bd771a4ebc6f4a4

Dialogic Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(In thousands, except share and per share data)

DIALOGIC INC

FORM 10-Q

For the Quarterly Period Ended September 30, 2013

INDEX



PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS
Unaudited Condensed Consolidated Balance Sheets	3
Unaudited Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)	4
Unaudited Condensed Consolidated Statements of Cash Flows	5
Notes to Unaudited Condensed Consolidated Financial Statements	6
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	24
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK	35
ITEM 4. CONTROLS AND PROCEDURES	35

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS	37
ITEM 1A. RISK FACTORS	37
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	54
ITEM 3. DEFAULTS UPON SENIOR SECURITIES	54
ITEM 4. MINE SAFETY DISCLOSURES	54
ITEM 5. OTHER INFORMATION	54
ITEM 6. EXHIBITS	55
SIGNATURE	57

Dialogic Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(In thousands, except share and per share data)


Dialogic Inc.
Condensed Consolidated Balance Sheets
(in thousands, except share and per share data)

	September 30,		December 31,
	2013		2012
	(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	4,511	$	6,501
Restricted cash		1,180		900
Accounts receivable, net of allowance of $2,142 and $1,217, respectively		22,304		32,422
Inventory		6,396		8,874
Other current assets		6,855		8,993
Total current assets		41,246		57,690
Property and equipment, net		4,587		5,978
Intangible assets, net		20,656		25,089
Goodwill		31,223		31,223
Other assets		2,036		2,147
Total assets	$	99,748	$	122,127

LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable	$	10,349	$	16,994
Accrued liabilities		13,352		21,270
Deferred revenue, current portion		13,989		12,742
Bank indebtedness		12,475		11,717
Income taxes payable		756		1,007
Total current liabilities		50,921		63,730
Long-term debt, related parties, net of discount		73,074		66,536
Warrants		594		1,985
Other long-term liabilities		5,707		8,978
Total liabilities		130,296		141,229
Commitments and contingencies
Preferred stock, $0.001 par value:
Authorized - 10,000,000 shares; Issued and outstanding - 1 share		—		—
Stockholders' deficit:
Common stock, $0.001 par value:
Authorized - 200,000,000 shares; Issued and outstanding
16,179,809 shares and 14,415,652 shares, respectively		16		14
Additional paid-in capital		262,893		257,658
Accumulated other comprehensive loss		(22,208)		(22,423)
Accumulated deficit		(271,249)		(254,351)
Total stockholders' deficit		(30,548)		(19,102)
Total liabilities and stockholders' deficit	$	99,748	$	122,127

See accompanying notes to Unaudited Condensed Consolidated Financial Statements.

Dialogic Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(In thousands, except share and per share data)


Dialogic Inc.
Unaudited Condensed Consolidated Statements of Operations
and Comprehensive Income (Loss)
(in thousands, except per share data)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2013		2012		2013		2012
Revenue:
Products	$	20,841	$	33,837	$	68,325	$	93,279
Services		9,366		10,251		26,752		29,808
Total revenue		30,207		44,088		95,077		123,087

Cost of revenue:
Products		6,944		11,654		25,389		38,329
Services		3,986		5,118		12,930		15,267
Total cost of revenue		10,930		16,772		38,319		53,596
Gross profit		19,277		27,316		56,758		69,491

Operating expenses:
Research and development, net		5,881		9,266		20,997		33,459
Sales and marketing		7,615		9,261		25,219		31,935
General and administrative		6,280		7,375		21,869		23,766
Restructuring charges, net		(2,323)		457		(1,997)		4,760
Total operating expenses		17,453		26,359		66,088		93,920
Income (loss) from operations		1,824		957		(9,330)		(24,429)

Other income (expense):
Interest and other income, net		109		242		56		95
Interest expense		(2,620)		(1,792)		(7,519)		(8,836)
Change in fair value of warrants		118		1,750		1,391		2,154
Foreign exchange loss, net		(8)		(278)		(919)		(1,047)
Total other expense, net		(2,401)		(78)		(6,991)		(7,634)
(Loss) income before provision for income taxes		(577)		879		(16,321)		(32,063)
Income tax provision		274		56		577		304
Net (loss) income	$	(851)	$	823	$	(16,898)	$	(32,367)
Net (loss) income per share - basic and diluted	$	(0.05)	$	0.08	$	(1.11)	$	(4.24)
Weighted average shares of common stock used in
calculation of net (loss) income per share - basic and diluted		16,046		10,229		15,227		7,634
Comprehensive income (loss):
Net (loss) income	$	(851)	$	823	$	(16,898)	$	(32,367)
Foreign currency translation adjustment		29		(192)		215		(424)
Total comprehensive (loss) income	$	(822)	$	631	$	(16,683)	$	(32,791)

See accompanying notes to Unaudited Condensed Consolidated Financial Statements.

Dialogic Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(In thousands, except share and per share data)


Dialogic Inc.
Unaudited Condensed Consolidated Statements of Cash Flows
(in thousands)

	Nine Months Ended September 30,
	2013		2012
Cash flows from operating activities:
Net loss	$	(16,898)	$	(32,367)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		6,891		9,205
Stock-based compensation		1,766		1,896
Amortization of debt issuance costs and debt discount		1,196		677
Fair value adjustment to warrants		(1,391)		(2,154)
Loss on disposal of fixed assets		13		364
Payment-in-kind interest expense on long-term debt		5,622		5,944
Bad debt expense, net		1,643		334
Gain on settlement of office lease obligation		(4,184)		—
Deferred income taxes		94		(48)
Other non-cash charges		215		(108)
Net changes in operating assets and liabilities
Accounts receivable		8,475		5,964
Inventory		2,399		10,033
Other current assets		2,136		1,715
Accounts payable and accrued liabilities		(11,529)		(8,432)
Deferred revenue		1,247		(1,617)
Income taxes payable		(251)		(693)
Other long-term liabilities		(1,682)		1,396
Net cash used in operating activities		(4,238)		(7,891)
Cash flows from investing activities:
Restricted cash		(280)		497
Purchases of property and equipment		(826)		(967)
Purchases of intangible assets		—		(73)
Net cash used in investing activities		(1,106)		(543)
Cash flows from financing activities:
Payments of debt issuance costs		—		(1,511)
Borrowings (payments) on bank indebtedness, net		154		(1,800)
Proceeds from long-term debt, net of original issue discount		3,200		4,000
Net cash provided by financing activities		3,354		689
Effect of exchange rate changes on cash and cash equivalents		—		53
Net decrease in cash and cash equivalents		(1,990)		(7,692)
Cash and cash equivalents at beginning of period		6,501		10,353
Cash and cash equivalents at end of period	$	4,511	$	2,661

Supplemental disclosure of cash flow information:
Cash paid
Interest	$	522	$	5,293
Income taxes	$	449	$	548
Non-cash financing activities:
Issuance of common stock in connection with debt modification	$	3,461	$	—
Debt issuance costs incurred as additional term loan debt	$	250	$	—
Prepayment premium on term loan conversion paid in convertible notes	$	—	$	1,500
Issuance of warrants in connection with debt refinancing	$	—	$	7,072
Conversion of long-term debt	$	—	$	33,034
See accompanying notes to Unaudited Condensed Consolidated Financial Statements.

Dialogic Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(In thousands, except share and per share data)

Note 1 – The Company

Dialogic Inc., the Network Fuel® company (“Dialogic” or the “Company”), inspires the world’s leading service providers and application developers to elevate the performance of media-rich communications across the most advanced networks. The Company increases the reliability of any-to-any network connections, enhances the impact of applications and amplifies the capacity of congested networks.

Wireless and wireline service providers use the Company’s products to transport, transcode, manage and optimize video, voice and data traffic while enabling VoIP and other media rich services. These service providers also utilize the Company’s technology to energize their revenue-generating value-added services platforms such as messaging, SMS, voice mail and conferencing, all of which are becoming increasingly video-enabled. Enterprises rely on the Company’s innovative products to simplify the integration of IP and wireless technologies and endpoints into existing communication networks, and to empower applications that serve businesses, including unified communication applications, contact center and Interactive Voice Response/Interactive Voice and Video Response.

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

The Company was incorporated in Delaware on October 18, 2001 as Softswitch Enterprises, Inc., and subsequently changed its name to NexVerse Networks, Inc. in 2001, Veraz Networks, Inc. in 2002 and Dialogic Inc. in 2010. The Company or businesses it has acquired have been providing products and services for nearly 25 years.

Note 2 – Basis of Presentation

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

The accompanying condensed consolidated financial statements as of September 30, 2013 and for the three and nine months ended September 30, 2013 and 2012 are unaudited. These financial statements and notes should be read in conjunction with the audited consolidated financial statements and related notes, together with management’s discussion and analysis of financial condition and results of operations, contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”), and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim reporting. As permitted under those rules, certain footnotes or other financial information that are normally required by U.S. GAAP have been condensed or omitted, and accordingly the balance sheet as of December 31, 2012 has been derived from audited consolidated financial statements at that date but does not include all of the information required by U.S. GAAP for complete financial statements. In the opinion of management, the accompanying unaudited condensed consolidated financial statements and notes have been prepared on the same basis as the annual financial statements and include adjustments (consisting of normal recurring adjustments) necessary for the fair presentation of the Company’s financial position as of September 30, 2013, results of operations for the three and nine months ended September 30, 2013 and 2012, and cash flows for the nine months ended September 30, 2013 and 2012. Certain reclassifications have been made to prior periods to conform to the current period presentation.

Note 3 – Immaterial Corrections to Prior Period Financial Statements

Subsequent to the issuance of the consolidated financial statements for the year ended December 31, 2012, the Company became aware of one revenue transaction with a distributor recorded during the second quarter of 2012 that should have been recorded on the sell-through basis in the third quarter of 2012 as a result of a non-standard term that was agreed to with the customer by the Company. The Company reviewed shipping dates and terms related to additional shipments of its products during 2012 and the first quarter of 2013 to determine whether revenue was recognized in the correct period. Based on the Company’s evaluation, it was not proper for the Company to recognize revenue for products collected by certain intermediate common carriers, used primarily at quarter-ends, since title and risk of loss did not pass until such shipments were picked up by the customer’s shipping agent under the agreed upon shipping terms. As a result, previously reported product revenue and cost of product revenue for each of the quarterly periods of 2012 were misstated. In addition, the opening accumulated deficit as of January 1, 2012 was understated and the ending accumulated deficit as of December 31, 2012 was understated.

The Company assessed the materiality of these errors, using relevant quantitative and qualitative factors, and determined that these errors, both individually and in the aggregate, were not material to any previously reported period. The Company made these immaterial corrections to the 2012 financial statements, which include corrections to each of the quarterly periods of 2012.

Dialogic Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(In thousands, except share and per share data)

Accordingly, the December 31, 2012 consolidated balance sheet as presented in this Form 10-Q has been revised from the information presented in the Company’s most recent Annual Report on Form 10-K as follows: accounts receivable has been reduced by $1.8 million, inventory has been increased by $0.6 million and ending accumulated deficit has been increased by $1.2 million. The opening accumulated deficit as of January 1, 2012 was also increased by $1.4 million. The impact of the errors as of and for the year ended December 31, 2012 and for each of the quarters of 2012 is shown in the tables below. There was no impact on cash flows from operating activities in any of the periods presented. The revised financial data will be reflected when those periods are published again in the Company’s future filings with the SEC, as appropriate.

The following table summarizes the impact of immaterial errors on the Company’s consolidated balance sheet as of December 31, 2012.


		As Reported		Immaterial Corrections		As Revised

Assets:
Accounts receivable	$	34,248	$	(1,826)	$	32,422
Inventory	$	8,306	$	568	$	8,874
Total current assets	$	58,948	$	(1,258)	$	57,690
Total assets	$	123,385	$	(1,258)	$	122,127

Liabilities Stockholders' Deficit:
Accumulated deficit	$	(253,093)	$	(1,258)	$	(254,351)
Total stockholders' deficit	$	(17,844)	$	(1,258)	$	(19,102)
Total liabilities and stockholders' deficit	$	123,385	$	(1,258)	$	122,127

Dialogic Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(In thousands, except share and per share data)

The following table summarizes the impact of immaterial corrections on the Company’s consolidated statement of operations and comprehensive income (loss) for the year ended December 31, 2012 and for each of the quarters of 2012.


As Reported		Q1 2012		Q2 2012		Q3 2012		Q4 2012		YTD 2012

Revenue:
Products	$	31,510	$	28,599	$	32,140	$	28,980	$	121,229
Total revenue		41,107		38,559		42,391		37,912		159,969
Cost of revenue:										—
Products		11,067		15,901		11,070		10,483		48,521
Total cost of revenue		16,238		20,879		16,188		14,928		68,233
Gross profit		24,869		17,680		26,203		22,984		91,736
Loss from operations		(7,207)		(17,805)		(156)		(5,547)		(30,715)
Loss before provision (benefit) for income taxes		(14,425)		(18,143)		(234)		(4,755)		(37,557)
Net loss	$	(14,785)	$	(18,031)	$	(290)	$	(4,664)	$	(37,770)
Net loss per share - basic and diluted	$	(2.35)	$	(2.85)	$	(0.03)	$	(0.32)	$	(4.04)
Total comprehensive income (loss)	$	(14,834)	$	(18,214)	$	(482)	$	(4,457)	$	(37,987)

Immaterial Corrections		Q1 2012		Q2 2012		Q3 2012		Q4 2012		YTD 2012
Revenue:
Products	$	978	$	(1,645)	$	1,697	$	(920)	$	110
Total revenue		978		(1,645)		1,697		(920)		110
Cost of revenue:
Products		(344)		637		(584)		333		42
Total cost of revenue		(344)		637		(584)		333		42
Gross profit		634		(1,008)		1,113		(587)		152
Loss from operations		634		(1,008)		1,113		(587)		152
Loss before provision (benefit) for income taxes		634		(1,008)		1,113		(587)		152
Net loss	$	634	$	(1,008)	$	1,113	$	(587)	$	152
Net loss per share - basic and diluted	$	0.10	$	(0.16)	$	0.11	$	(0.04)	$	0.02
Total comprehensive income (loss)	$	634	$	(1,008)	$	1,113	$	(587)	$	152

As Revised		Q1 2012		Q2 2012		Q3 2012		Q4 2012		YTD 2012
Revenue:
Products	$	32,488	$	26,954	$	33,837	$	28,060	$	121,339
Total revenue		42,085		36,914		44,088		36,992		160,079
Cost of revenue:
Products		11,411		15,264		11,654		10,150		48,479
Total cost of revenue		16,582		20,242		16,772		14,595		68,191
Gross profit		25,503		16,672		27,316		22,397		91,888
Loss from operations		(6,573)		(18,813)		957		(6,134)		(30,563)
Loss before provision (benefit) for income taxes		(13,791)		(19,151)		879		(5,342)		(37,405)
Net loss	$	(14,151)	$	(19,039)	$	823	$	(5,251)	$	(37,618)
Net loss per share - basic and diluted	$	(2.25)	$	(3.00)	$	0.08	$	(0.36)	$	(4.03)
Total comprehensive income (loss)	$	(14,200)	$	(19,222)	$	631	$	(5,044)	$	(37,835)

Dialogic Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(In thousands, except share and per share data)

Note 4 – Summary of Significant Accounting Policies

There have been no significant changes in the Company’s accounting policies for the three and nine months ended September 30, 2013 as compared to the significant accounting policies described in its Annual Report on Form 10-K for the year ended December 31, 2012.

