gross profit margin increased to 59% in the quarter ended September 30, 2011 compared to 57% in the comparable period in 2010, which is due to the decrease in cost of revenues driven by a decrease in revenues totaling $4.4 million which were partly offset by improvements in cost of revenues of $0.8 million.

Operating Expenses


	Three Months Ended September 30,
	2011					2010					Period-to-Period Change
	Amount		% of Total Revenue			Amount		% of Total Revenue			Amount			Percentage
Research and development, net	$	13,540		29	%	$	10,273		26	%	$	3,267			32	%
Sales and marketing		12,664		27			11,176		28			1,488			13
General and administrative		9,391		20			8,147		20			1,244			15
Acquisition costs		—		—			1,213		3			(1,213	)		(100	)
Restructuring charges		1,674		4			549		1			1,125			205

Total operating expenses	$	37,269		79	%	$	31,358		79	%	$	5,911			19	%

Research and Development Expenses

Research and development expenses of $13.5 million for the quarter ended September 30, 2011 increased by 32%, or $3.2 million, from $10.3 million in the quarter ended September 30, 2010. Included in the total research and development expenses are $4.7 million in additional expenses due to the acquisition completed in the last quarter of 2010. The incremental research and development costs from the acquisition are comprised of salaries and related costs of $3.6 million for 92 employees, occupancy costs of $0.9 million, equipment depreciation of $0.4 million and consultants of $0.2 million partially offset by research grants from the Israeli government of $0.4 million.

Research and development expenses, excluding the acquisition, were $8.9 million for the quarter ended September 30, 2011 and $10.3 million for the quarter ended September 30, 2010. The decrease was primarily caused by lower salaries and benefits from decreased headcount, and decreased occupancy costs related to the closing of our Salem, New Hampshire facility.

Research and development expenses were 29% and 26% of total revenues in both of the quarters ended September 30, 2011 and September 30, 2010, respectively. We expect that research and development expenses as a percentage of total revenue will decrease in the remainder of 2011 as compared to 2010 as we continue to integrate our research and development operations with those of Dialogic Corporation. We expect that the research and development expenses will increase on an absolute dollar basis in 2011 since we will incur a full year’s worth of post-acquisition expenses as compared to three months in 2010, and we intend to continue to invest in developing new products and enhance and refresh existing products.

Sales and Marketing

Sales and marketing expenses of $12.7 million for the quarter ended September 30, 2011 increased by 13%, or $1.5 million, from $11.2 million in the quarter ended September 30, 2010. Included in the sales and marketing expenses are $3.6 million in additional expenses due to the acquisition completed in the last quarter of 2010. The incremental sales and marketing costs related to the acquisition include salaries and related costs of $2.3 million for 30 employees, sales agents and consultant expenses of $0.4 million, depreciation and amortization of intangibles of $0.3 million, and occupancy costs of $0.6 million.

Sales and marketing expenses, excluding the acquisition, decreased by $2.1 million for the quarter ended September 30, 2011 as compared to the same quarter in 2010. This decrease reflects a decrease in amortization expense of $0.6 million, lower salaries and related benefits of $0.6 million, lower marketing expense of $0.5 million and other expenses of $0.4 million.

Sales and marketing expenses were 27% and 28% of total revenues for the quarters ended September 30, 2011 and 2010, respectively. We expect that sales and marketing expenses as a percentage of total revenue will decrease in the remainder of 2011as compared to 2010 as we continue to integrate our sales and marketing operations. We expect that the sales and marketing expenses will increase on an absolute dollar basis in 2011 since we will incur a full year’s worth of post-acquisition expenses as compared to three months in 2010.

General and Administrative

General and administrative expenses of $9.4 million for the quarter ended September 30, 2011 increased by 15%, or $1.2 million, from $8.2 million in the quarter ended September 30, 2010. Included in general and administrative expenses is $4.1 million due to the acquisition completed in the last quarter of 2010. The incremental general and administrative expenses from the acquisition include salaries and related costs of $1.5 million for 30 employees, legal and accounting fees of $0.5 million, consulting fees of $2.0 million and other costs of $0.1 million.

General and administrative expenses, excluding the acquisition, decreased by 35%, or $2.9 million, in the quarter ended September 30, 2011 to $5.3 million as compared to $8.2 million in the quarter ended September 30, 2010. The primary drivers of this decrease were lower salaries and related benefits of $0.5 million caused by decreased headcount, decreased legal and accounting fees of $0.9 million, a decrease in bad debt expense of $0.8 million, and other decreases totaling $0.7 million.

General and administrative expenses were 20% of total revenues in both of the quarters ended September 30, 2011 and 2010. We expect that general and administrative expenses as a percentage of total revenue will decrease in the remainder of 2011 as we continue to integrate our general and administrative operations and gain efficiencies in lower overhead and employee costs. We expect that the general and administrative expenses will increase on an absolute dollar basis in 2011 since we will incur a full year’s worth of post-acquisition expenses as compared to three months in 2010.

Restructuring Charges

For the quarter ended September 30, 2011, we recorded a restructuring charge of $1.7 million compared to $0.5 million for the same period of the prior year. The restructuring charges in the third quarter of 2011 relate to severance and related benefits for 36 terminated employees.

As of September 30, 2011, approximately $2.5 million of accrued restructuring expenses was included as a component of current accrued liabilities and $2.7 million was classified as long-term liabilities in the accompanying unaudited condensed consolidated balance sheets. As of December 31, 2010, $1.7 million was included in our current accrued liabilities. We expect to pay $0.9 million in employee related costs through December 31, 2011 and the remaining costs of $1.1 million during the fiscal year ending December 31, 2012. We expect to pay $0.2 million in facilities costs through December 2011 and the remaining amounts totaling $3.0 million over the lease periods ending in 2015. During the three months ended September 30, 2010, the Company incurred employee termination costs for severance and benefits aggregating to $0.5 million.

Interest and Other Income (Expense), net

Interest and other income (expense), net decreased by $16 thousand to an expense of $3 thousand in the three months ended September 30, 2011 as compared to income of $13 thousand during the same period ended September 30, 2010.

Interest Expense

Interest expense was $4.7 million and $5.3 million during the quarters ended September 30, 2011 and 2010, respectively. The average interest rate was 15% on the amounts outstanding under the Term Loan Agreement and 5.75% on amounts outstanding under the Revolving Credit Agreement in 2011, compared to 15.4%, inclusive of 2% PIK interest, on the Term Loan Agreement and 6.0% on the Revolving Credit Agreement in 2010. The Stockholder Loans bear a contractual annual interest rate of 20% compounded monthly in the form of a PIK. During the three months ended September 30, 2011, we amortized an additional $0.5 million of deferred debt issuance costs related to the breach of the Minimum Liquidity Covenant under our Term Loan Agreement.

Foreign Exchange Losses, net

Foreign exchange loss was $0.1 million in each of the quarters ended September 30, 2011 and 2010.