Risks and Uncertainties

The Company has experienced significant losses in the past and has not sustained quarter over quarter profits. The Company is also highly leveraged, with $12.5 million in current bank indebtedness and $73.1 million in long-term debt, net of discount as of September 30, 2013. During 2012, the Company and certain of its subsidiaries entered into and subsequently amended the Third Amended and Restated Credit Agreement, dated as of March 22, 2012, (the “Term Loan Agreement”) with Obsidian, LLC, as agent, and Special Value Expansion Fund, LLC, Special Value Opportunities Fund, LLC, and Tennenbaum Opportunities Partners V, LP, as lenders (collectively the “Term Lenders”), which among other things, reduced the stated interest rate to 10% from 15%, revised the financial covenants and provided for additional borrowings.

On February 7, 2013, the Company and certain of its subsidiaries entered into a Third Amendment to the Term Loan Agreement (the “Third Amendment”), in which the Term Lenders provided additional borrowings of $4.0 million, in exchange for 1,442,172 shares of common stock pursuant to a Subscription Agreement (the “Subscription Agreement”). Further, the minimum EBITDA financial covenant was amended and its application was postponed until the fiscal quarter ending March 31, 2014 and the other financial covenants, including the minimum liquidity covenant, are no longer applicable under the Term Loan Agreement. Additionally, the definition of Maturity Date in the Term Loan Agreement was also amended to provide that it shall be extended to March 31, 2016 upon the earlier to occur of (i) the receipt by the Company of Net Equity Proceeds (as defined in the Term Loan Agreement) in an aggregate amount of at least $5.0 million or (ii) a Change in Control (as defined in the Term Loan Agreement).

These actions were determined to be a troubled debt restructuring and were taken to improve the Company’s liquidity, leverage and future operating cash flow. The Company also took certain restructuring actions during the year ended December 31, 2012 and the nine months ended September 30, 2013 (see Note 8 for further discussion) in order to improve its future operating performance.

As discussed further in Notes 6 and 7, the Company is required to meet certain financial covenants under the Term Loan Agreement and Revolving Credit Agreement dated March 5, 2008 (“Revolving Credit Agreement”) between the Company and Wells Fargo Foothill Canada ULC (the “Revolving Credit Lender”), including 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). Under the Term Loan Agreement, the Company must maintain a minimum EBITDA of at least $1.0 million for the three month period ending on March 31, 2014; $2.0 million for the six month period ending on June 30, 2014; $3.0 million for the nine month period ending on September 30, 2014; and $4.0 million for the twelve month period ending on December 31, 2014 and the last date of each twelve month period ending on December 31thereafter. Under the Revolving Credit Agreement, the Company must maintain a minimum EBITDA of at least $6.0 million for the twelve month period ending on March 31, 2014 and for each twelve month period ending on the last date of each quarter thereafter. In the event that the Company is unable to achieve the aforementioned EBTDA levels, the covenants may not be met and the Company would be required to reclassify its long-term debt under the Term Loan Agreement to current liabilities on its consolidated balance sheet.

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

Dialogic Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(In thousands, except share and per share data)

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

Based on the Company’s current plans and business conditions, it believes that its existing cash and cash equivalents, expected cash generated from operations and available credit facilities will be sufficient to satisfy its anticipated cash requirements through the end of 2013. Accordingly, the accompanying consolidated financial statements have been prepared on a going concern basis.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual amounts could differ from these estimates.

Significant estimates and judgments relied upon by management in preparation of these consolidated financial statements include revenue recognition, allowances for doubtful accounts, reserves for sales returns and allowances, reserves for excess and obsolete inventory, warranty obligations, valuation of deferred tax assets, stock-based compensation, income tax uncertainties, valuation of goodwill and intangible assets, useful lives of long-lived assets and the fair value of warrants.

The consolidated financial statements included in this Form 10-Q include estimates based on currently available information and management’s judgment as to the outcome of future conditions and circumstances. Changes in the status of certain facts or circumstances could result in material changes in the estimates used in the preparation of the consolidated financial statements, and actual results could differ from the estimates and assumptions. Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic environment, which management believes to be reasonable under the circumstances. The Company adjusts such estimates and assumptions when facts and circumstances dictate. Illiquid credit markets, volatile equity, foreign currency, emerging markets, and declines in consumer spending have combined to increase the uncertainty inherent in such estimates and assumptions. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates. Changes in those estimates resulting from continuing changes in the economic environment will be reflected in the financial statements in future periods.

Fair Value Measurements

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants based on the highest and best use of the asset or liability. As such, fair value is a market based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. The inputs used to measure fair value are as follows:



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

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

Level 3:		Unobservable inputs for the asset or liability

The carrying amounts of cash, cash equivalents, restricted cash, accounts receivable, bank indebtedness, accounts payable, and accrued liabilities approximate fair value because of their generally short maturities. For cash equivalents, the estimated fair values are based on market prices. The fair value of the Revolving Credit Agreement approximates the carrying amount since interest is based on market based variable rates. The fair value of the Company’s long-term debt is estimated by discounting 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

(In thousands, except share and per share data)

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The Company evaluates its financial assets and liabilities subject to fair value measurements on a recurring basis to determine the appropriate level of classification for each reporting period. The following table sets forth the Company’s financial liabilities that were measured at fair value on a recurring basis as of September 30, 2013 and December 31, 2012:


September 30, 2013		Fair Value		Level 1		Level 2		Level 3
Liabilities:
Warrants	$	594	$	—	$	594	$	—

December 31, 2012		Fair Value		Level 1		Level 2		Level 3
Liabilities:
Warrants	$	1,985	$	—	$	1,985	$	—

The Company measured its warrants at fair value on a recurring basis and has determined that these financial liabilities should be classified as level 2 instruments in the fair value hierarchy. The following table sets forth the Company’s warrant liability that was measured at fair value as of September 30, 2013 and December 31, 2012 using the Black-Scholes method of valuation using the following assumptions.


	September 30,		December 31,
	2013		2012
Expected Term	3.5 years		4.25 years
Volatility	89	%	90	%
Dividend Yield	—	%	—	%
Risk-Free Interest Rate	1.39	%	0.72	%

Concentrations and Credit Risk

As of September 30, 2013 and December 31, 2012, accounts receivable aggregating approximately $21.0 million and $16.8 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 0.13% of consolidated revenue.

No customers accounted for over 10% of the Company’s revenue for the three and nine months ended September 30, 2013 and 2012, respectively. No customer accounted for more than 10% of accounts receivable as of September 30, 2013 and December 31, 2012.

Dialogic Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(In thousands, except share and per share data)

Note 5 – Select Balance Sheet Information

Inventory

Inventory is stated at the lower of cost, determined on a first in, first out basis, or market, and consists primarily of raw material and components; work in process and finished products. The following table sets forth the components of inventory as of September 30, 2013 and December 31, 2012:


		September 30, 2013		December 31, 2012
Raw materials and components	$	2,707	$	3,580
Work in process		517		1,031
Finished products		3,172		4,263
Total inventory	$	6,396	$	8,874

Property and Equipment

Property and equipment are stated at cost, less accumulated depreciation. Depreciation is calculated using the straight-line method over the estimated useful lives. The following table sets forth the components of property and equipment, net as of September 30, 2013 and December 31, 2012:


		September 30, 2013		December 31, 2012

Computer equipment and software	$	40,583	$	40,025
Furniture and fixtures		3,359		3,355
Machinery and equipment		13,208		13,077
Leasehold improvements		4,655		4,278
		61,805		60,735
Less: accumulated depreciation		(57,218)		(54,757)
Total property and equipment, net	$	4,587	$	5,978

Depreciation expense was $0.8 million and $0.7 million for the three months ended September 30, 2013 and 2012, respectively and $2.5 million for the nine months ended September 30, 2013 and 2012.

Goodwill and Intangible Assets

As of September 30, 2013 and December 31, 2012, goodwill was $31.2 million. Goodwill represents costs in excess of the fair value of net tangible and identifiable net intangible assets acquired in business combinations. The Company is required to perform a test for impairment of goodwill and indefinite-lived intangible assets on an annual basis or more frequently if impairment indicators arise during the year.

As of June 30, 2013, the Company performed an interim impairment test based on triggering events resulting from the significant decrease in the price of its common stock and delisting from the NASDAQ Stock Market during the three months ended June 30, 2013. Based on the results of the interim impairment test, the estimated fair value of the reporting unit exceeded its carrying value by approximately 10% and therefore no impairment was required as of June 30, 2013. During the three months ended September 30, 2013, there were no new triggering events other than those that existed as of June 30, 2013. The Company will assess the estimated fair value of the reporting unit during the fourth quarter as part of its annual test for impairment of goodwill and indefinite-lived intangible assets.

Dialogic Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(In thousands, except share and per share data)

The following sets forth a summary of intangible assets as of September 30, 2013 and December 31, 2012:


		September 30, 2013

		Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount
Indefinite-lived intangibles:
Trade names	$	10,000	$	—	$	10,000
Finite-lived intangibles:
Technology		55,949		(49,058)		6,891
Customer relationships		38,312		(34,612)		3,700
Software licenses		3,489		(3,489)		—
Patents		1,317		(1,252)		65
	$	109,067	$	(88,411)	$	20,656


		December 31, 2012
		Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount
Indefinite-lived intangibles:
Trade names	$	10,000	$	—	$	10,000
Finite-lived intangibles:
Technology		55,949		(45,792)		10,157
Customer relationships		38,312		(33,525)		4,787
Software licenses		3,489		(3,486)		3
Patents		1,317		(1,175)		142
	$	109,067	$	(83,978)	$	25,089

Amortization expense was $1.5 million and $1.6 million for the three months ended September 30, 2013 and 2012, respectively and $4.4 million and $6.7 million for the nine months ended September 30, 2013 and 2012, respectively.

Dialogic Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(In thousands, except share and per share data)

Accrued Liabilities

The following table summarizes the Company’s accrued liabilities as of September 30, 2013 and December 31, 2012.


		September 30,		December 31,
		2013		2012

Accrued compensation and benefits	$	5,507	$	7,744
Accrued restructuring expenses		251		3,773
Accrued royalty expenses		1,283		1,280
Accrued commissions		611		1,585
Accrued professional fees		2,008		2,147
Deferred rent		25		271
Other accrued expenses		3,667		4,470
Total accrued liabilities	$	13,352	$	21,270

On July 8, 2013, the Company’s subsidiary Dialogic (US) Inc. entered into a Settlement Agreement and Mutual Release (“Settlement Agreement”) with Intel Americas, Inc. (“Intel”) , whereby it agreed to pay $1.0 million, in equal installments over a ten month period, commencing within three working days of the executed agreement, in order to settle the dispute described in the Company’s Quarterly Report on Form 10-Q for the quarterly period ending June 30, 2013 and its other filings with the SEC. As a result, the Company recorded a benefit of $1.8 million during the three months ended September 30, 2013 related to the Settlement Agreement.

In addition, on July 8, 2013, Dialogic (US) Inc. and Intel entered into a Second Amendment to Sublease Agreement, dated September 19, 2006, with respect to the property located in Parsippany, New Jersey whereby the Company agreed to pay base rent, utilities and taxes of approximately $0.2 million per month, beginning from July 1, 2013 through December 31, 2015 (the end of the lease term). As a result, the Company reversed its deferred rent accrual in the amount of $0.7 million during the three months ended September 30, 2013.

In the event Dialogic (US) Inc. does not pay rent pursuant to this sublease at any time, it has 60 days to leave the space, with no future liabilities or penalties. As a result, the Company reversed its restructuring accrual in the amount of $2.3 million during the three months ended September 30, 2013. In the event Dialogic (US) Inc. stops payment and does not vacate the space within 60 days, Dialogic (US) Inc. will have to pay the balance of the remaining rent owed under the sublease, plus a penalty of $1.4 million.

Note 6 – Bank Indebtedness

The Company has a working capital facility, the Revolving Credit Agreement with the Revolving Credit Lender. As of September 30, 2013, the borrowing base under the Revolving Credit Agreement amounted to $13.7 million, the Company borrowed $12.5 million, and the unused line of credit totaled $12.5 million, of which $1.2 million was available for additional borrowings. As of December 31, 2012, the borrowing base under the Revolving Credit Agreement amounted to $18.1 million, the Company had borrowed $11.7 million, and the unused line of credit totaled $13.3 million, of which $6.4 million was available for additional borrowings.

On February 7, 2013, the Company and certain of its subsidiaries entered into a Twentieth Amendment to the Revolving Credit Agreement (the “Twentieth Amendment”) with the Revolving Credit Lender. Pursuant to the Twentieth Amendment, the Revolving Credit Agreement was amended to change the minimum EBITDA financial covenant and postpone its application until the first quarter ending March 31, 2014. Previously, the minimum EBITDA financial covenant would have commenced in the quarter ending June 30, 2013. The “Availability Block” was increased to $0.5 million and will increase by an additional $0.1 million on July 1, 2013 and on the first day of each fiscal quarter thereafter. The Revolving Credit Agreement was also amended to reduce the Borrowing Base by the Availability Block at all times.

Dialogic Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(In thousands, except share and per share data)

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

Term. The commitment of the Revolving Credit Lender to make revolving credit loans terminates and all outstanding revolving credit loans are due on the maturity date, which is defined as the earlier of (i) March 31, 2015 or (ii) maturity of the Indebtedness (by acceleration or otherwise) under the Term Loan Agreement. The Company may repay the facility at its own option with 30 days’ notice to the Revolving Credit Lender.

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

Interest Rates and Fees. At the Company’s election, revolving credit loans may bear interest at a rate equal to the prime rate plus 1.5% or at a rate equal to reserve-adjusted LIBOR plus 3%. Upon the occurrence and continuance of an event of default and at the election of the Revolving Credit Lender, the revolving credit loans will bear interest at a default rate equal to the 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 and an annual deferred closing fee.

For the three months ended September 30, 2013 and 2012, the Company recorded interest expense related to the Revolving Credit Agreement in the amount of $0.1 million. The average interest rate for the three months ended September 30, 2013 and 2012 was 4.75%. For the nine months ended September 30, 2013 and 2012, the Company recorded interest expense related to the Revolving Credit Agreement in the amount of $0.4 million and $0.5 million, respectively. The average interest rates for the nine months ended September 30, 2013 and 2012 were 4.75% and 5.05%, respectively.

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

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

Minimum EBITDA. Defined as earnings plus interest expense, taxes, depreciation, amortization, foreign exchange gain or loss and subject to certain additional adjustments in accordance with U.S. GAAP. The Company must also maintain Minimum EBITDA of at least $6.0 million for the twelve month period ending on March 31, 2014 and for each twelve month period ending on the last date of each quarter thereafter.

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 Revolving Credit Agreement contains customary events of default, including a change in control of the Company and an Event of Default (as defined in the Revolving Credit Agreement), which results in a cross-default under the Term Loan Agreement.

Note 7 – Debt and Related Party Transactions

Tennenbaum Capital Partners, LLC (“Tennenbaum”), a private equity firm, manages the funds of the Term Lenders. Tennenbaum also owned approximately 55% of the Company’s outstanding common stock as of September 30, 2013. One Managing Partner for Tennenbaum also serves as a member of the Company’s Board of Directors.

In connection with entering into the Term Loan Agreement during 2012, the Company issued to the Term Lenders warrants to purchase 3.6 million shares of common stock with an exercise price of $5.00 per share. The fair value of the warrants at issuance of $7.1 million reduced the carrying amount of the Term Loan as a debt discount and is accreted to interest expense over the life of the Term Loan. The warrants have been determined to qualify as a liability and, therefore, have been classified as such in the accompanying unaudited condensed consolidated balance sheets. The fair value of the warrants is determined at the end of each reporting period and the change in fair value is recorded as a change in fair value of warrants in the accompanying unaudited condensed consolidated statements of operations and comprehensive income (loss). The fair value of the warrants was $0.6 million and $2.0 million as of September 30, 2013 and December 31, 2012, respectively. The Company recorded a gain of $0.1 million and $1.8 million for the three months ended September 30, 2013 and 2012, respectively, and a gain of $1.4 million and $2.2 million for the nine months ended September 30, 2013 and 2012, respectively, to reflect the change in fair value, which is recorded as a component of other income (expense), net in the accompanying unaudited condensed consolidated statements of operations and comprehensive income (loss).

Dialogic Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(In thousands, except share and per share data)

On February 7, 2013, the Company and certain of its subsidiaries entered into a Third Amendment to the Term Loan Agreement. Pursuant to the Third Amendment, the Term Lenders agreed to provide for additional borrowing of $4.0 million under the Term Loan Agreement. In consideration of this additional borrowing, the Company issued an amount of common stock to the Term Lenders equal to the market value of 10.0% of the outstanding shares of the common stock of the Company based on the closing price of the Company’s common stock immediately prior to such issuance pursuant to a Subscription Agreement, further described elsewhere in this Form 10-Q. Further, the minimum EBITDA financial covenant was amended and its application was postponed until the fiscal quarter ending March 31, 2014 and the other financial covenants, including the minimum liquidity covenant, are no longer applicable under the Term Loan Agreement. Additionally, the definition of Maturity Date in the Term Loan Agreement was also amended to provide that it shall be extended to March 31, 2016 upon the earlier to occur of (i) the receipt by the Company of Net Equity Proceeds (as defined in the Term Loan Agreement) in an aggregate amount of at least $5.0 million or (ii) a Change in Control (as defined in the Term Loan Agreement).

A closing fee in the amount of $0.3 million was added to principal amount of Term Loans in consideration for the third quarter 2012 cash interest of $0.8 million converted into paid in kind (“PIK”) and $0.5 million of loans funded by the Term Lenders on December 28, 2012.

In connection with the Third Amendment, on February 7, 2013, a total of 1,442,172 shares of common stock were issued to the Term Lenders under the terms of the Subscription Agreement.

The Company and the Term Lenders also entered into a Registration Rights Agreement with the Term Lenders dated February 7, 2013 (the “Rights Agreement”) pursuant to which the Company agreed to file one or more registration statements registering for resale the shares of common stock issued under the Subscription Agreement within 90 days of such issuance. The Company obtained a waiver from the Term Lenders until it regains its eligibility to file a registration statement on Form S-3.

The following describes certain provisions of the Term Loan Agreement, as amended:

Additional Borrowings. The Term Lenders have at their discretion the ability to provide additional loans to the Company up to $10.0 million on the same terms as the Term Loans. As of December 31, 2012, the Company had received $4.5 million under this provision. On February 7, 2013, in connection with the Third Amendment, the Term Lenders provided for an additional borrowing in the amount of $4.0 million, which was added to the principal amount of Term Loans. Of the total $4.0 million borrowing, approximately $3.2 million was received in cash, after an original issue discount of $0.8 million. There is $1.5 million remaining to be borrowed at the discretion of the Term Lenders.

Maturity. The Term Loans are due on March 31, 2015, provided that such date shall be extended to March 31, 2016 upon the earlier to occur of (i) the receipt by the Company of Net Equity Proceeds (as defined in the Term Loan Agreement) in an aggregate amount of at least $5.0 million or (ii) a Change in Control.

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

The Company is required to offer to prepay the Term Loans out of the net proceeds of certain asset sales (including asset sales by the Company and its subsidiaries) at 100% of the principal amount of Term Loans prepaid, plus the prepayment premiums described above, subject to the Company’s right to retain proceeds of up to $1.0 million in the aggregate each fiscal year. Subject to the right to retain proceeds of up to $1.5 million in the aggregate in each fiscal year, the Company is also required to prepay the Term Loans out of 50% of the net proceeds from certain equity issuances by the Company, plus the prepayment premiums described above, except that no prepayment premium is required to be paid in respect of the first $35.0 million of net proceeds of an issuance by the Company of stock at a price of $6.25 per share or more.

Interest Rates. The Term Loans bear interest, payable quarterly in cash, at a rate per annum of 10%. In 2012 and thereafter, if certain minimum cash requirements are not met, interest may be paid at the rate of 5% in cash with the remaining 5% added to principal and PIK. However, for interest incurred during the three and nine months ended September 30, 2013, the Company was permitted, based on an agreement with the Term Lender, to pay the cash interest due as PIK.

Upon the occurrence and continuance of an event of default, the Term Loans will bear interest at a default rate equal to the applicable interest rate plus 2%.

For the three months ended September 30, 2013 and 2012, the Company recorded interest expense of $2.4 million and $1.5 million, respectively, related to the Term Loan Agreement of which $2.4 million and $1.4 million, respectively, related to accrued PIK interest and amortization charges for deferred debt issuance costs and accretion of debt discount, respectively. For the nine months ended September 30, 2013 and 2012, the Company recorded interest expense of $6.8 million and $7.5 million, respectively, related to the Term Loan Agreement of which $6.8 million and $3.5 million, respectively, related to accrued PIK interest and amortization charges for deferred debt issuance costs and accretion of debt discount.

Dialogic Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(In thousands, except share and per share data)

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

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

Financial Covenants. The Term Loans subject the Company to a 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. The Company must maintain a Minimum EBITDA of at least $1.0 million for the three month period ending on March 31, 2014; $2.0 million for the six month period ending on June 30, 2014; $3.0 million for the nine month period ending on September 30, 2014; and $4.0 million for the twelve month period ending on December 31, 2014 and the last date of each twelve month period thereafter. Financial covenants pertaining to Minimum Interest Coverage Ratio, Maximum Consolidated Total Leverage Ratio and Minimum Liquidity have been removed from the Term Loan Agreement, effective with the Third Amendment.

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 and an Event of Default (as defined in the Term Loan Agreement), which results in a cross-default under the Revolving Credit Agreement.

The following table summarizes debt with related parties as of September 30, 2013 and December 31, 2012:


		September 30,		December 31,
		2013		2012
Term loan, principal	$	78,536	$	68,665
Debt discount		(5,462)		(2,129)
Total long-term	$	73,074	$	66,536

Note 8 – Restructuring Charges

The Company has implemented various initiatives to reduce its overall cost structure, including exiting certain facilities and transitioning work to other locations. Costs incurred in connection with these actions include employee separation costs, including severance, benefits and outplacement, and lease termination, cease use and other related facility exit costs

In December 2012, the Company committed to and approved a restructuring plan for a workforce reduction of approximately 95 full-time employees. On January 9, 2013, the Company executed upon the restructuring plan and notified the affected employees. The termination benefits are comprised of severance and related ongoing employee benefits. The Company had undertaken such workforce reduction in order to reduce operating costs and focus its resources on a restructured business model. During the three and nine months ended September 30, 2013, cash payments amount to $0.1 million and $2.6 million, respectively, for these termination benefits. For the three and nine months ended September 30, 2013, the Company recorded a charge in the amount of $0.02 million and $0.1 million, respectively, for termination benefits. As of September 30, 2013 and December 31, 2012, zero and $2.5 million, respectively, remained accrued and unpaid for these termination benefits, which are reflected as a component of accrued liabilities in the accompanying unaudited condensed consolidated balance sheets.

For the three and nine months ended September 30, 2012, the Company recorded employee separation costs and other costs related to employee termination benefits in the amount of $0.2 million and $3.6 million. Such charges were recorded as a component of restructuring charges in the accompanying unaudited condensed consolidated statements of operations and comprehensive income (loss).

In an effort to reduce overall operating expenses, the Company decided it was beneficial to close or consolidate office space at certain locations. In addition, the Company amended its sublease for office space and settled unpaid rent during the third quarter 2013. For the three and nine months ended September 30, 2013, the Company recorded a benefit in the amount of $2.3 million related to the reversal of its restructuring accrual for the Parsippany, New Jersey location based on the new sublease which allows for the Company to exit the space within 60 days, with no future liability or penalty, based on new sublease terms. In addition during the nine months

Dialogic Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(In thousands, except share and per share data)

ended September 30, 2013, the Company recorded a net charge in the amount of $0.3 million for adjustments to its facility related restructuring accruals for Eatontown, New Jersey and Renningen, Germany, which was partially offset by idle space in Milpitas, California, and Needham, Massachusetts. Such credits and charges, net are recorded as a component of restructuring charges in the accompanying unaudited condensed consolidated statements of operations and comprehensive income (loss).

For the three and nine months ended September 30, 2012, the Company incurred expense of $0.3 million and $1.2 million, respectively, in lease and facility exit costs related to the Company’s research and development facilities in Getzville, New York and Renningen, Germany. Such charges are recorded as a component of restructuring charges in the accompanying unaudited condensed consolidated statements of operations and comprehensive income (loss).

As of September 30, 2013, $0.3 million of lease and facility exit costs were reflected as a component of accrued liabilities and $0.5 million was reflected as a component of other non-current liabilities in the accompanying unaudited condensed consolidated balance sheets. As of December 31, 2012, $1.2 million of lease and facility exit costs were reflected as a component of accrued liabilities and $1.9 million was reflected as a component of other non-current liabilities in the accompanying unaudited condensed consolidated balance sheets.

The following table sets forth restructuring activity for the three and nine month periods ended March 31, 2013, June 30, 2013 and September 30, 2013, respectively:


		Accrual for Employee Termination/ Severance and Related Costs		Accrual for Facilities Costs		Total

Balance, December 31, 2012	$	2,487	$	3,131	$	5,618
Charges to operations, net		(43)		255		212
Payments made during the period		(1,746)		(126)		(1,872)
Balance, March 31, 2013	$	698	$	3,260	$	3,958
Charges to operations, net		103		11		114
Payments made during the period		(684)		(70)		(754)
Balance, June 30, 2013	$	117	$	3,201	$	3,318
Charges to operations, net		23		—		23
Reversal of restructuring accrual related to lease amendment		—		(2,346)		(2,346)
Payments made during the period		(140)		(84)		(224)
Balance, September 30, 2013	$	—	$	771	$	771

Dialogic Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(In thousands, except share and per share data)

Note 9 – Stock-Based Compensation

The following table summarizes stock-based compensation expense by category for the three and nine months ended September 30, 2013 and 2012:


		Three Months Ended September 30,				Nine Months Ended September 30,

		2013		2012		2013		2012
Cost of revenue	$	20	$	86		133	$	244
Research and development		25		146		121		506
Sales and marketing		61		175		335		551
General and administrative		362		238		1,177		595
Total stock-based compensation expense	$	468	$	645	$	1,766	$	1,896

Stock Options

The following table sets forth the summary of stock options for the nine months ended September 30, 2013:


	Number of Options Outstanding		Weighted Average Exercise Price	Weighted Average Contractual Life (in years)

Balance, December 31, 2012	831,663	$	14.70	7.57
Granted	2,000	$	1.00
Exercised	—
Cancelled and forfeited	(212,327)	$	13.08
Balance, September 30, 2013	621,336	$	15.20	6.67

Vested and expected to vest at September 30, 2013	606,297	$	15.45	6.62
Exercisable at September 30, 2013	362,689	$	21.73	5.33

As of September 30, 2013 and December 31, 2012, the weighted-average grant date fair value for stock options outstanding was $10.24 and $10.40, respectively. For the three months ended September 30, 2013 and 2012, stock-based compensation expense related to stock options was $0.2 million and $0.3 million, respectively. For the nine months ended September 30, 2013 and 2012, stock-based compensation related to stock options was $0.6 million and $0.8 million, respectively. The total intrinsic value of options exercised was zero during the three and nine months ended September 30, 2013 and 2012. As of September 30, 2013, $1.2 million of total unrecognized compensation expense related to non-vested stock options granted to employees and directors is expected to be recognized over a weighted average period of 2.4 years.