Income Tax Provision

We recorded an income tax benefit of $0.6 million and a provision of $0.3 million for the three months ended September 30, 2011 and 2010, respectively. The tax benefit for the three months ended September 30, 2011 is primarily due to the release of uncertain tax positions net of current tax payable in our profitable foreign entities with no corresponding tax attributes to offset current tax expense. The tax expense for the three months ended September 30, 2010 is primarily comprised of a provision for uncertain tax positions and foreign income tax expense. There was no deferred provision recorded for either quarter.

Comparison of Nine months Ended September 30, 2011 and 2010

Revenues (amounts in thousands)

Revenues


	Nine Months Ended September 30,
	2011					2010					Period-to-Period Change
	Amount		% of Total Revenue			Amount		% of Total Revenue			Amount		Percentage
Revenues:
Products	$	118,428		80	%	$	115,051		93	%	$	3,377		3	%
Services		29,644		20			8,270		7			21,374		258

Total revenues	$	148,072		100	%	$	123,321		100	%	$	24,751		20	%

Revenues by geography:
Americas	$	67,776		46	%	$	63,349		52	%	$	4,427		7	%
Europe, Middle East and Africa		51,193		35			32,675		26			18,518		57
Asia Pacific		29,103		19			27,297		22			1,806		7

Total revenues	$	148,072		100	%	$	123,321		100	%	$	24,751		20	%

Total revenues of $148.1 million for the first three quarters of 2011 increased by 20%, or $24.8 million, from $123.3 million in the same period in 2010. Our product revenues were 80% of total revenues at $118.4 million in the nine months ended September 30, 2011 as compared to 93% of total revenues, or $115.1 million, in the nine months ended September 30, 2010, an increase of 3%, or $3.3 million. Our services revenues were 20% of total revenues at $29.6 million in the nine months ended September 30, 2011 as compared to 7% of total revenues, or $8.3 million, in the nine months ended September 30, 2010, an increase of 258%, or $21.3 million. Included in the total revenue increase is $48.6 million revenue attributable to the acquisition completed in the last quarter of 2010 which is comprised of $28.9 million in product revenue and $19.7 million in services revenues. Revenues, excluding the acquisition, were $99.5 million, for the nine months ended September 30, 2011, which represented a decrease of 19%, or $23.8 million, from $123.3 million in the same period ended September 30, 2010. The decrease is generally attributable to reduced demand for TDM products whose revenue decreased by 34%, or $29.6 million, partially offset by a 15%, or $4.1 million, increase in IP product revenues and a 20%, or $1.7 million, increase in services revenues.

Product Revenue

Product revenues of $118.4 million for the first three quarters of 2011 increased by 3% or $3.3 million from $115.1 million in the same period in 2010. Our TDM products were 49% of product revenues at $58.1 million in the nine months ended September 30, 2011 as compared to 76% of product revenues, or $87.2 million in the nine months ended 2010, representing a decrease of 33% or $29.1 million. Our IP products were 51% of product revenues at $60.4 million in the nine months ended 2011 as compared to 24% of product revenues, or $27.8 million, in the nine months ended 2010, representing an increase of 117%, or $32.6 million.

Product revenues, excluding $28.9 million due to the acquisition, were $89.5 million for the first three quarters of 2011 representing a decrease of $25.6, million or 22%, from $115.1 million in the same period in 2010. The decline resulted from lower customer demand for our TDM products. Our TDM product revenues are expected to decline as there is a gradual conversion of the telecommunication networks to our IP technology.

Service Revenue

Service revenues of $29.6 million for the first three quarters of 2011 increased by 258%, or $21.3 million, from $8.3 million in the same period in 2010.

Service revenues, excluding $19.7 million due to the acquisition, were $9.9 million for the nine months ended September 30, 2011 representing an increase of 19%, or $1.6 million, from $8.3 million in the nine months ended September 30, 2010. The increase in service revenues was the result of growth in our installed base of customers for IP products and a related increase in IP maintenance revenue.

Revenues by geography

The $24.8 million increase in total revenues for the first three quarters of 2011 as compared to the same period in 2010 is attributable to an increase in sales of $18.5 million the Europe, Middle East and Africa region, $4.5 million in the Americas regions and $1.8 million in the Asia Pacific region over the same periods.

Total revenues, excluding the acquisition, decreased by $23.8 million for the first three quarters of 2011 compared to the same period in 2010, resulting from a decrease in sales in the three regions. The Americas declined by $16.9 million, Europe, Middle East and Africa revenues decreased by $5.0 million and Asia Pacific decreased by $1.9 million. The decrease in revenues in the three regions is due to the decline in demand for our TDM products.

Americas:

Total revenues in the Americas increased by $4.5 million to $67.8 million in the first three quarters of 2011 from $63.3 million in the same period of the prior year. Included in the 2011 revenues for the Americas is $21.4 million due to the acquisition, which is comprised of $12.8 million related to IP product revenues and $8.6 million of services revenues.

In the Americas, our IP product revenues, excluding the acquisition, increased by 18%, or $2.2 million, to $14.1 million in the nine months ended September 30, 2011 as compared to $11.9 million in the same period of the prior year. Our TDM product revenues decreased by 43%, or $20.0 million, to $26.5 million in the first three quarters of 2011 as compared to $46.5 million in the same period of the prior year. Services revenues increased by $0.9 million in the first three quarters of 2011 to $5.8 million as compared to $4.9 million in the same period of the prior year.

Europe, Middle East and Africa:

Total revenues in the Europe, Middle East and Africa region increased by $18.5 million to $51.2 million in the first three quarters of 2011 from $32.7 million in the same period of the prior year. Included within the revenues for the Europe, Middle East and Africa region in 2011 is $23.6 million from the acquisition which is comprised of $13.8 million of IP product revenues, $0.4 million in TDM product revenues, and $9.4 million of services revenues.

In Europe, Middle East and Africa, our IP product revenues, excluding the acquisition, decreased by 11%, or $1.1 million, to $8.4 million in the first three quarters of 2011 as compared to $9.5 million in the same period in 2010. Our TDM product revenues decreased by 21%, or $4.4 million, to $16.6 million in the first three quarters of 2011 as compared to $21.0 million in the same period in 2010. Services revenues increased $0.4 million to $2.6 million from $2.2 million in the first three quarters of 2011 and 2010, respectively.

Asia Pacific:

Total revenues in the Asia Pacific region increased by $1.8 million to $29.1 million in the first three quarters of 2011 from $27.3 million in the same period of the prior year. Included within the revenues for the Asia Pacific region in the first three quarters of 2011 is $3.7 million from the acquisition which is comprised of $1.9 million in IP revenue and $1.8 million of services revenues.

In Asia Pacific, our IP product revenues, excluding the acquisition, was $9.4 million in the first nine months of 2011 as compared to $6.4 million during the same period in 2010. Our TDM product revenues decreased by 26%, or $5.2 million, to $14.5 million in the first three quarters of 2011 as compared to $19.7 million in the same period in 2010. Services revenues increased by $0.5 million from $1.1 million to $1.6 million in the first three quarters of 2011 and 2010, respectively.