Stock-based compensation cost is estimated at the grant date based on the award’s fair value. For stock options, fair value is calculated by the Black-Scholes option-pricing model. For restricted stock units (“RSUs”), fair value is determined based on the stock price on grant date. The Company recognizes the compensation cost of stock-based awards on a straight-line basis over the requisite service period, which is generally the vesting period of the award. The Black-Scholes model requires various judgment-based assumptions including interest rates, expected volatility and expected term.

The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for the period commensurate with the expected term. The computation of expected volatility is based on the historical volatility of the Company’s stock, as well as historical and implied volatility of comparable companies from a representative peer group based on industry and market capitalization data. 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 exercise behavior. The expected term for stock-based awards has been determined using the “simplified” method. The Company will continue to use the simplified method until it has enough historical experience to provide a reasonable estimate of expected term. The Company

Dialogic Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(In thousands, except share and per share data)

has not paid, and does not anticipate paying, cash dividends on its common stock; therefore the expected dividend yield is assumed to be zero. Management makes an estimate of expected forfeitures and recognizes compensation expense only for the equity awards expected to vest.

The following weighted average assumptions were used to value options granted during the three and nine months ended September 30, 2013 and 2012:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2013		2012		2013		2012
Risk-free interest rate	—	%	0.95	%	1.18	%	0.87	%
Expected volitility	—	%	89	%	91	%	89	%
Expected life (in years)	—		6.0		6.0		6.0
Dividend yield	—		—		—		—

Restricted Stock Awards

The following table summarizes restricted stock outstanding as of September 30, 2013:


	Number of RSUs	Weighted Average Contractual Life (in years)	Weighted Average Grant Date Fair Value
Balance, December 31, 2012	237,612	0.97	8.03
Granted	1,032,096		1.95
Vested	(311,991)		5.72
Forfeited or expired	(85,481)		3.73
Balance, September 30, 2013	872,236	0.99	2.10

For the three months ended September 30, 2013 and 2012, stock-based compensation expense related to RSUs was $0.3 million and $0.4 million, respectively. For the nine months ended September 30, 2013 and 2012, stock-based compensation related to RSUs was $1.2 million and $1.0 million, respectively. During the three and nine months ended September 30, 2013, the aggregate intrinsic value of vested RSUs was $0.2 million and $0.3 million. As of September 30, 2013, $1.5 million of total unrecognized compensation expense related to non-vested RSUs granted to employees and directors is expected to be recognized over a weighted average period of 1.4 years.

Employee Stock Purchase Plan

The Company has in effect the 2006 Employee Stock Purchase Plan as amended (“2006 ESPP”) under which subject to certain limitations, employees may elect to have 1% to 15% of their compensation withheld through payroll deductions to purchase shares of common stock. 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. For the three months ended September 30, 2013 and 2012, the total share-based compensation expense related to such purchases amounted to zero and $0.02 million, respectively. For the nine months ended September 30, 2013 and 2012, the total share-based compensation expense related to such purchases amounted to zero and $0.03 million, respectively.

As of September 30, 2013, 52,734 shares have been issued under the 2006 ESPP and 317,478 shares remained available for issuance under the 2006 ESPP.

Dialogic Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(In thousands, except share and per share data)

Note 10 – Net Loss Allocable to Common Stockholders per Share

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

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


		Three Months Ended September 30,				Nine Months Ended September 30,
		2013		2012		2013		2012
Numerator:
Net loss (income)	$	(851)	$	823	$	(16,898)	$	(32,367)

Denominator:
Basic and diluted weighted-average shares:
Weighted average shares used in computing
basic and diluted net (loss) income per share		16,046		10,229		15,227		7,634
Net (loss) income per share - basic and diluted	$	(0.05)	$	0.08	$	(1.11)	$	(4.24)

Note 11 – Commitments and Contingencies

Office of the Chief Scientist Grants

The Company’s research and development efforts in Israel have been partially financed through grants from that country’s Office of the Chief Scientist (“OCS”). In return for the OCS’s participation, the Company’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.

Royalties payable to the OCS are recorded as sales are recognized and the associated royalty becomes due and are classified as cost of revenues. For the three months ended September 30, 2013 and 2012, royalty expenses relating to OCS grants included in cost of product revenues were $0.2 million and $0.4 million, respectively. For the nine months ended September 30, 2013 and 2012, royalty expenses relating to OCS grants were $0.6 million and $0.7 million, respectively. As of September 30, 2013 and December 31, 2012, the royalty payable amounted to $1.0 million. The maximum amount of the contingent liability under these grants potentially due to the Israeli Government (excluding interest) was $16.8 million and $16.9 million as of September 30, 2013 and December 31, 2012, respectively.

Guarantees

From time to time, customers require the Company to issue bank guarantees for stated monetary amounts that expire upon achievement of certain agreed objectives, typically customer acceptance of the product, completion of installation and commissioning services, or expiration of the term of the product warranty or maintenance period. Restricted cash represents the collateral securing these guarantee arrangements with banks. As of September 30, 2013 and December 31, 2012, the maximum potential amount of future payments the Company could be required to make under the guarantees, amounted to $1.2 million and $0.9 million, respectively. The guarantee term generally varies from three months to thirty years. The guarantees are usually provided for approximately 10% of the contract value.

Litigation

From time to time, the Company is engaged in various legal proceedings incidental to its normal business activity. Although the results of litigation and claims cannot be predicted with certainty, the Company believes the final outcome of such matters will not have a material adverse effect on its financial position, results of operations, or cash flows. Legal costs are expensed as incurred.

Dialogic Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(In thousands, except share and per share data)

Note 12 – 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 (“CEO”). The CEO 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 geographic area is based on the billing address of the customer.

The following tables set forth revenue and long-lived assets, net by geographic area:


		Three Months Ended September 30,				Nine Months Ended September 30,

Revenue:		2013		2012		2013		2012
Americas	$	13,454	$	19,271	$	44,877	$	55,573
Europe, Middle East and Africa		11,354		13,528		32,929		38,880
Asia Pacific		5,399		11,289		17,271		28,634
Total revenue	$	30,207	$	44,088	$	95,077	$	123,087


		September 30,		December 31,
Long-lived assets, net		2013		2012
Americas:
United States	$	30,783	$	32,594
Canada		24,342		28,063
Other foreign countries		1,341		1,633
Total long-lived assets, net	$	56,466	$	62,290

Note 13 – Income Taxes

The Company recorded an income tax provision of $0.3 million and $0.1 million for the three months ended September 30, 2013 and 2012, respectively. For the three months ended September 30, 2013 and 2012, the Company’s effective tax rate was approximately (47.5)% and 6.4%, respectively. The Company recorded an income tax provision of $0.6 million and $0.3 million for the nine months ended September 30, 2013 and 2012, respectively. For the nine months ended September 30, 2013 and 2012, the Company’s effective tax rate was approximately (3.5)% and (0.9)%, respectively.

The effective tax rate is significantly different from the statutory rate as the Company is not benefiting from current losses in the U.S. and foreign jurisdictions. The tax expense for the three and nine months ended September 30, 2013 and 2012 was primarily due to the current tax expense in the Company’s profitable foreign entities with no corresponding tax attributes.

As of September 30, 2013 and December 31, 2012, the Company’s net deferred tax assets were $0.9 million and $1.0 million, respectively. A valuation allowance is provided to the extent recoverability of the deferred tax asset, or the timing of such recovery, is not “more likely than not”. The need for a valuation allowance is continually reviewed by management. The utilization of tax attributes by the Company is dependent on the generation of taxable income in the principal jurisdictions in which it operates and/or has tax planning strategies. As required, the Company has evaluated and weighted the positive and negative evidence present at each period. In arriving at its conclusion the Company has given significant weight to the history of pretax losses. If circumstances change and management believes a larger or smaller deferred tax asset is justified, the reduction (increase) of the valuation allowance will result in an income tax benefit or (expense).

Dialogic Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

(In thousands, except share and per share data)

The Company files U.S. federal income tax returns as well as income tax returns in various states and foreign jurisdictions. Unrecognized tax benefits represent uncertain tax positions for which reserves have been established. As of September 30, 2013 and December 31, 2012, the total liability for unrecognized tax benefits was $2.4 million and $2.6 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 three and nine months ended September 30, 2013, there was a net decrease of less than $0.1 million and $0.2 million, respectively, due to the settlement of previously recorded unrecognized tax benefits, partially offset by interest expense.

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

Note 14 – Subsequent Events

In October 2013, the Company made the determination to discontinue a technology-optimization project. As a result, the Company will incur a charge of approximately $0.4 million primarily related to severance during the fourth quarter of 2013.

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, 2012, in our Annual Report on Form 10-K, filed with the SEC on March 22, 2013 (as amended by Amendment No.1 thereto filed with the SEC on July 31, 2013). 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 of this Form 10-Q and the Risk Factors section of our other Form 10-Ks, Form 10-Qs and other filings with the SEC 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., the Network Fuel® company, inspires the world’s leading service providers and application developers to elevate the performance of media-rich communications across the most advanced networks. We boost the reliability of any-to-any network connections, enhance the impact of applications and amplify the capacity of congested networks. Forty-eight of the world’s top 50 mobile operators and nearly 3,000 application developers rely on Dialogic to redefine the possible and exceed user expectations.

Wireless and wireline service providers use our products to transport, transcode, manage and optimize video, voice and data traffic while enabling Voice over Internet Protocol and other media rich services. These service providers also utilize our technology to energize their revenue-generating value-added services platforms such as messaging, Short Message Service, voice mail and conferencing, all of which are becoming increasingly video-enabled. Enterprises rely on our innovative products to simplify the integration of IP and wireless technologies and endpoints into existing communication networks, and to empower applications that serve businesses, including unified communication applications, contact centers and Interactive Voice Response/ Interactive Voice and Video Response.

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

We were incorporated in Delaware on October 18, 2001 as Softswitch Enterprises, Inc., and subsequently changed our name to NexVerse Networks, Inc. in 2001, Veraz Networks, Inc. in 2002 and Dialogic Inc. in 2010. We and businesses that we have acquired have been providing products and services for nearly 25 years.

Industry Background

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

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

Our products allow service providers to deploy services efficiently and with scale across disparate networks. We offer a softswitch that allows new services to be implemented flexibly and securely throughout the entire network along with routing, billing, and number portability for operational savings. Our software-based media servers offer state of the art media-rich mixing to enable the creation of innovative value-added communications services with seamless transition to virtualization and cloud. Our network

congestion solutions seek to amplify capacity gains across all wireless architectures and across broadband VOIP networks at a fraction of the cost of building new capacity. We also offer a family of session border controllers with superior media signaling and handling performance, secure any to any network and service connectivity and a feature-rich web-based dashboard and management. Our media gateways interconnect complex video, voice and data protocols and include both bandwidth and codec optimization.

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

Our Products

Our products include both Next-Generation products that serve advanced mobile and IP networks and are designed to seamlessly connect these disparate networks, as well as Legacy products that serve the predominant installed base of TDM networks.

Our Next-Generation products and solutions are offered in five main solution areas:

Any to Any Networking — We manufacture products designed to seamlessly and efficiently connect disparate networks and/or value-added services platforms based on a complex array of network protocols such as TDM, IP, SIP and IMS. Our technologies seek to enable media-rich communications, including video, voice and data, to flow uninterrupted between service providers and application developers and their end-users while ensuring the lowest operating costs and most optimal customer experience. Products that excel in Any to Any Networking include the ControlSwitch™ System IP Softswitch, BorderNet™ Sessions Border Controllers, IMG Media Gateways, Signaling solutions and PowerMedia™ XMS and HMP media servers.

Network Congestion — The explosion in video, voice and data communications has challenged network operators to balance the challenges of network expansion with business profitability. Our solutions re-energize congested networks by optimizing network traffic and amplifying capacity gains of up to 500% at a fraction of the cost of new network capacity. Our key technologies are network agnostic, successfully driving capacity gains over TDM, VOIP, 2G, 3G, 4G, LTE, satellite, microwave, copper and fiber transport. Products that alleviate Network Congestion include Session Bandwidth Optimization solutions for Mobile Backhaul, Core Networks and VOIP.

Contact Center Transformation — As contact centers transition from TDM to IP, from premise-based to cloud/hosted or from fragmented to centralized to decentralized, our technologies enable contact center operators to maximize their investment by integrating multi-modal media-rich communications in a secure and optimized fashion. Contact centers empowered by our technologies perform better and run more cost effectively. Products that are designed for Contact Center Transformation include ControlSwitch System IP Softswitch, BorderNet Session Border Controllers, IMG Media Gateways, PowerMedia XMS and HMP media servers and Network Congestion solutions.

Unified Communications for Service Providers — Through partnerships with market leaders in Unified Communications, we are enabling Service Providers to better leverage their investments in network switching infrastructure and offer a broader array of value-added services including hosted IP-PBX via PC and mobile, video calling and more sophisticated Class 5 services over a more secure and cost-optimized network. This collaboration enables Service Providers to more effectively compete with traditional Enterprise telephony vendors. Products that are designed for Unified Communications for Service Providers include ControlSwitch System IP Softswitch, BorderNet Session Border Controllers, IMG Media Gateways, and PowerMedia XMS and HMP media servers.

Application Enablement — We are a recognized leader in software-based solutions that enable Application Developers to rapidly develop and monetize a wide array of value-added services such as messaging, SMS, video calling, ringtones, lawful intercept and location-based services. Our customers benefit from extensive capabilities in mixing media-rich communications, transitioning to virtualized or cloud-based architectures and deploying highly available and scalable platforms or services. Products that are designed for Application Enablement include PowerMedia XMS and HMP media servers, BorderNet Sessions Border Controllers, IMG Media Gateways, Signaling solutions and Brooktrout Fax over IP software, as well as our Legacy portfolio.

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

We have expanded upon our expertise with voice solutions to include video and data. We believe that the continued demand for services by mobile users will drive increasing demand for bandwidth. As a result, we have continued to invest in our portfolio of network congestion solutions to enable mobile operators to amplify their bandwidth in their network. We are also actively expanding products that deliver video applications to mobile devices. Our customers and partners are increasingly adding video to value-added service application and our products support key video codecs and APIs such as WebRTC, perform video transcoding and transrating functions from one codec type to another, and enable video play/record and video conferencing. We also support new voice functionalities such as high definition voice codecs.

Critical Accounting Policies and Estimates

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

There have been no significant changes in our accounting policies for the three and nine months ended September 30, 2013 as compared to the significant accounting policies described in our Annual Report on Form 10-K for the year ended December 31, 2012, except as noted below with respect to goodwill.

Goodwill

As of September 30, 2013 and December 31, 2012, goodwill was $31.2 million. Goodwill represents costs in excess of the fair value of net tangible and identifiable net intangible assets acquired in business combinations. We are required to perform a test for impairment of goodwill and indefinite-lived intangible assets on an annual basis or more frequently if impairment indicators arise during the year.

As of June 30, 2013, we performed an interim impairment test based on triggering events resulting from the significant decrease in the price of our common stock and delisting from the NASDAQ Stock Market during the three months ended June 30, 2013. Based on the results of the interim impairment test, the estimated fair value of our reporting unit exceeded the carrying value by approximately 10% and therefore no impairment was required as of June 30, 2013.

We used a weighted approach of 80% discounted cash flows and 20% market approach. The valuation methodology and weightings used in the interim impairment test are consistent with those used in the prior year. The discounted cash flow method derives a value by determining the present value of a projected level of income stream, including a terminal value. This method involves the present value of a series of estimated future benefits at the valuation date by the application of a discount rate, one which a prudent investor would require before making an equity investment. We consider this method to be most reflective of a market participant’s view of fair value given the current market conditions, as it is based on our forecasted results.

Key assumptions within our discounted cash flow model include projected financial operating results, a long term growth rate of 5% and discount rate of approximately 16%. As stated above, as the discounted cash flow method derives value from the present value of a projected level of income stream, a modification to our projected operating results including changes to the long term growth rate could impact the fair value. The present value of the cash flows is determined using a discount rate that was based on the capital structure and capital costs of comparable public companies as identified by us. A change to the discount rate could impact the fair value determination.

The market approach is a general way of determining a value indication of a business by using one or more methods that compare the subject to similar businesses that have been sold. The market approach is a valuation technique in which the fair value is estimated based on market prices realized in actual arm’s length transactions. The technique consists of undertaking a detailed market analysis of publicly traded companies that provides a reasonable basis for comparison to our relative investment characteristics of us. The most critical assumption underlying the market approach utilized by us is the comparable companies utilized. As such, a change to the comparable companies could have an impact on the fair value determination.

In deriving its fair value estimates, we have utilized certain key assumptions. These assumptions, specifically those included within the discounted cash flow estimate, are comprised of the revenue growth rate, gross margin, operating expenses, working capital requirements, and depreciation and amortization expense.

We have estimated a revenue growth estimate of 5% annually over the next four years, based on our assessment of market demand for our existing and future products. We have utilized gross margin estimates of approximately 64 – 65% that are materially consistent with historical gross margins achieved. Estimates of operating expenses and depreciation and amortization expense utilized are

consistent with actual historical amounts. Working capital requirements used in the interim impairment test reflect current financial trends.

The current economic conditions and the continued volatility in the U.S. and in many other countries where we operate could contribute to decreased consumer confidence which may adversely impact our operating performance, including the revenue growth rates utilized in the discounted cash flow model. Reductions in the expected revenue growth rate or gross margins or a reduction in the discount rate used could have a material adverse impact on the underlying estimates used in deriving the fair value or could result in additional triggering events requiring future interim impairment tests. These conditions may result in an impairment charge in future periods.

During the three months ended September 30, 2013, there were no new triggering events other than those that existed as of June 30, 2013. We will re-assess the estimated fair value of the reporting unit during the fourth quarter as part of our annual test for impairment of goodwill and indefinite-lived intangible assets.

Results of Operations (amounts in 000’s other than percentages)

Comparison of Three Months Ended September 30, 2013 and 2012

Revenue


	2013			2012			Period-to-Period Change
	Amount		% of Total Revenue	Amount		% of Total Revenue	Amount		Percentage
Revenue:
Products	$	20,841	69%	$	33,837	77%	$	(12,996)	(38%)
Services		9,366	31%		10,251	23%		(885)	(9%)
Total revenue	$	30,207	100%	$	44,088	100%	$	(13,881)	(31%)

Legacy vs. NextGen:
Legacy	$	8,625	29%	$	14,975	34%	$	(6,350)	(42%)
NextGen		21,582	71%		29,113	66%		(7,531)	(26%)
Total revenue	$	30,207	100%	$	44,088	100%	$	(13,881)	(31%)

Revenue by geography:
Americas	$	13,454	45%	$	19,271	44%	$	(5,817)	(30%)
Europe, Middle East and Africa		11,354	38%		13,528	31%		(2,174)	(16%)
Asia Pacific		5,399	18%		11,289	26%		(5,890)	(52%)
Total revenue	$	30,207	100%	$	44,088	100%	$	(13,881)	(31%)

Revenue

Total revenue of $30.2 million for the three months ended September 30, 2013 decreased by $13.9 million, or 31%, from $44.1 million for the three months ended September 30, 2012.

Our product revenue was 69% of total revenue at $20.8 million for the three months ended September 30, 2013, compared to 77% of total revenue, or $33.8 million for the three months ended September 30, 2012, a representing decrease of $13.0 million, or 38%. The decrease in product revenue is primarily attributable to a decline in demand for our Legacy products, as well as project timing and associated revenue recognition of NextGen products.

Our services revenue was 31% of total revenue at $9.4 million for the three months ended September 30, 2013, compared to 23% of total revenue, or $10.3 million for the three months ended September 30, 2012, representing a decrease of $0.9 million, or 9%. The decrease in services revenue was the result of decommissioning of our Legacy products in certain customer networks, partially offset by customer expansions and upgrades of our Next-Gen products.

Cost of Revenue and Gross Profit


	2013			2012			Period-to-Period Change
	Amount		% of Total Revenue	Amount		% of Total Revenue	Amount		Percentage
Cost of Revenue:
Products	$	6,944	33%	$	11,654	34%	$	(4,710)	(40%)
Services		3,986	43%		5,118	50%		(1,132)	(22%)
Total cost of revenue	$	10,930	36%	$	16,772	38%	$	(5,842)	(35%)

Gross Profit:
Products	$	13,897	67%	$	22,183	66%	$	(8,286)	(37%)
Services		5,380	57%		5,133	50%		247	5%
Total gross profit	$	19,277	64%	$	27,316	62%	$	(8,039)	(29%)

Cost of Revenue

Total cost of revenue of $10.9 million for the three months ended September 30, 2013 decreased by 35%, or $5.8 million, from $16.8 million for the three months ended September 30, 2012.

Cost of product revenue of $6.9 million for the three months ended September 30, 2013 decreased by 40%, or $4.7 million, from $11.6 million for the three months ended September 30, 2012. The change is primarily attributable to lower product costs, as a result of the decline in volume and a reduction in salaries and benefits due to the decrease in operations personnel headcount.

Cost of services revenue of $4.0 million for the three months ended September 30, 2013 decreased by 22%, or $1.1 million, from $5.1 million for the three months ended September 30, 2012. The change is primarily attributable to the decrease in headcount compared to the corresponding prior year period. In addition, the allocation of occupancy costs for the three months ended September 30, 2013 was favorable by $0.1 million due primarily to the Settlement Agreement with Intel. Cost of services includes the direct costs of customer support and consists primarily of payroll, related benefits and travel for our support personnel.

Gross Profit

Gross profit of $19.3 million for the three months ended September 30, 2013 decreased by $8.0 million, or 29%, from $27.3 million for the three months ended September 30, 2012. Gross profit margin increased from 62% of total revenue for the three months ended September 30, 2012 to 64% of total revenue for the three months ended September 30, 2013.

For the three months ended September 30, 2013, product gross profit decreased by 37%, or $8.3 million, from $22.2 million for the three months ended September 30, 2012 to $13.9 million for the three months ended September 30, 2013. Gross profit margin increased from 66% of total product revenue for the three months ended September 30, 2012 to 67% of total product revenue for the three months ended September 30, 2013. The increase in gross profit margin is primarily a result of product mix.

For the three months ended September 30, 2013, services gross profit increased by 5%, or $0.2 million, from $5.1 million for the three months ended September 30, 2012 to $5.4 million for the three months ended September 30, 2013. Gross profit margin increased from 50% of total services revenue for the three months ended September 30, 2012 to 57% of total services revenue for the three months ended September 30, 2013, due to revenue recognized on a contract for which there were no associated costs incurred during the period. In the normal course of business, we may experience fluctuations in our gross profit margin as revenue is recognized on significant contracts.

Operating Expenses


	2013			2012			Period-to-Period Change
	Amount		% of Total Revenue	Amount		% of Total Revenue	Amount		Percentage
Research and development, net	$	5,881	19%	$	9,266	21%	$	(3,385)	(37%)
Sales and marketing		7,615	25%		9,261	21%		(1,646)	(18%)
General and administrative		6,280	21%		7,375	17%		(1,095)	(15%)
Restructuring charges		(2,323)	(8%)		457	1%		(2,780)	(608%)
Total operating expenses	$	17,453	58%	$	26,359	60%	$	(8,906)	(34%)

Research and Development Expenses

Research and development expenses of $5.9 million, or 19% of total revenue, for the three months ended September 30, 2013 decreased by $3.4 million, or 37%, from $9.3 million, or 21% of total revenue for the three months ended September 30, 2012. The decrease was primarily the result of a $2.2 million decrease in salaries and employee benefits and stock-based compensation associated with a decrease in departmental headcount, as a result of our restructuring efforts. In addition, the allocation of occupancy costs for the three months ended September 30, 2013 was favorable by $0.8 million due primarily to the Settlement Agreement with Intel.

Sales and Marketing

Sales and marketing expenses of $7.6 million, or 25% of total revenue, for the three months ended September 30, 2013 decreased by $1.6 million, or 18%, from $9.3 million, or 21% of total revenue for the three months ended September 30, 2012. The change in sales and marketing expenses is primarily attributable to decreases in third party sales commissions of $0.5 million, sales commissions of $0.4 million, allocation of occupancy costs of $0.3 million due primarily to the Settlement Agreement with Intel, and salaries and employee benefits and stock-based compensation of $0.2 million.

General and Administrative

General and administrative expenses of $6.3 million, or 21% of total revenue, for the three months ended September 30, 2013 decreased by $1.1 million, or 15%, from $7.4 million, or 17% of total revenue for the three months ended September 30, 2012. The change is primarily attributable to decreases in the allocation of occupancy costs of $0.5 million due primarily to the Settlement Agreement with Intel, other third party professional services of $0.4 million, and salaries and employee benefits and stock-based compensation of $0.1 million.

Restructuring Charges

For the three months ended September 30, 2013 and 2012, we recorded employee separation costs and other costs related to employee termination benefits in the amount of $0.02 million and $0.2 million, respectively.

For the three months ended September 30, 2013, the Company recorded a benefit in the amount of $2.3 million related to the reversal of its restructuring accrual for the Parsippany, New Jersey location due to the fact that we can exit the space within 60 days with no future liability or penalty upon certain conditions, based on new sublease terms. For the three months ended September 30, 2012, we incurred expense of $0.3 million in lease and facility exit costs related to our research and development facilities in Getzville, New York and Renningen, Germany.

Interest Expense

Interest expense increased by $0.8 million or 46%, from $1.8 million for the three months ended September 30, 2012 to $2.6 million for the three months ended September 30, 2013. The change is primarily attributable to PIK interest and the amortization of debt discount on our Term Loan, which increased $0.3 million $0.6 million, respectively, due to a higher Term Loan principal balance.

Change in Fair Value of Warrants

The change in fair value of warrants represented a gain of $0.1 million for the three months ended September 30, 2013 as a result of a decrease in our stock price compared to June 30, 2013. For the three months ended September 30, 2012, the Company recorded a

gain of $1.8 million related to the change in fair value of warrants, as a result of a decrease in our stock price compared to June 30, 2012.

Foreign Exchange Loss net

Foreign exchange loss, net was less than $0.1 million for the three months ended September 30, 2013, compared to a foreign exchange loss, net of $0.3 million for the three months ended September 30, 2012.

Income Tax Provision

For the three months ended September 30, 2013 and 2012, we recorded a provision for income taxes of $0.3 million and $0.1 million, respectively. The tax expense for the three months ended September 30, 2013 and 2012 was primarily due to the current tax expense in our profitable foreign entities with no corresponding tax attributes.