Cost of Revenue and Gross Margin


	Nine Months Ended September 30,
	2011					2010					Period-to-Period Change
	Amount		% of Total Related Revenue			Amount		% of Total Related Revenue			Amount			Percentage
Cost of Revenues:
Products	$	45,237		38	%	$	40,700		35	%	$	4,537			11	%
Services		16,215		55			6,666		81			9,549			143

Total cost of revenues	$	61,452		42	%	$	47,366		38	%	$	14,086			30	%

Gross Profit:
Products	$	73,191		62	%	$	74,351		65	%	$	(1,160	)		(2	)%
Services		13,429		45			1,604		19			11,825			737

Total gross profit	$	86,620		58	%	$	75,955		62	%	$	10,665			14	%

Cost of Revenue

Total cost of revenues of $61.5 million for the first nine months of 2011 increased by 30%, or $14.1 million, from $47.4 million in the same period in 2010. Included in cost of revenues in the first three quarters of 2011 is an increase of $20.0 million due to the acquisition completed in the last quarter of 2010.

Cost of product revenues of $45.2 million for the first three quarters of 2011 increased by 11%, or $4.5 million, from $40.7 million in the same period in 2010. Cost of product revenues, excluding $11.6 million attributable to the acquisition, decreased by $7.1 million in the first three quarters of 2011 as compared to the same period in 2010. The decrease in the nine months ended September 30, 2011 compared to the same period of 2010 is attributable to decreased product revenue, $5.1 million in lower outsourced product manufacturing costs due to a decline in product quantities ordered, lower amortization expense by $0.4 million, and lower operations overhead of $1.8 million due to reduced overhead.

Cost of services revenues of $16.2 million for the first nine months of 2011 increased by 143%, or $9.5 million, from $6.7 million in the same period in 2010. Included in the cost of services revenues is an increase of $8.4 million due to the acquisition completed in the last quarter of 2010. Cost of services includes the direct costs of customer support and consists primarily of payroll, related benefits and travel for our support personnel.

Cost of services, excluding the acquisition, was $7.8 million for the nine months ended September 30, 2011 compared to $6.7 million for the same period in the prior year. The cost increase in the first three quarters of 2011 as compared to the same period 2010 primarily results from the increase in services revenue.

Gross Profit

Gross profit of $86.6 million for the first nine months of 2011 increased by 14%, or $10.6 million, from $76.0 million in the same period in 2010.

As a percentage of product revenue, product gross profit was 62% in the nine months ended September 30, 2011 compared to 65% in the comparable period in 2010. The acquisition contributed to the product gross profit decrease as the former Veraz Networks Inc. had lower profit associated with its product revenues.

As a percentage of services revenue, services gross profit was 45% in the first nine months of 2011 as compared to 19% in comparable period in 2010. The acquisition contributed to the services gross profit increase as the former Veraz Networks Inc. had higher profit associated with its service revenues.

For the nine months ended September 30, 2011, gross profit, excluding $28.6 million attributable the acquisition, decreased by 24%, or $18.0 million, from $76.0 million for the nine months ended September 30, 2010 to $58.0 million for the same period in 2011. The decrease is primarily a result of a decline in product revenues.

As a percentage of sales, excluding the acquisition, gross profit decreased to 58% in the first three quarters of 2011 compared to 62% in the comparable period in 2010 which is primarily due to the decline in product revenues.

Operating Expenses


	Nine Months Ended September 30,
	2011					2010					Period-to-Period Change
	Amount		% of Total Revenue			Amount		% of Total Revenue			Amount			Percentage
Research and development, net	$	42,262		29	%	$	30,741		25	%	$	11,521			37	%
Sales and marketing		41,829		28			33,453		27			8,376			25
General and administrative		27,552		19			19,811		16			7,741			39
Acquisition costs		—		—			2,128		2			(2,128	)		(100	)
Restructuring charges		6,421		4			549		—			5,872			1,070

Total operating expenses	$	118,064		80	%	$	86,682		70	%	$	31,382			36	%

Research and Development Expenses

Research and development expenses of $42.3 million for the first nine months of 2011 increased by 37%, or $11.6 million, from $30.7 million in the same period in 2010. Included in the total research and development expenses are $13.9 million in additional expenses due to the acquisition completed in the last quarter of 2010. The incremental research and development costs from the acquisition are comprised of salaries and related costs of $10.9 million for 93 employees, occupancy costs of $2.6 million, equipment depreciation of $1.2 million, consultants of $0.4 million, and other costs of $0.1 million partially offset by research grants from the Israeli government of $1.3 million.

Research and development expenses, excluding the acquisition, were $28.4 million for the nine months ended September 30, 2011 and $30.7 million in the same period in 2010. The decrease of $2.3 million is primarily comprised of lower salary and related benefits of $1.2 million resulting from lower headcount, decreased occupancy costs of $0.5 million from the closing of our Salem, New Hampshire facility, and a decrease in consultants of $0.6 million.

Research and development expenses increased to 29% of total revenues in the first three quarters of 2011 from 25% of total revenues in the same period in 2010. We expect that research and development expenses as a percentage of total revenue will decrease in the remainder of 2011 as we continue to integrate our research and development operations with those of Dialogic Corporation. We expect that the research and development expenses will increase on an absolute dollar basis in 2011 since we will incur a full year’s worth of post-acquisition expenses as compared to three months in 2010, and we intend to continue to invest in developing new products and enhance and refresh existing products.

Sales and Marketing

Sales and marketing expenses of $41.8 million for the first nine months in 2011 increased by 25%, or $8.3 million, from $33.5 million in the same period in 2010. Included in sales and marketing expense is $11.4 million relating to the acquisition completed in the last quarter of 2010. The incremental sales and marketing costs from the acquisition are comprised of salaries and related costs of $8.0 million for 34 employees, occupancy costs of $1.6 million, equipment depreciation of $0.8 million, and sales agents and consultants of $1.0 million.

Sales and marketing expenses, excluding the acquisition, were $30.2 million and $33.5 million for nine months ended September 30, 2011 and 2010, respectively, a decrease of $3.3 million. This decrease was primarily caused by a decrease in amortization expense of $1.7 million, lower salary and related benefits expense of $0.5 million caused by lower headcount, lower marketing expense of $0.5 million, lower occupancy costs of $0.3 million and other costs of $0.3 million.

Sales and marketing expenses increased to 28% of total revenues in the first three quarters in 2011 from 27% of total revenues in the same period in 2010.

General and Administrative

General and administrative expenses of $27.6 million for the first nine months of 2011 increased by 39%, or $7.8 million, from $19.8 million in the same period in 2010. Included in general and administrative expenses is $10.1 million due to the acquisition completed in the last quarter of 2010. The incremental general and administrative expenses from the acquisition include salaries and related costs of $5.1 million for 33 employees, legal and accounting fees of $1.6 million, and consulting fees of $3.4 million.

General and administrative expenses, excluding the acquisition, decreased by 12%, or $2.3 million, in the nine months ended September 30, 2011 to $17.5 million as compared to $19.8 million in the same period 2010. The primary drivers of this decrease were lower legal and accounting fees of $1.9 million and decreased depreciation of $0.4 million.