Comparison of Nine Months Ended September 30, 2013 and 2012

Revenue


	2013			2012			Period-to-Period Change
	Amount		% of Total Revenue	Amount		% of Total Revenue	Amount		Percentage
Revenue:
Products	$	68,325	72%	$	93,279	76%	$	(24,954)	(27%)
Services		26,752	28%		29,808	24%		(3,056)	(10%)
Total revenue	$	95,077	100%	$	123,087	100%	$	(28,010)	(23%)

Legacy vs. NextGen:
Legacy	$	27,598	29%	$	43,601	35%	$	(16,003)	(37%)
NextGen		67,479	71%		79,486	65%		(12,007)	(15%)
Total revenue	$	95,077	100%	$	123,087	100%	$	(28,010)	(23%)

Revenue by geography:
Americas	$	44,877	47%	$	55,573	45%	$	(10,696)	(19%)
Europe, Middle East and Africa		32,929	35%		38,880	32%		(5,951)	(15%)
Asia Pacific		17,271	18%		28,634	23%		(11,363)	(40%)
Total revenue	$	95,077	100%	$	123,087	100%	$	(28,010)	(23%)

Revenue

Total revenue of $95.1 million for the nine months ended September 30, 2013 decreased by $28.0 million, or 23%, from $123.1 million for the nine months ended September 30, 2012.

Our product revenue was 72% of total revenue at $68.3 million for the nine months ended September 30, 2013, compared to 76% of total revenue, or $93.3 million for the nine months ended September 30, 2012, a decrease of $25.0 million, or 27%. The decrease in product revenue is primarily attributable to a decline in demand for our Legacy products, as well as project timing and associated revenue recognition of NextGen products.

Our services revenue was 28% of total revenue at $26.8 million for the nine months ended September 30, 2013, compared to 24% of total revenue, or $29.8 million for the nine months ended September 30, 2012, a decrease of $3.1 million, or 10%. The decrease in services revenue was the result of decommissioning of our Legacy products in certain customer networks, partially offset by customer expansions and upgrades of our Next-Gen products.

Cost of Revenue and Gross Profit


	2013			2012			Period-to-Period Change
	Amount		% of Total Revenue	Amount		% of Total Revenue	Amount		Percentage
Cost of Revenue:
Products	$	25,389	37%	$	38,329	41%	$	(12,940)	(34%)
Services		12,930	48%		15,267	51%		(2,337)	(15%)
Total cost of revenue	$	38,319	40%	$	53,596	44%	$	(15,277)	(29%)

Gross Profit:
Products	$	42,936	63%	$	54,950	59%	$	(12,014)	(22%)
Services		13,822	52%		14,541	49%		(719)	(5%)
Total gross profit	$	56,758	60%	$	69,491	56%	$	(12,733)	(18%)

Cost of Revenue

Total cost of revenue of $38.3 million for the nine months ended September 30, 2013 decreased by 29%, or $15.3 million, from $53.6 million for the nine months ended September 30, 2012.

Cost of product revenue of $25.4 million for the nine months ended September 30, 2013 decreased by 34%, or $12.9 million, from $38.3 million for the nine months ended September 30, 2012. The change is primarily attributable to lower product costs, as a result of the decline in volume and a reduction in salaries and benefits due to the decrease in operations personnel headcount.

Cost of services revenue of $12.9 million for the nine months ended September 30, 2013 decreased by 15%, or $2.3 million, from $15.3 million for the nine months ended September 30, 2012. The change is primarily attributable to the decrease in headcount compared to the corresponding prior year period. In addition, the allocation of occupancy costs for the three months ended September 30, 2013 was favorable by $0.1 million due primarily to the Settlement Agreement with Intel. Cost of services includes the direct costs of customer support and consists primarily of payroll, related benefits and travel for our support personnel.

Gross Profit

Gross profit of $56.8 million for the nine months ended September 30, 2013 decreased by $12.7 million, or 18%, from $69.5 million for the nine months ended September 30, 2012. Gross profit margin increased from 56% of total revenue for the nine months ended September 30, 2012 to 60% of total revenue for the nine months ended September 30, 2013.

For the nine months ended September 30, 2013, product gross profit decreased by 22%, or $12.0 million, from $54.9 million for the nine months ended September 30, 2012 to $42.9 million for the nine months ended September 30, 2013. The decrease in gross profit on product revenue is primarily a result of an overall decline in product revenue. Gross profit margin increased from 59% of total product revenue for the nine months ended September 30, 2012 to 63% of total product revenue for the nine months ended September 30, 2013 due to product mix.

For the nine months ended September 30, 2013, services gross profit decreased by 5%, or $0.7 million from $14.5 million for the nine months ended September 30, 2012 to $13.8 million for the nine months ended September 30, 2013. Gross profit margin increased from 49% of total services revenue for the nine months ended September 30, 2012 to 52% of total services revenue for the nine months ended September 30, 2013.

Operating Expenses


	2013			2012			Period-to-Period Change
	Amount		% of Total Revenue	Amount		% of Total Revenue	Amount		Percentage
Research and development, net	$	20,997	22%	$	33,459	27%	$	(12,462)	(37%)
Sales and marketing		25,219	27%		31,935	26%		(6,716)	(21%)
General and administrative		21,869	23%		23,766	19%		(1,897)	(8%)
Restructuring charges		(1,997)	(2%)		4,760	4%		(6,757)	(142%)
Total operating expenses	$	66,088	70%	$	93,920	76%	$	(27,832)	(30%)

Research and Development Expenses

Research and development expenses of $21.0 million, or 22% of total revenue, for the nine months ended September 30, 2013 decreased by $12.5 million, or 37%, from $33.5 million, or 27% of total revenue for the nine months ended September 30, 2012. The decrease was primarily the result of a $9.3 million decrease in salaries and employee benefits and stock-based compensation associated with a decrease in departmental headcount, as a result of our restructuring efforts. In addition, the allocation of occupancy costs for the nine months ended September 30, 2013 was favorable by $1.1 million due primarily to the Settlement Agreement with Intel.

Sales and Marketing

Sales and marketing expenses of $25.2 million, or 27% of total revenue, for the nine months ended September 30, 2013 decreased by $6.7 million, or 21%, from $31.9 million, or 26% of total revenue for the nine months ended September 30, 2012. The change in sales and marketing expenses is primarily attributable to decreases in salaries and employee benefits and stock-based compensation of $2.3 million, third party commissions of $0.9 million, sales commissions of $0.8 million, marketing related costs of $0.6 million, allocation of occupancy costs of $0.5 million primarily related to Settlement Agreement with Intel, and travel and expenses of $0.3 million.

General and Administrative

General and administrative expenses of $21.9 million, or 23% of total revenue, for the nine months ended September 30, 2013 decreased by $1.9 million, or 8%, from $23.8 million, or 19% of total revenue for the nine months ended September 30, 2012. The change is primarily attributable to decreased expenses related to the allocation of occupancy costs of $1.5 million primarily related to the Settlement Agreement with Intel, legal fees of $1.0 million, other third party professional services of $0.6 million, partially offset by bad debt expense of $1.2 million.

Restructuring Charges

For the nine months ended September 30, 2013 and 2012, we recorded employee separation costs and other costs related to employee termination benefits in the amount of $0.1 million and $3.6 million, respectively.

For the nine months ended September 30, 2013, we recorded a benefit in the amount of $2.3 million related to the reversal of our restructuring accrual for the Parsippany, New Jersey location based on the new sublease which allows for us to exit the space within 60 days, with no future liability or penalty, based on new sublease terms. In addition, during the nine months ended September 30, 2013, we recorded a net charge in the amount of $0.3 million for adjustments to our facility related restructuring accruals for Eatontown, New Jersey and Renningen, Germany, which was partially offset by idle space in Milpitas, California, and Needham, Massachusetts. For the nine months ended September 30, 2012, we incurred expense of $1.2 million in lease and facility exit costs related to our research and development facilities in Getzville, New York and Renningen, Germany.

Interest Expense

Interest expense decreased by $1.3 million or 15%, from $8.8 million for the nine months ended September 30, 2012 to $7.5 million for the nine months ended September 30, 2013. The decrease is primarily attributable to lower interest rates for the nine months ended September 30, 2013 on our Term Loan Agreement, which decreased from a stated interest rate of 15% to 10% during the second quarter of 2012. In addition, the average interest rate on the Revolving Credit Agreement decreased from 5.05% for the nine months ended September 30, 2012 to 4.75% for the nine months ended September 30, 2013.

Change in Fair Value of Warrants

The change in fair value of warrants represented a gain of $1.4 million for the nine months ended September 30, 2013, as a result of a decrease in our stock price for the period. For the nine months ended September 30, 2012, the Company recorded a gain of $2.2 million related to the change in fair value of warrants, which were granted on March 22, 2012, as a result of a decrease in our stock price.

Foreign Exchange Loss net

Foreign exchange loss, net was $0.9 million for the nine months ended September 30, 2013, compared to a foreign exchange loss, net of $1.0 million for the nine months ended September 30, 2012.

Income Tax Provision

For the nine months ended September 30, 2013 and 2012, we recorded a provision for income taxes of $0.6 million and $0.3 million, respectively. The tax expense for the nine months ended September 30, 2013 and 2012 was primarily due to the current tax expense in our profitable foreign entities with no corresponding tax attributes.

Financial Position

Liquidity and Capital Resources

Our primary anticipated sources of liquidity are funds generated from operations, and as required, funds borrowed under the Revolving Credit Agreement and Term Loan Agreement. We monitor and manage liquidity by preparing and updating annual budgets, as well as monitor compliance with terms of our financing agreements.

We have experienced significant losses in the past and have not sustained quarter over quarter profits. As of September 30, 2013, we had cash and cash equivalents of $4.5 million, compared to $6.5 million of cash and cash equivalents as of December 31, 2012. During the nine months ended September 30, 2013, we used net cash in operating activities of $4.2 million. As of September 30, 2013, we had borrowed $12.5 million under our Revolving Credit Agreement and the unused line of credit totaled $12.5 million, of which $1.2 million was available to us. As of September 30, 2013, our long-term debt with related parties was $73.1 million, net of discount, and during the nine months ended September 30, 2013, we borrowed $4.0 million under the Term Loan Agreement. During the nine months ended September 30, 2013, we paid $0.3 million to service the interest payments on the Revolving Credit Agreement. No cash interest was paid during the nine months ended September 30, 2013 related to the Term Loan Agreement as all interest incurred during the nine months ended September 30, 2013 was paid in kind, as permitted by the Term Loan Agreement.

During 2012, we entered into and subsequently amended the Term Loan Agreement to, among other things, reduce the stated interest rate to 10% from 15%, revise the financial covenants and provide for additional borrowings.

On February 7, 2013, we entered into a Third Amendment to the Term Loan Agreement, in which the Term Lenders provided additional borrowings of $4.0 million, in exchange for 1,442,172 shares of common stock issued pursuant to the Subscription Agreement. Further, the minimum EBITDA financial covenant was amended and its application was postponed until the fiscal quarter ending March 31, 2014 and the other financial covenants, including the minimum liquidity covenant, are no longer applicable under the Term Loan Agreement. Additionally, the definition of Maturity Date in the Term Loan Agreement was also amended to provide that it shall be extended to March 31, 2016 upon the earlier to occur of (i) the receipt by the Company of Net Equity Proceeds (as defined in the Term Loan Agreement) in an aggregate amount of at least $5.0 million or (ii) a Change in Control (as defined in the Term Loan Agreement).

On February 7, 2013, we entered into a Twentieth Amendment to the Revolving Credit Agreement, or Twentieth Amendment, with the Revolving Credit Lender. Pursuant to the Twentieth Amendment, the Revolving Credit Agreement was amended to change the minimum EBITDA financial covenant and postpone its application until the first quarter ending March 31, 2014. Previously, the minimum EBITDA financial covenant would have commenced in the quarter ending June 30, 2013. The “Availability Block” was increased to $0.5 million and shall increase by an additional $0.1 million on July 1, 2013 and on the first day of each fiscal quarter thereafter. The Revolving Credit Agreement was also amended to reduce the Borrowing Base by the Availability Block at all times.

These actions were determined to be a troubled debt restructuring and were taken to improve our liquidity, leverage and future operating cash flow. We also took certain restructuring actions during the year ended December 31, 2012 and the nine months ended September 30, 2013 in order to improve our future operating performance.

We are required to meet certain financial covenants under the Term Loan Agreement and Revolving Credit Agreement, including 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). Our minimum EBITDA financial covenants under the Term

Loan Agreement have been postponed and will commence in the quarter ending March 31, 2014. Specifically, the Term Loan financial covenant requires EBITDA of at least $1.0 million for the three month period ending on March 31, 2014; $2.0 million for the six month period ending on June 30, 2014; $3.0 million for the nine month period ending on September 30, 2014; and $4.0 million for the twelve month period ending on December 31, 2014 and the last date of each twelve month period thereafter. Under the Revolving Credit Agreement, we must maintain a minimum EBITDA of at least $6.0 million for the twelve month period ending on March 31, 2014 and for each twelve month period ending on the last date of each quarter thereafter. In the event we are unable to achieve the aforementioned EBITDA levels, the covenants may not be met and we would be required to reclassify our long-term debt under the Term Loan Agreement to current liabilities on the consolidated balance sheet.

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

We will need to either raise additional funding to fund our debt obligations in 2015 or to implement a business plan where cash flow will fully fund operations and debt repayments. However, there is no assurance that additional funding will be available to us on acceptable terms on a timely basis, if at all, or that we will achieve profitable operations to fund both operations and our debt obligations. If we are unable to raise additional capital or achieve sufficient operating cash flows to fund our operations and debt obligations, we will need to curtail planned activities and to reduce costs. Doing so may affect our ability to operate effectively.

Based on our current plans and business conditions, we believe that our existing cash and cash equivalents, expected cash generated from operations and available credit facilities will be sufficient to satisfy our anticipated cash requirements through the end of 2013. Accordingly, our consolidated financial statements have been prepared on a going concern basis.

Operating Activities

Net cash used in operating activities of $4.2 million for the nine months ended September 30, 2013 was primarily attributable to our net loss of $16.9 million, partially offset by adjustments for non-cash items aggregating to $11.9 million. Operating assets decreased by $13.0 million and operating liabilities decreased by $12.2 million. The decrease in operating assets relates to accounts receivable of $8.5 million, inventory of $2.4 million, and other current assets of $2.1 million. The decrease in operating liabilities is primarily attributable to decreases of $11.3 million in accounts payable and accrued liabilities and $1.7 million in other long-term liabilities, partially offset by an increase in deferred revenue of $1.2 million.

Net cash used in operating activities of $7.9 million for the nine months ended September 30, 2012 was primarily attributable to our net loss of $32.4 million, partially offset by adjustments for non-cash items aggregating to $16.1 million. Operating assets decreased by $17.7 million and operating liabilities decreased by $9.3 million. The decrease in operating assets relates to inventory of $10.0 million, accounts receivable of $6.0 million and other current assets of $1.7 million. The decrease in operating liabilities is primarily attributable to decreases of $8.4 million in accounts payable and accrued liabilities, deferred revenue of $1.6 million, income taxes payable of $0.7 million, partially offset by an increase in other long-term liabilities of $1.4 million.

Investing Activities

Net cash used in investing activities of $1.1 million for the nine months ended September 30, 2013 consisted primarily of a decrease of $0.3 million related to restricted cash and $0.8 million related to the purchase of property and equipment.

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

Financing Activities

Net cash provided by financing activities of $3.4 million for the nine months ended September 30, 2013 included $3.2 million in net borrowings under the Term Loan Agreement and $0.2 million in net borrowings under the Revolving Credit Agreement.

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

Off-Balance Sheet Arrangements

As of September 30, 2013, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance, special purpose or variable interest entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. We do not have any off-balance sheet arrangements that are currently material or reasonably likely to be material to our consolidated financial position or results of operations.

Recent Accounting Pronouncements

See Note 2 in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 22, 2013 for a full description of the recent accounting pronouncements including the date of adoption and effect on results of operations and financial condition.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Not applicable.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

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

Our management evaluated (under the supervision and with the participation of our principal executive officer and principal financial officer) our disclosure controls and procedures, and concluded that, because we have identified material weaknesses with respect to our internal controls over financial reporting as of December 31, 2012, our disclosure controls and procedures were not effective as of September 30, 2013, 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 principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Controls

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

·	Conducted corporate policy and procedures training for all employees; and

·	Hired new Chief Financial Officer.

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

Our management, including our principal executive officer and principal 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

As described elsewhere in this Quarterly Report on Form 10-Q, on July 8, 2013, Dialogic (US) Inc. entered into the Settlement Agreement with Intel, whereby it agreed to pay $1.0 million, in equal installments over a ten month period, commencing within three working days of the executed agreement, in order to settle the dispute described in our Quarterly Report on Form 10-Q for the quarterly period ending June 30, 2013 and our other filings with the SEC.

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

We have experienced significant losses in the past and never sustained quarter over quarter profits. For the nine months ended September 30, 2013 and 2012, we recorded net losses of $16.9 million and $32.4 million, respectively. As of September 30, 2013, we had $12.5 million in current bank indebtedness and $73.1 million in long-term debt, net of discount. If we fail to comply with the covenants under the Third Amended and Restated Credit Agreement as amended (the “Term Loan Agreement”) with Obsidian, LLC, as agent and collateral agent, and Special Value Expansion Fund, LLC, Special Value Opportunities Fund, LLC and Tennenbaum Opportunities Partners V, LP as lenders (collectively, the “Term Lenders”) and the Waiver and Twentieth Amendment (the “Twentieth Amendment”) to the Credit Agreement dated as of March 5, 2008, as amended (the “Revolving Credit Agreement”) with Wells Fargo Foothill Canada ULC, as administrative agent, and certain lenders (the “Revolving Credit Lenders”), the maturity date of our outstanding indebtedness may be accelerated.

While we believe that our current cash resources, together with anticipated cash flows from operating activities, will be sufficient to fund our operations, including interest payments, in 2013, they will not be sufficient to fund repayment of principal on our outstanding indebtedness in 2015. Further, we do not anticipate having sufficient cash and cash equivalents to repay the debt should the Revolving Credit Lender or the Term Lenders accelerate the maturity date of outstanding debt, and we would be forced to seek alternative sources of financing. In light of these circumstances, we will need to seek additional capital through public or private debt or equity financings or development financings.

However, there are no assurances that those efforts will be successful or that additional capital will be available on terms that do not adversely affect our existing stockholders or restrict our operations, if it is available at all. If we raise additional funds through the issuance of debt securities, these securities could have rights that are senior to holders of our common stock and could include different financial covenants, restrictions and financial ratios other than what we currently operate under. The conversion of debt to equity in 2012 resulted in substantial dilution to our stockholders and any additional equity financing would also likely be substantially dilutive to our stockholders, particularly in light of the prices at which our common stock has been recently trading. In addition, if we raise additional funds through the sale of equity securities, new investors could have rights senior to our existing stockholders. The terms of any future financings may restrict our ability to raise additional capital, which could delay or prevent the further development or marketing of our products and services. Our need to raise capital before the repayment of our debt becomes due may require us to accept terms that may harm our business or be disadvantageous to our current stockholders, particularly in light of the current illiquidity and instability in the global financial markets.

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

Credit Lender, followed by any unsecured creditors, before any funds would be available to pay our stockholders. If we are required to liquidate under the federal bankruptcy laws, it is unlikely that stockholders would receive any value for their shares.

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

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

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

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

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

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

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

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

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

•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;

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

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

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

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

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

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

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

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

Our common stock has been delisted from the NASDAQ Global Market and is trading on the OTCQB, which may negatively impact the price of our common stock and our ability to access the capital markets.

On April 15, 2013, we received a Staff Determination Letter from the Listing Qualifications Department of The NASDAQ Stock Market that the NASDAQ Hearings Panel had determined to delist our shares from the NASDAQ Stock Market effective at the open of business on April 17, 2013 because we could not achieve compliance with a market value of publicly held shares of at least $15.0 million, or the Market Value Rule. Beginning with the opening of trading on April 17, 2013, our common stock began trading on the over-the-counter market, or OTCQB, under the symbol “DLGC. Moving our listing to the over-the-counter market could adversely affect the liquidity of our common stock. Stocks traded in the over-the-counter market generally have limited trading volume and exhibit a wider spread between the bid/ask quotation, as compared to securities listed on a national securities exchange. In the future, there can be no assurance that a more active public market for our common stock will ever develop or be sustained, allowing you to sell large quantities of shares or all of your holdings. Consequently, you may not be able to liquidate your investment in the event of an emergency or for any other reason.

As a result of our common stock being delisted from the NASDAQ, we could face significant material adverse consequences, including:

•a limited availability of market quotations for our common stock;

•a reduced amount of news and analyst coverage for us;

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

•reduced liquidity for our stockholders;

•potential loss of confidence by partners and employees; and

"	loss of institutional investor interest and fewer business development opportunities.

In addition, the stock market and the over-the-counter market in particular, have experienced significant price and volume fluctuations that have affected the market prices of companies in recent years. These fluctuations may continue to occur and disproportionately impact the price of our common stock. In the past, following periods of volatility in the market price of a

company's securities, securities class-action litigation has often been instituted. While we are not aware of any such litigation filed or pending against us, this type of litigation could result in substantial costs and a diversion of management's attention and resources, which could materially affect our business, financial condition, cash flows, or results of operations.

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

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

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

Our common stock traded as high as $2.46 and as low as $0.71 per share during the nine months ended September 30, 2013. Some of the factors leading to this volatility include:

•fluctuations in our quarterly revenue and operating results;

•announcements of product releases by us or our competitors;

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

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

•delays in producing finished goods inventory for shipment;

•market conditions in the telecommunications industry;

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

•deviations in our operating results from the estimates of analysts;

•additions or departures of key personnel;

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

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

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

Rules applicable to trading of our common stock reduce the level of trading in the secondary market for our stock and as a result, investors may find it difficult to sell their shares.

Trades of our common stock are subject to Rule 15g-9 of the Securities and Exchange Commission, known as the Penny Stock Rule. This rule imposes requirements on broker/dealers who sell securities subject to the rule to persons other than established customers and accredited investors. For transactions covered by this rule, broker/dealers must make a special suitability determination for purchasers of the securities and receive the purchaser’s written agreement to the transaction prior to sale. The Securities and Exchange Commission also has rules that regulate broker/dealer practices in connection with transactions in “penny stocks.” Penny stocks generally are equity securities with a price of less than $5.00 (other than securities registered on certain national securities exchanges, provided that current price and volume information with respect to transactions in that security is provided by the exchange). The Penny Stock Rule requires a broker/dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document prepared by the Commission that provides information about penny stocks and the nature and level of risks in the penny stock market. The broker/dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker/dealer and its salesperson in the transaction, and monthly account statements showing the market value of each penny stock held in the customer’s account. The bid and offer quotations, and the broker/dealer and salesperson compensation information, must be given to the customer orally or in writing prior to effecting the transaction and must be given to the customer in writing before or with the customer’s confirmation. These disclosure requirements have the effect of reducing the level of trading activity in the secondary market for our common stock. As a result of these rules, investors may find it difficult to sell their shares.

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

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

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

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

•capital spending levels of service providers;

•competition among service providers;

•pricing pressures in the telecommunications equipment market;

•end user demand for new services;

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

•lack of or evolving industry standards;

•consolidation in the telecommunications industry; and

•changes in the regulation of telecommunications services.

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

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

For the nine months ended September 30, 2013 and 2012, we used cash of $4.2 million and $7.9 million, respectively, to fund our operating activities. We have made significant efforts to reduce costs and reduce headcount and streamline operations for the last several years and continued to focus on reducing costs during 2013. We successfully reduced quarterly operating costs from $38.6 million to $19.8 million (excluding restructuring charges) per quarter between the first quarter of 2011 and the third quarter of 2013. However, we may not be able to continue to reduce spending as planned and unanticipated costs may occur. Any restructuring efforts to focus on key products may not prove successful due to a variety of factors, including risks that a smaller workforce may have difficulty successfully completing research and development efforts and adequately monitoring our development and commercialization efforts. In addition, we may, in the future, decide to restructure operations and further reduce expenses by taking such measures as additional reductions in our workforce and reductions in other spending. Any restructuring places a substantial strain on remaining management and employees and on operational resources, and there is a risk that our business will be adversely affected by the diversion of management time to the restructuring efforts. There can be no assurance that following any restructuring we will have sufficient cash resources to allow us to fund our operations or repay our outstanding indebtedness as planned.

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

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

We have supply contracts in place with each of these subcontractors and have done our best to negotiate terms which protect our business. However, all of these contracts can be terminated by subcontractors following a reasonable notice period pursuant to the

terms of each individual contract. In addition the credit limits provided to us by our subcontractors are subject to change within contractual limits and should the credit limits be revised downwards this may negatively impact our cash flow and negatively impact our competitive position.

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

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

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

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

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

Management, with the participation of our principal executive officer and principal financial officer, has conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework set forth in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission as of December 31, 2012. Based on this evaluation, management concluded that there were material weaknesses identified in our internal controls as of December 31, 2012. The material weaknesses related to a lack of effective controls over revenue recognition and a lack of effective entity level controls. Accordingly, management has concluded that we did not maintain effective internal control over financial reporting as of December 31, 2012 based on criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in 1992 Internal Control — Integrated Framework.

Our management, including our principal executive officer and principal financial officer, do not expect that our disclosure controls or Internal Controls will prevent all error and all fraud. A control system, even when 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 Audiocodes Ltd., Cisco Systems, Inc. Genband Inc., Radisys Corporation, Metaswitch Networks and Sonus Networks, Inc., among others. While some of the established competitors are exiting the market, we are seeing increasingly intense competition from Huawei Technologies Co. Ltd., which leverages its broad product portfolio and significant financial resources to compete with us for our switching business.

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

To compete effectively, we must deliver innovative products that:

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

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

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

•scale and deploy easily and efficiently;

•interoperate with existing network designs and other vendors’ equipment;

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

•provide effective network management;

•are accompanied by comprehensive customer support and professional services; and

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

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

•a longer operating history;

•greater name recognition and marketing power;

•preferred vendor status with our existing and potential customers;

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

•lower cost structures; and

•offer a seamless transition to virtualization and cloud deployments.

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:

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

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

•new product introductions and enhancements by our competitors and us;

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

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

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

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

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

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

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

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

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

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

•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, and certain of our affiliates beneficially owned or controlled approximately 65% of our outstanding common stock (assuming exercise of outstanding warrants to purchase our common stock) as of September 30, 2013.

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

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

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

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

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

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

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

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

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

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

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

The market for IP infrastructure products and services is characterized by rapid technological change, frequent new product introductions and evolving standards. We may be unable to respond quickly or effectively to these developments. We may experience difficulties with software development, hardware design, manufacturing, marketing, or certification that could delay or prevent our development, introduction, or marketing of new products and enhancements. The introduction of new products by our competitors, the market acceptance of products based on new or alternative technologies or the emergence of new industry standards could render our existing or future products obsolete. If the standards adopted are different from those that we have chosen to support, market acceptance of our products may be significantly reduced or delayed. If our products become technologically obsolete, we may be

unable to sell our products in the marketplace and generate revenues, and our business could be adversely affected. Because our products are sophisticated and designed to be deployed in complex environments and in multiple locations, they may have errors or defects that we find only after full deployment. If these errors lead to customer dissatisfaction or we are unable to establish and maintain a support infrastructure and required support levels to service these complex environments, our business may be seriously harmed.

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

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

•loss of customers and market share;

•harm to our reputation;

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

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

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

•costly and time-consuming legal actions by our customers.

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

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

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

•loss of customers and market share;

•a failure to attract new customers in new geographies;

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

•network performance penalties.