General and administrative expenses increased to 19% of total revenues in the first three quarters of 2011 from 16% of total revenues in the same period in 2010. We expect that general and administrative expenses as a percentage of total revenue will decrease in the remainder of 2011 as we continue to integrate our general and administrative operations and gain efficiencies in lower overhead and employee costs. We expect that the general and administrative expenses will increase on an absolute dollar basis in 2011 since we will incur a full year’s worth of post-acquisition expenses as compared to three months in 2010.

Restructuring Charges

For the nine months ended September 30, 2011, we recorded a restructuring charge of $6.4 million compared to $0.5 million for the same period of the prior year. The restructuring charges in 2011 relate to $2.9 million of severance and related benefits for 58 terminated employees and $3.5 million of future lease payments and other costs associated with vacated spaces in our Parsippany, New Jersey and Salem, New Hampshire facilities.

As of September 30, 2011, approximately $2.5 million of accrued restructuring expenses was included as a component of current accrued liabilities and $2.7 million was classified as long-term liabilities in the accompanying unaudited condensed consolidated balance sheets. As of December 31, 2010, $1.7 million was included in our current accrued liabilities. We expect to pay $0.9 million in employee related costs through December 31, 2011 and the remaining costs of $1.1 million during the fiscal year ending December 31, 2012. We expect to pay $0.2 million in facilities costs through December 2011 and the remaining amounts totaling $3.0 million over the lease periods ending in 2015. During the three months ended September 30, 2010, the Company incurred employee termination costs for severance and benefits aggregating to $0.5 million.

Interest and Other Income, net

Interest and other income, net, was $3 thousand in the first nine months of 2011 as compared to income of $0.5 million during the same period in 2010. This decrease is primarily due to the gain of $0.5 million in January 2010 resulting from the settlement agreement reached between our subsidiary, Cantata Technology, Inc., or Cantata, and InterMetro Communications, Inc., or InterMetro, following the filing by Cantata of a complaint against InterMetro.

Interest Expense, net

Interest expense, net decreased by $1.2 million, or 8%, from $14.4 million in the first nine months of 2010 to $13.2 million in the same period in 2011. The decrease in 2011 is primarily attributable to lower interest rates in 2011 on our borrowings. The average interest rate in 2011 was 15% on the Term Loan Agreement, and 5.75% on the Revolving Credit Agreement, compared to 15.4%, inclusive of 2% PIK interest, on the Term Loan Agreement and 6.0% on the Revolving Credit Agreement in 2010. The Stockholder Loans bear a contractual annual interest rate of 20% compounded monthly in the form of a PIK. During the nine months ended September 30, 2011, we amortized an additional $1.0 million of deferred debt issuance costs related to the breach of the Minimum Liquidity covenant under the Term Loan Agreement.

Foreign Exchange Gains (Losses), net

Foreign exchange loss was $0.4 million in the nine months ended September 30, 2011 as compared to a foreign exchange gain of $0.1 million in the same period in 2010.

Income Tax Provision

We recorded an income tax provision of $0.6 million and $0.7 million for the nine months ended September 30, 2011 and 2010, respectively. The tax expense for the nine months ended September 30, 2011 is primarily due to current tax payable in our profitable foreign entities with no corresponding tax attributes to offset current tax expense, which was partly offset by a decrease in the reserve for uncertain tax positions. The tax expense for the nine months ended September 30, 2010 is primarily comprised of a provision for uncertain tax positions and foreign income tax expense. There was no deferred provision recorded for either period.

Financial Position

Liquidity and Capital Resources

As of September 30, 2011, we had cash and cash equivalents of $9.0 million, compared to $24.6 million of cash and cash equivalents as of December 31, 2010. Of our cash and cash equivalents of $9.0 million at September 30, 2011, approximately $7.6 million was held by our subsidiaries outside the U.S. and could be subject to tax implications if repatriated to the U.S.

Our current primary sources of liquidity are funds generated from operations, and as required, funds borrowed under the Revolving Credit Agreement. As of September 30, 2011, we had borrowed $11.6 million under our Revolving Credit Agreement. Under the Revolving Credit Agreement, the unused line of credit totaled $13.4 million, of which $0.9 million was available to us. As of September 30, 2011, total liquidity including cash and availability under the Revolving Credit Agreement was $9.9 million as compared to $28.1 million on December 31, 2010.

In addition, at September 30, 2011, we had aggregate indebtedness of $97.7 million outstanding under the Term Loan Agreement and Stockholder Loans, of which $89.9 million had an original maturity in September 2013 and $4.6 million is due in March 2014. However, because we were not in compliance with any of the covenants under our Term Loan Agreement and certain covenants under the Revolving Credit Agreement, the Term Lenders and Revolving Credit Lender may accelerate the maturity date of the Term Loan and Revolving Credit Loans, respectively, to be immediately due and payable. In March 2011, we obtained a letter from the Term Lenders confirming that they will not under any circumstances accelerate the maturity date of the Term Loan prior to January 15, 2012. On July 26, 2011, the Revolving Credit Lender agreed not to accelerate the maturity date of any Revolving Credit Loans until the earliest of (i) January 15, 2012; (ii) the occurrence of any additional Event of Default or (iii) the occurrence of any Termination Event (as defined in the Term Loan Agreement). However, as of September 30, 2011, additional Events of Default had occurred and, accordingly, the Revolving Credit Lender currently has the right to accelerate the maturity date of the principal and the accrued interest under the Revolving Credit Agreement to be immediately due and payable and exercise all its remedies, including realizing against the collateral we have pledged to secure the loans outstanding under the Revolving Credit Agreement. On November 14, 2011, we executed a Forbearance Agreement with the Revolving Credit Lender whereby the Revolving Credit Lender agreed to forbear from exercising its right to accelerate the maturity date and its right to realize on its collateral before the earliest of (i) January 6, 2012; (ii) the occurrence of any additional Event of Default, which for this purpose includes the exercise by any third party of any rights or remedies against the Company or any of the Revolving Credit Guarantors; or (iii) the occurrence of any Termination Event. Accordingly, the debt has been classified as a current liability in the accompanying unaudited September 30, 2011 condensed consolidated balance sheet.

Immediately prior to completion of our business combination with Dialogic Corporation and as part of the integration of the operations of Dialogic Corporation, we undertook restructuring initiatives involving the elimination of approximately 59 positions through reductions in force affecting all departments. We and Dialogic Corporation both also undertook efforts to reduce headcount and streamline operations in 2008 and 2009. We continued to focus significant efforts on reducing costs during 2010 and in the first half of 2011. As we continue to integrate our operations with those of Dialogic Corporation, we expect our operating expenses to decrease going forward, and we are continuing to review our operations in order to identify additional measures to further reduce expenses. We decreased borrowings by $1.2 million under the Revolving Credit Agreement and used net cash in operating activities of $11.1 million in the first three quarters of 2011.

We are currently seeking a number of financing and strategic alternatives and are in discussions with the Term Lenders and Revolving Credit Lender with respect to our current noncompliance with the covenants under the Term Loan Agreement and Revolving Credit Agreement, and the related potential acceleration of the maturity date of amounts outstanding under such agreements. There can be no assurance that we will be able to renegotiate the terms of and restructure our Term Loan and Revolving Credit Loans by their respective maturity dates on acceptable terms or at all, or that our lenders will agree to extend forbear exercising their remedies under such agreements beyond January 15, 2012 in the case of the Term Lenders or January 6, 2012 in the case of the Revolving Credit Lender, or that we will be able to obtain sufficient financing or enter into other transactions to satisfy our existing debt obligations in a timely manner, or at all. We do not have sufficient cash resources to pay the amount that would become payable in the event of an acceleration of the Term Loan and Revolving Credit Loans, or either of them, and even if we could obtain additional financing, it is unlikely that we could obtain an amount sufficient to repay the Term Loan and Revolving Credit Loans in full. In the nine months ended September 30, 2011, we paid $10.0 million to service the interest payments on the Term Loan and Revolving Credit Agreements.

The Term Lenders and Revolving Credit Lender have security interests in all of our assets as described above and, in the event of an acceleration of our obligations under the Term Loan Agreement and Revolving Credit Agreement and our failure to pay the amounts that would then become due, the Term Lenders and Revolving Credit Lender 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. 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 and unsecured creditors, including the Term Lenders, Revolving Credit Lender and the holders of the Stockholder Loans, 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.

would 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 soon 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.

There can be no assurances that alternative financing will be available on acceptable terms or at all. If we are unable to raise sufficient additional funds when needed, we would be required to further reduce operating expenses by, among other things, curtailing significantly or delaying or eliminating part or all of our development programs, and/or scaling back our commercial operations, or we may need to seek protection under the provisions of the U.S. Bankruptcy Code.

We believe that we will continue as a going concern. For the nine months ended September 30, 2011, we incurred a net loss of $45.6 million and used cash in operating activities of $11.1 million.

Operating Activities

Net cash used in operating activities of $11.1 million in 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 for items such as depreciation, amortization, stock-based compensation, PIK interest expense on long-term debt, allowance for doubtful accounts, deferred income taxes and other non-cash charges before net changes in operating assets and liabilities. Our operating assets decreased by $22.9 million and our liabilities decreased by $7.8 million. The decrease in operating assets relates to accounts receivable of $11.8 million, prepaid expenses of $5.1 million and inventories of $5.9 million. The decrease in our operating liabilities is primarily attributable to a decrease of $3.0 million in deferred revenue, and a decrease of $4.9 million in accounts payable and accrued liabilities, income taxes payable of $0.2 million offset by an increase in interest payable, related parties of $0.3 million.

Net cash provided by operating activities of $2.7 million in the nine months ended September 30, 2010 was primarily attributable to our net loss of $25.4 million, offset by adjustments for non-cash items aggregating to $26.6 million for items such as depreciation, amortization, interest expense payable-in-kind on long-term debt, allowance for doubtful accounts, deferred income taxes and other non-cash charges before net changes in operating assets and liabilities. Our operating assets increased by $2.8 million and our operating liabilities decreased by $1.3 million in the nine months ended September 30, 2010. The increase in our operating assets was driven by an increase in accounts receivable balances. The decrease in our operating liabilities is primarily attributable to a decrease in accounts payable and accrued liabilities offset by an increase in interest payable on long-term debt and deferred revenue.

Investing Activities

Net cash used in investing activities of $3.5 million in the nine months ended September 30, 2011 consisted primarily of an increase of $1.0 million for restricted cash and $2.3 million in purchases of property and equipment.

Net cash used in investing activities of $2.1 million in the nine months ended September 30, 2010 consisted primarily of $1.8 million in purchases of property and equipment and $0.3 million in purchases of other assets.

Financing Activities

Net cash used in financing activities of $1.0 million in the nine months ended September 30, 2011 included $1.2 million in net repayments on our Revolving Credit Agreement to support our operations which was partly offset by $0.2 million in proceeds from the exercise of stock options.

Net cash used in financing activities of $2.9 million in the nine months ended September 30, 2010 was due to payments of debt issuance fees of $3.6 million which were partly offset by net proceeds from our borrowings under Revolving Credit Agreement of $0.6 million.

Off-Balance Sheet Arrangements

At September 30, 2011, 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 3(d) of the Unaudited Condensed Consolidated Financial Statements for a full description of the recent accounting pronouncement related to revenue recognition, including the date of adoption and effect on results of operations and financial condition. See also Note 3(h) for a description of other new accounting pronouncements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Foreign Currency Risk

A significant portion of our cash flows and financial assets and liabilities are denominated in U.S. dollars, which is our functional and reporting currency. The majority of our revenues and most of our costs of sales, including subcontractor manufacturing expenses, are also denominated in U.S. dollars. However, we maintain sales and business operations in foreign countries and part of our operating expenses are incurred in these foreign countries. As such, we have exposure to adverse changes in exchange rates associated with operating expenses, including personnel, facilities and other expenses, of our foreign operations. Foreign currency risk is limited to the portion of our business transactions denominated in currencies other than U.S. dollars, and relates primarily to expenses in our Canadian, Brazilian and European operations. Our foreign currency transactions and fluctuations in the respective exchange rates relative to the U.S. dollar will create volatility in our cash flows and the reported amounts for selling, general and administrative expenses in our consolidated statements of operations.

We have not historically used forward contracts or other derivative instruments to mitigate the effects of foreign exchange risk on our operations. Although we have not used these instruments in the past, we have the ability under the terms of the Revolving Credit Agreement to enter into foreign currency forward contracts with the Revolving Credit Lender to protect against foreign exchange risks.

If the exchange rates between the U.S. dollar and the Great Britain Pound, Canadian dollar, Brazilian Reals and the Euros had increased or decreased by 10% in the nine months ended September 30, 2011, the foreign exchange (gain) or loss would have increased or decreased by less than $2.8 million. Due to the impact of actual changes in foreign currency exchange rates between the U.S. Dollar and these other currencies, we recorded foreign exchange losses of $0.4 million in the nine months September 30, 2011.

Credit Risk

Credit risk results from the possibility that a loss may occur from the failure of another party to perform according to the terms of the contract. Our financial assets that are exposed to credit risk consist primarily of cash and cash equivalents and accounts receivable. Cash is placed with major financial institutions. Concentration of credit risk with respect to accounts receivable is mitigated by our credit evaluation process, credit insurance on certain receivables and the dispersion of our customers among different geographical locations around the world.

As of September 30, 2011, accounts receivable aggregating approximately $10.7 million were insured for credit risk, as compared to $11.9 million as of December 31, 2010, 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, we are required to pay a premium equal to 0.20 % of consolidated revenues.

Interest Rate Risk

We had cash and cash equivalents totaling $9.0 million and $24.6 million at September 30, 2011 and December 31, 2010, respectively. Our current monetary assets are not exposed to significant interest rate risk due to their relatively short-term nature. Excess cash is invested with financial institutions and generally bears interest at fixed rates. Changes in interest rates on cash balances held with those financial institutions would not have a significant effect on our consolidated statement of operations.

We had debt aggregating $97.7 million and $96.8 million under our Term Loan Agreement and Stockholder Loans, and bank indebtedness of $11.6 million and $12.8 million as of September 30, 2011 and December 31, 2010, respectively. The bank indebtedness and the Term Loan Agreement bears interest at floating rates, generally tied to LIBOR. Accordingly, we are exposed to interest rate risk to the extent that our debt is at a variable rate of interest. We did not have any open derivative contracts relating to floating rate debt as of either September 30, 2011 or December 31, 2010. An increase or decrease in the interest rate by 10% would have increased or decreased interest expense by $1.1 million in each of the nine months ended September 30, 2011 and 2010.

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 (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 our disclosure controls and procedures were not effective as of December 31, 2010 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, there has not been any change 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 has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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, 2010, filed with the SEC on March 31, 2011.

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 SEC Inquiry, and requesting that we preserve certain categories of records in connection with the SEC 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 FCPA violations of the former Veraz Networks Inc. business during periods prior to completion of our business combination with Dialogic Corporation. 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. We may incur significant costs related to the governmental inquiry, which will have a material adverse effect on our financial condition and results of operations. Further, the governmental inquiry may 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.

An informal inquiry by the SEC may result in charges filed against us and in fines or penalties.

As a result of the SEC inquiry, criminal or civil charges could be filed against us and we could be required to pay significant fines or penalties in connection with the governmental inquiry 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 are in default under our Term Loan Agreement and, if we are unable to restructure the Term Loan Agreement prior to the expiration of our forbearance agreement on January 15, 2012, the Term Lenders will have the right to accelerate our indebtedness and foreclose on substantially all of our assets. We are also in default under our Revolving Credit Agreement and, if we are unable to restructure the Revolving Credit Agreement prior to the expiration of our forbearance agreement on January 6, 2012, the Revolving Credit Lender will have the right to accelerate our indebtedness and foreclose on substantially all of our assets.

We are in breach of the financial covenants under our second amended and restated credit agreement, dated as of October 1, 2010, as amended, or the Term Loan Agreement, with Obsidian, LLC as agent, and Special Value Expansion Fund, LLC, Special Value Opportunities Fund, LLC and Tennebaum Opportunities Partners V, LP, as lenders, or, collectively, the Term Lenders, and credit agreement, dated as of March 5, 2008, as amended, or the Revolving Credit Agreement, with Wells Fargo Foothill Canada ULC, or the Revolving Credit Lender. The Term Lenders agreed to forbear exercising any remedies until January 15, 2012 and the Revolving Credit Lender has agreed to forbear exercising any remedies until January 6, 2012. While we believe that our current cash resources, together with anticipated product and service revenues, would be sufficient to fund our operations, they are not sufficient to fund both our operations and payment of interest or repayment of principal on our outstanding indebtedness. If we are unable to restructure our outstanding indebtedness under the Term Loan Agreement, or the Term Loan, prior to January 15, 2012 and the Revolving Credit Agreement, or the Revolving Credit Loans by January 6, 2012 or otherwise obtain sufficient financing to satisfy our existing debt obligations in a timely manner, our lenders may accelerate the indebtedness outstanding under the those agreements and exercise all their remedies, including realizing against the collateral we have pledged to secure those facilities.

There are no assurances that we will be able to renegotiate the terms of and restructure our Term Loan and Revolving Credit Loans on acceptable terms or at all, or that our lenders will agree to forbear exercising their remedies under such agreements beyond January 15, 2012 in the case of the Term Lenders or January 6, 2012 in the case of the Revolving Credit Lender, or that we will be able to obtain sufficient financing or enter into other transactions to satisfy our existing debt obligations in a timely manner, or at all. If we are unable to do so and our lenders exercise remedies against our assets there may be little or no assets remaining for the holders of our equity securities.

*Our current capital raising efforts may not be successful in raising additional capital on favorable terms, or at all. Without sufficient additional capital to apply to repay our indebtedness, we may not be able to renegotiate the terms of our Term Loan and Revolving Credit Loans on terms that are acceptable to us, in which case 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.

As of September 30, 2011, we had $109.4 million in total debt outstanding. As noted, while we believe that our current cash resources, together with anticipated product and service revenues, would be sufficient to fund our operations, they are not sufficient to fund both our operations and payment of interest or repayment of principal on our outstanding indebtedness. In light of the circumstances described above, we are currently seeking 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 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. Any additional equity financing would 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 soon 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.

Additionally, even if we are able to raise additional capital, if the amount of proceeds available to repay our indebtedness does not result in a meaningful reduction of our total leverage, we may not be able to restructure our existing indebtedness or obtain extensions of our forbearance agreements on terms that are acceptable to us. If we are unable to renegotiate our debt or obtain an extension of the forbearance agreements from our lenders, our lenders could accelerate our debt and exercise their remedies, including foreclosing their security interests against substantially all of our assets.

* 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, our debt could be accelerated.

As of September 30, 2011, we had $109.4 million in total debt outstanding. 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 servicing, 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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influencing investor and customer perceptions about our financial stability and limiting our ability to obtain financing or acquire customers; 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. At September 30, 2011, we failed to comply with all of the covenants under our Term Loan Agreement and certain of the covenants under the Revolving Credit Agreement. If such event of default is not cured or waived, we may suffer adverse effects on our operations, business or financial condition, including acceleration of our debt. We do not anticipate having sufficient cash and cash equivalents to repay the debt should the related party lenders accelerate the maturity date and we would be forced to seek alternative sources of financing. There can be no assurances that alternative financing will be available on acceptable terms or at all.

We are dependent on revenue from mature products, including TDM products. Our success depends in large part on continued migration to an IP network architecture for communications and 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, dual tone multi-frequency detection, voice play and record, conferencing, fax, modem, speech integration, and monitoring. This business has been declining as networks increasingly deploy packet-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 packet-based product lines, our business and results of operations will suffer. Although we have developed a migration path to broadband based IP products, the TDM products remain a sizable portion of our revenue. If our migration path to broadband based IP products is unsuccessful, we may not be able to mitigate the revenue loss due to the decrease in sales of its TDM products.

Our IP and IP-enabled products are used by service providers and enterprises to deliver communications over IP networks. Our success depends on the continued migration of customers 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 communications 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.

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

Our common stock traded as high as $7.75 and as low as $1.33 per share during the past 12 months. 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 RSUs 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; and

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the small public float of our outstanding common stock in the marketplace.

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

Our integration of Dialogic Corporation could result in disruptions in business, loss of customers or contracts or other adverse effects.

Our integration of the operations of Dialogic Corporation may cause disruptions, including potential loss of customers and other business partners, in our business, which could have material adverse effects on our business and operations. Although we believe that our business relationships are stable following consummation of our business combination with Dialogic Corporation, our customers, and other business partners, in response to the completion of our business combination with Dialogic Corporation, may adversely change or terminate their relationships with us, which could have a material adverse effect on us.

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.

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 communications 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, 2011 and the year ended December 31, 2010, we used cash of $11.1 million and $5.9 million, respectively, to fund our operating activities. Immediately prior to completion of our business combination with Dialogic Corporation and as part of the integration of the operations of Dialogic Corporation, we undertook restructuring initiatives involving the elimination of approximately 59 positions through reductions in force affecting all departments. We and Dialogic Corporation both also undertook efforts to reduce headcount and streamline operations in 2008 and 2009. We continued to focus significant efforts on

reducing costs during 2010 and in the first nine months of 2011. We may not be able 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 this restructuring we will have sufficient cash resources to allow us to fund our operations as planned.

*We have not had sustained profits and our losses could continue.

We have experienced significant losses in the past and never sustained profits. For the nine months ended September 30, 2011 and for the fiscal years ended December 31, 2010 and 2009, we recorded net losses of approximately $46.0 million, $46.7 million and $37.6 million, respectively. While we have been able to generate sufficient cash to fund our operations in the past, we may not generate sufficient cash flows to fund our operating commitments in the future.

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 a number of subcontractors including Jabil Circuit, Inc., SigmaPoint Technologies, Inc., Plexus Corp., Flextronics, ECI Telecom and SMTC Manufacturing Corp. 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.

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.

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 CEO and CFO, 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.

Dialogic Corporation’s management and KPMG LLP located in Canada, or KPMG Canada, identified a material weakness and significant deficiencies in Dialogic Corporation’s Internal Controls for the year ended December 31, 2009. During the year ended December 31, 2009, Dialogic Corporation was a private company with limited accounting personnel and other resources for designing and implementing Internal Controls. In connection with the audit of Dialogic Corporation’s financial statements for the year ended

December 31, 2009, Dialogic Corporation’s management and KPMG Canada identified a “material weakness”, as defined under the SEC rules and regulations. The following material weakness was identified, which results from the accumulation of certain significant deficiencies identified during the audit: ineffective processes and controls over the accounting for and reporting of transactions in the sales and inventory processes. Specifically, it was noted that there was a lack of sufficient accounting and finance personnel to perform in-depth analysis and review of accounting matters within the timeframes set by Dialogic Corporation’s management for finalizing its financial statements. This weakness resulted in certain adjustments to the amounts or disclosures of the following items: revenues and deferred revenue, inventories, warranty provisions, net income and accumulated deficit. In addition, the following “significant deficiencies” were identified: a lack of methodology for determining sales returns other than stock rotation; inadequate methodology for determining warranty provision; cut-off errors in timing of revenue recognition; and incomplete methodology for determining inventory obsolescence.

Our management and KPMG LLP located in the United States, or KPMG LLP, identified a material weakness and significant deficiencies in our Internal Controls for the year ended December 31, 2010. In connection with the audit of our financial statements for the year ended December 31, 2010, our management and KPMG LLP identified a “material weakness”. The following material weakness was identified, which results from the aggregation of certain significant deficiencies identified during the audit: insufficient staff with technical accounting expertise to apply accounting requirements, as they relate to non-routine and highly complex transactions, in accordance with U.S. GAAP. Specifically, it was noted that there was a lack of sufficient accounting and finance personnel to perform in-depth analysis and review of accounting matters within the timeframes set by our management for finalizing our financial statements. This weakness resulted in certain audit adjustments to the amounts or disclosures of the following items: inventory reserves, debt issuance costs, stock-based compensation expenses and restructuring expenses. Because of this material weakness, management has concluded that we did not maintain effective Internal Controls as of December 31, 2010 based on criteria set forth by the Committee of Sponsoring Organization of the Treadway Commission in Internal Control-Integrated Framework.

Both before and after our business combination with Dialogic Corporation, we took measures to remediate the material weakness and significant deficiencies but these remediation efforts are not yet completed. These measures are broadly grouped into the following categories: (a) increasing finance staff with technical accounting expertise, (b) improving training, and (c) implementing appropriate Internal Control processes.

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Personnel: In 2009 Dialogic Corporation added a new Worldwide Controller with significant public company experience. As a result of our business combination with Dialogic Corporation, our global finance staff increased to more than 50 employees including employees with significant technical accounting and financial reporting backgrounds, significant tax, treasury and Financial planning and analysis skills. We further strengthened the finance team with the addition of a new Financial Reporting Director with technical SEC experience during the quarter ended June 30, 2011. We plan to continue to evaluate our personnel needs and hire experienced and qualified employees as appropriate.

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Training: Members of our team routinely participate in training relating to stock administration, revenue recognition and additional new accounting developments. Further, as a result of the business combination with Dialogic Corporation, we have commenced a process of providing cross-training between the finance team that was previously part of the Dialogic Corporation group and the finance team that was previously part of the Veraz Networks Inc. finance team.

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Internal Process: We have steadily made improvements in our internal processes. The objective of such internal process improvements has been to remediate the material weaknesses and significant deficiencies, and achieve an overall improvement in internal controls over financial reporting. Such process improvements have included, but are not limited to, the establishment of a centralized electronic database of key contracts, accounting records and related documentation, increased uniformity and consistency with respect to customer contracts, accounting records and related documentation, and increased level of management review of key processes, particularly the revenue cycle and sales process. We plan to continue to evaluate our internal controls and make improvements as appropriate.

Our management, including our CEO and CFO, 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 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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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;

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

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offer a broad array of services.

Additionally, we compete with a number of companies and divisions of companies that focus on providing one or more aspects of communication enabling technology, including, but not limited to, AudioCodes Limited, Radisys Corporation, Movius Interactive Corporation, Cisco Systems, Inc., Network Equipment Technologies, Inc., Genband Inc., Dilithium Networks, RipCode, Inc., Radvision Ltd. and Huawei Technologies Co., Ltd. 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 52% of our outstanding common stock as of September 30, 2011. 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 communications 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 communications 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 communications 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 communications 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 communications 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.

Our products are sophisticated and are designed to be deployed in large and complex networks. Because of the nature 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 service, 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 service 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 service, 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 12 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 the continued listing requirements of The Nasdaq Global Market, or the 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, 2010, we have identified a material weakness in our Internal Controls and, as such, our Internal Controls over financial reporting are not effective. 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 manufacturing operations are located in Canada, Israel, the United States and Ireland and we utilize various subcontractors in Canada, the United States, Israel and Malaysia. We have development locations in Canada, the United States, Ireland, Israel and Germany 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, Belgium, Slovenia and Sweden. 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.

*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, 2011 and for the fiscal years ended December 31, 2010 and 2009, revenues from outside of the Americas were approximately $80.5 million, $90.7 million and $84.7 million, respectively, or 54%, 51% and 48% 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;

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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. In particular, Nick Jensen, the chairman of our board of directors and chief executive officer, and Douglas Sabella, our president and chief operating officer, are critical to the overall management of our business as well as to the development of our culture and our strategic direction. To be successful, we must also hire, retain and motivate key employees, including those in managerial, technical,

marketing, and sales positions. In particular, our product generation efforts depend on hiring and retaining qualified engineers. Experienced management and technical, sales, 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 our component suppliers and they 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 service, 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. Any patents owned by us may be invalidated, circumvented or challenged. Any of our patent applications, whether or not being currently challenged, may not be issued with the scope of the claims we seek, if at all. 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 its 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 receive inquiries from other patent holders and may become subject to claims that we infringe their intellectual property rights. We cannot assure you that we are not in infringement of third party patents. Any parties claiming that our products infringe upon their proprietary rights, regardless of its merits, could force us to license their patents for substantial royalty payments or to defend ourselves, and possibly our customers or contract manufacturers, in litigation. We may also be required to indemnify our customers and contract manufacturers for damages they suffer as a result of such infringement. These claims and any resulting 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, incorporating, or using our products that use the challenged intellectual property;

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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, 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 communications 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 in certain states and countries may subject us to environmental and other regulations including, in some instances, the requirement to provide customers the ability to return product at the end of its useful life and make us responsible for disposing or recycling products in an environmentally safe manner. Additionally, certain states and countries may pass regulations requiring our products to meet certain requirements to use environmentally friendly components, such as the European Union Directive 2002/96/EC Waste Electrical and Electronic Equipment, or WEEE, to mandate funding, collection, treatment, recycling, and recovery of WEEE by producers of electrical or electronic equipment into Europe and similar rules and regulations in other countries. China is in the final approval stage of compliance programs which will harmonize with the European Union WEEE and Recycling of Hazardous Substances directives. In the future, Japan and other countries are expected to adopt environmental compliance programs. 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. 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.

For example, we recognize our product software license revenue in accordance with Software Revenue Recognition literature or other accounting standards. The standards may change and the standards setters may continue to issue interpretations and guidance for applying the relevant accounting standards to a wide range of sales contract terms and business arrangements that are prevalent in software licensing arrangements. Future interpretations of existing accounting standards or changes in our business practices could result in future changes in our revenue recognition accounting policies that have a material adverse effect on our results of operations. We may be required to delay revenue recognition into future periods, which could adversely affect our operating results. In the past we have had to defer recognition of revenue, and may have to do so again in the future. Such deferral may be as a result of several factors, including whether a transaction involves:

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software arrangements that include undelivered elements for which we do not have vendor specific objective evidence, or VSOE, of fair value;

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requirements that we deliver services for significant enhancements and modifications to customize our software for a particular customer;

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material acceptance criteria or other identified product-related issues; or

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payment terms extending beyond our customary terms.

Because of these factors and other specific requirements under U.S. GAAP for software revenue recognition, we must have very precise terms in our software arrangements to recognize revenue when we initially deliver software 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:

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

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

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accurately define and design new products to meet market needs;

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

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rapidly develop and produce these products at competitive prices;

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

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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 its revenues and negatively impact its 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 communications networking sector. Program delays or cancellations could be more frequent during times of meaningful economic downturn.

Our business depends on conditions in the communications 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 2010, 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, Iraq, and Libya, threats against Israel and the recent Israeli conflict in Gaza, have created uncertainty throughout the Middle East and have significantly increased the political, economic, and social instability in Israel, where some of our products are manufactured. Acts of terrorism, either domestically or abroad and particularly in Israel, or a resumption of the confrontation along the northern border of Israel, 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 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 and we are in the process of diversifying our manufacturing capabilities to locations outside of the Middle East, 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 $36.7 million of intangible assets, net and $31.2 million of goodwill as of September 30, 2011, that have originated from our acquisitions of Intel’s media and signaling business in 2006, EAS in 2007, and the NMS CP business acquired in 2008 and the reverse acquisition of 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 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 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 its customers for many of its 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.

Two of our key U.S. patents expired in March 2011, which could lead to competitors entering the market.

The Dialogic^® Brooktrout^® TDM boards, the Dialogic^® Diva^® TDM boards and the Dialogic^® Brooktrout^® SR140 software products make use of our patented technology to route a fax to a local area network using a direct inward dial number. The two patents covering this technology recently expired. The expiration of a patent typically results in increased competition and a decline in revenue. If other companies start to manufacture and sell a similar product based on this technology in the United States it could adversely impact our revenues.

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

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. (Removed and Reserved)

Item 5. Other Information

None.

Item 6. Exhibits.

Exhibit

Number

Exhibit Description

Form

File No.

Exhibit

Filing Date

Filed
Herewith

2.1

Incorporated
By
Reference

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

05/14/2010

3.1

Amended and Restated Certificate of Incorporation of the Registrant.

S-1

333-138121

3.2

10/20/2006

3.2

Certificate of Amendment of Amended and Restated Certificate of Incorporation of Registrant.

8-K

001-33391

3.2

10/20/2006

3.3

Certificate of Amendment of Amended and Restated Certificate of Incorporation of Registrant.

8-K

001-33391

3.3

10/20/2010

3.4

Amended and Restated Bylaws of Registrant.

S-1

333-138121

3.4

10/20/2006

3.5

Amendment to Amended and Restated Bylaws of Registrant.

8-K

001-33391

3.4

10/06/2010

4.1

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

4.2

Specimen stock certificate.

S-1/A

333-138121

4.2

03/30/2007

4.3

Registration Rights Agreement.

8-K

001-33391

4.1

10/20/2006

10.1

Second Amendment to Employment Agreement, dated August 26, 2011, by and between Dialogic Inc. and Jean Gagnon

8-K

001-33391

10.1

8/26/2011

10.2

Offer Letter, dated September 26, 2011, by and between Dialogic Inc. and John T. Hanson

8-K

001-33391

10.2

9/29/2011

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.IN

XBRL Instance Document

101.SCH#

XBRL Taxonomy Extension Schema Document

101.CAL#

XBRL Taxonomy Extension Calculation 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

Incorporated By Reference

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

05/14/2010

3.1

Amended and Restated Certificate of Incorporation of the Registrant.

S-1

333-138121

3.2

10/20/2006

3.2

Certificate of Amendment of Amended and Restated Certificate of Incorporation of Registrant.

8-K

001-33391

3.2

10/20/2006

3.3

Certificate of Amendment of Amended and Restated Certificate of Incorporation of Registrant.

8-K

001-33391

3.3

10/20/2010

3.4

Amended and Restated Bylaws of Registrant.

S-1

333-138121

3.4

10/20/2006

3.5

Amendment to Amended and Restated Bylaws of Registrant.

8-K

001-33391

3.4

10/06/2010

4.1

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

4.2

Specimen stock certificate.

S-1/A

333-138121

4.2

03/30/2007

4.3

Registration Rights Agreement.

8-K

001-33391

4.1

10/20/2006

10.1

Second Amendment to Employment Agreement, dated August 26, 2011, by and between Dialogic Inc. and Jean Gagnon

8-K

001-33391

10.1

8/26/2011

10.1

Offer Letter, dated September 26, 2011, by and between Dialogic Inc. and John T. Hanson

8-K

001-33391

10.2

9/29/2011

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.IN

XBRL Instance Document

101.SCH#

XBRL Taxonomy Extension Schema Document

101.CAL#

XBRL Taxonomy Extension Calculation Linkbase Document

101.LAB#

XBRL Taxonomy Extension Labels Linkbase Document

101.PRE#

XBRL Taxonomy Extension Presentation Linkbase Document

†

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company