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

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

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

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

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

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

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

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

As a public company, we are subject to the reporting requirements of the Exchange Act and the Sarbanes-Oxley Act. 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, 2012, we have identified material weaknesses in our Internal Controls. These material weaknesses have not been cured as of September 30, 2013. 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 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 and officers will be significantly curtailed

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

We are a multinational company based in the United States with branch offices and representative offices located in many countries around the world. Our logistics group is located in Israel, the United States and Ireland and we utilize various subcontractors in the United States and Israel. We have development locations in Canada, the United States, India, the United Kingdom and Israel and we have sales offices in many other countries, including China, India, Brazil, Russia, Singapore, Malaysia, Australia, Hong Kong, Japan, France, the Netherlands and Slovenia. Approximately half of our sales are generated in markets outside of the Americas and we see

our largest market growth occurring in foreign countries such as India, Brazil, Russia and China. As a result of all these international activities we are subject to worldwide economic and market condition risks generally associated with global trade, such as fluctuating exchange rates, tariff and trade policies, domestic and foreign tax policies, foreign governmental regulations, political unrest, wars and other acts of terrorism and changes in other economic conditions. In addition our insurance on receivables applies to a lesser base of accounts due to the difficulties in obtaining coverage for accounts in some of these regions.

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

For the nine months ended September 30, 2013 and 2012, revenue from outside of the Americas was $50.2 million and $67.5 million, respectively, or 53% and 55% of our total revenue, 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:

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

•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;

•the impact of recessions in economies outside the United States;

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

•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;

•inadequate protection for intellectual property rights in certain countries;

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

•potentially adverse tax or duty consequences;

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

•political and economic instability.

Our exposure to the credit risks of our customers may make it difficult to collect accounts receivable and could adversely affect our operating results and financial condition.

In the course of our sales to customers, we may encounter difficulty collecting accounts receivable and could be exposed to risks associated with uncollectible accounts receivable. Economic conditions may impact some of our customers’ ability to pay their accounts payable. While we attempt to monitor these situations carefully and attempt to take appropriate measures to collect accounts receivable balances, we have written down accounts receivable and written off doubtful accounts in prior periods and may be unable to avoid accounts receivable write-downs or write-offs of doubtful accounts in the future. Such write-downs or write-offs could negatively affect our operating results for the period in which they occur and could harm our operating results.

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

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

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

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

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

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

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

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

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

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

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

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

•a loss of or delay in recognizing revenues;

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

•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:

•a loss of customers and market share; and

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

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

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

Changes in either patent laws or in interpretations of patent laws in the United States and other countries may materially diminish the value of our intellectual property or narrow the scope of our patent protection. For example, the Leahy-Smith America Invents Act, or the Leahy-Smith Act, was signed into law in September 2011 and includes a number of changes to United States patent law, including changes related to how patent applications are prosecuted, and may also affect patent defense, litigation, and enforcement. The United States Patent Office has developed new and untested regulations and procedures to govern the full implementation of the Leahy-Smith Act, and many of the substantive changes to patent law associated with the Leahy-Smith Act, and in particular, the first to file provisions, that became effective on March 16, 2013. It is not clear what impact the Leahy-Smith Act will have on the operation of our business and the protection and enforcement of our intellectual property. However, the Leahy-Smith Act and its implementation could increase the uncertainties and costs surrounding the prosecution of our patent applications and the enforcement or defense of our issued patents, all of which could have a material adverse effect on our business and financial condition.

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

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

The telecommunications industry generally and the market for IP telephony products in particular are characterized by a relatively high level of litigation based on allegations of infringement of proprietary rights. We have received in the past, and may receive in the future, inquiries from other patent holders and may become subject to claims that we infringe their intellectual property rights. We cannot assure you that we do not or might not infringe third party patents. Any parties claiming that our products infringe upon their proprietary rights, regardless of the merits of the claims and/or the underlying rights, could cause us to take action that results in expenditures of time and money to defend or settle the claims on our behalf and/or that of our customers or contract manufacturers. We may also be required to indemnify our customers and contract manufacturers for damages they suffer as a result of such infringement claims, if proven or settled. These claims, and any resulting settlement, licensing arrangement or lawsuit, if successful, could subject us to significant royalty payments or liability for damages and invalidation of our proprietary rights. Any potential intellectual property litigation also could force us to do one or more of the following:

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

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

•redesign those products that use any allegedly infringing technology.

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

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

The telecommunications industry is highly regulated and our business and financial condition could be adversely affected by the changes in the regulations relating to the telecommunications industry. Currently, there are few laws or regulations that apply directly to access to, or delivery of, voice services on IP networks. We could be adversely affected by regulation of IP networks and commerce in any country, including the United States, where we operate. Such regulations could include matters such as VoIP or using IP,

encryption technology, and access charges for service providers. The adoption of such regulations could decrease demand for our products, and at the same time increase the cost of selling our products, which could have a material adverse effect on our business, operating result, and financial condition.

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

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

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

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

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

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

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

New regulations related to "conflict minerals" may force us to incur additional expenses, may make our supply chain more complex and may result in damage to our reputation with customers.

The Dodd-Frank Wall Street Reform and Consumer Protection Act contains provisions to improve transparency and accountability concerning the supply of certain minerals, known as conflict minerals, originating from the Democratic Republic of Congo ("DRC") and adjoining countries. As a result, in August 2012 the SEC adopted annual disclosure and reporting requirements for those companies who use conflict minerals mined from the DRC and adjoining countries in their products. These new requirements will require due diligence efforts in fiscal 2013, with initial disclosure requirements beginning in fiscal 2014. There could be significant costs associated with complying with these disclosure requirements, including for diligence to determine the sources of conflict minerals used in our products and other potential changes to products, processes or sources of supply as a consequence of such verification activities. The implementation of these rules could adversely affect the sourcing, supply and pricing of materials used in our products. As there may be only a limited number of suppliers offering "conflict free" conflict minerals, we cannot be sure that we will be able to obtain necessary conflict minerals from such suppliers in sufficient quantities or at competitive prices. Also, we may

face reputational or consumer sales challenges if we determine that certain of our products contain minerals not determined to be conflict free or if we are unable to sufficiently verify the origins for all conflict minerals used in our products through the procedures we may implement.

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

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

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

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

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

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

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

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

•accurately define and design new products to meet market needs;

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

•rapidly develop and produce these products at competitive prices;

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

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

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

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

Our revenue growth expectations for our next-generation products are highly dependent upon successful ramping of our design wins. In some cases there is little time between when a design win is achieved and when production level shipments begin. With many new design wins, customers may require us to provide enhanced features not on its immediate roadmap. In addition, customers may require significant time to port their own applications to our products. Adding features to our products to meet customer requests as well as porting of customer specific applications can take 6 to 12 months. After that, there is an additional time lag from the start of production ramp to peak revenue. Not all product designs ramp into production and, even if a product ramps into production, the volumes derived from such products and associated projects may be less than we had originally estimated. Customer projects related to design wins are sometimes canceled or delayed, or can perform below original expectations, which can adversely impact anticipated revenues and profitability. In particular, the volumes and time to production ramp associated with new design wins depend on the adoption rate of new technologies in its customers’ end markets, especially in the telecommunications networking sector. Program delays or cancellations could be more frequent during times of meaningful economic downturn.

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

We derive our revenues from a number of diverse end markets, some of which are subject to significant cyclical changes in demand. In 2013 and 2012, we derived our revenues from both the enterprise and service provider markets, and we believe that our revenues will continue to be derived primarily from these two markets. In many instances, our products are building blocks for its customers’ products and as such, our customers are not the end-users of our products. If our customers experience adverse economic conditions in the end markets into which they sell our products, we would expect a significant reduction in spending by our customers. Some of these end markets are characterized by intense competition, rapid technological change and economic uncertainty. Our exposure to economic cyclicality and any related fluctuation in customer demand in these end markets could have a material adverse effect on its revenues and financial condition.

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

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

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

In addition, any hostilities involving Israel or the interruption or curtailment of trade between Israel and its present trading partners, or a significant downturn in the economic or financial condition of Israel, could adversely affect our operations and product development, cause our revenues to decrease, and adversely affect the price of our shares. Furthermore, several countries, principally in the Middle East, still restrict doing business with Israel, Israeli companies or companies with operations in Israel. Should additional countries impose restrictions on doing business with Israel, our business, operating results and financial condition could be adversely affected.

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

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

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

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

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

The successful deployment of advanced 3G and 4G wireless networks would significantly impact the deployment of video gateway infrastructure. Since our ability to increase revenue is partially dependent on video gateways and video media servers that attach to the advanced 3G and 4G wireless networks, delay in the deployment of 3G and 4G wireless networks would impact our ability to increase

revenue. Additionally, even if the advanced wireless networks are deployed successfully, the use of mobile video value added services (including video ring tones, video with interactive voice response, video location based services and video chat) may not be widely adopted. If the deployment of advanced wireless networks does not proceed according to analyst projections or if mobile video added services are not widely adopted, the growth of our business could be negatively affected.

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

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

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

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

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

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

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

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

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

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

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

Item 6. Exhibits.

Exhibit
Number

Exhibit Description

Incorporated By Reference

Filed
Herewith

Form

File No.

Exhibit

Filing Date

3.1

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

8-K

0001-33391

3.2

10/6/2010

3.2

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

8-K

0001-33391

3.3

10/6/2010

3.3

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

8-K

0001-33391

3.1

9/14/2012

3.4

Amended and Restated Bylaws of Registrant.

S-1

333-138121

3.4

10/20/2006

3.5

Amendment to the Amended and Restated Bylaws of Registrant.

8-K

0001-33391

3.4

10/6/2010

3.6

Certificate of Designation of Dialogic Inc. Series D-1 Preferred Stock.

8-K

0001-33391

3.1

4/13/2012

4.1

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

4.2

Specimen stock certificate.

S-1/A

333-138121

4.2

3/30/2007

4.3

Amended and Restated Registration Rights Agreement, dated March 22, 2012, by and among Dialogic Inc. and the investors signatory thereto.

10-K

0001-33391

4.3

4/16/2012

4.4

Registration Rights Agreement, dated April 11, 2012, by and among Dialogic Inc. and the investors signatory thereto.

8-K

0001-33391

4.1

4/13/2012

4.5

Form of Dialogic Inc. Warrant issued March 22, 2012.

10-Q

0001-33391

10.11

5/15/2012

4.6

Securities Purchase Agreement, dated April 11, 2012, by and among Dialogic Inc. and the investors identified on the Schedule of Purchasers thereto.

8-K

0001-33391

10.1

4/13/2012

4.7

Form of Dialogic Inc. Convertible Promissory Note issued April 11, 2012.

8-K

0001-33391

10.2

4/13/2012

4.8

Registration Rights Agreement, dated February 7, 2013, by and among Dialogic, Inc. and the buyers signatory thereto.

8-K

0001-33391

4.1

2/11/2013

10.1

Offer Letter by and between Dialogic Inc. and Robert M. Dennerlein executed by Dialogic Inc. on September 17, 2013.

8-K

0001-33391

10.1

9/23/2013

31.1

Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Exchange Act.

31.2

Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Exchange Act.

32.1#

Certification of Chief Executive Officer and Chief Financial Officer pursuant to 13a-14(b) or 15d-14(b) of the Exchange Act.

101.INS†

XBRL Instance Document

101.SCH†

XBRL Taxonomy Extension Schema Linkbase Document

10 1.CAL†

XBRL Taxonomy Extension Calculation Linkbase Document

10 1.DEF†

XBRL Taxonomy Extension Definition Linkbase Document

10 1.LAB†

XBRL Taxonomy Extension Labels Linkbase Document

10 1.PRE†

XBRL Taxonomy Extension Presentation Linkbase Document

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

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

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.



	DIALOGIC INC.

Date: November 14, 2013	By:	/s/ Robert Dennerlein
	Name:	Robert Dennerlein
	Title:	Chief Financial Officer (Principal Financial Officer)

EXHIBIT INDEX

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

3.1	Certificate of Amendment of Amended and Restated Certificate of Incorporation of Registrant.	8-K	0001-33391	3.2	10/6/2010
3.2	Certificate of Amendment of Amended and Restated Certificate of Incorporation of Registrant.	8-K	0001-33391	3.3	10/6/2010
3.3	Certificate of Amendment of Amended and Restated Certificate of Incorporation of Registrant.	8-K	0001-33391	3.1	9/14/2012
3.4	Amended and Restated Bylaws of Registrant.	S-1	333-138121	3.4	10/20/2006
3.5	Amendment to the Amended and Restated Bylaws of Registrant.	8-K	0001-33391	3.4	10/6/2010
3.6	Certificate of Designation of Dialogic Inc. Series D-1 Preferred Stock.	8-K	0001-33391	3.1	4/13/2012
4.1	Reference is made to Exhibits 3.1, 3.2, 3.3, 3.4, 3.5 and 3.6.
4.2	Specimen stock certificate.	S-1/A	333-138121	4.2	3/30/2007
4.3	Amended and Restated Registration Rights Agreement, dated March 22, 2012, by and among Dialogic Inc. and the investors signatory thereto.	10-K	0001-33391	4.3	4/16/2012
4.4	Registration Rights Agreement, dated April 11, 2012, by and among Dialogic Inc. and the investors signatory thereto.	8-K	0001-33391	4.1	4/13/2012
4.5	Form of Dialogic Inc. Warrant issued March 22, 2012.	10-Q	0001-33391	10.11	5/15/2012
4.6	Securities Purchase Agreement, dated April 11, 2012, by and among Dialogic Inc. and the investors identified on the Schedule of Purchasers thereto.	8-K	0001-33391	10.1	4/13/2012
4.7	Form of Dialogic Inc. Convertible Promissory Note issued April 11, 2012.	8-K	0001-33391	10.2	4/13/2012
4.8	Registration Rights Agreement, dated February 7, 2013, by and among Dialogic, Inc. and the buyers signatory thereto.	8-K	0001-33391	4.1	2/11/2013
10.1	Offer Letter by and between Dialogic Inc. and Robert M. Dennerlein executed by Dialogic Inc. on September 17, 2013.	8-K	0001-33391	10.1	9/23/2013
31.1	Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Exchange Act.					X
31.2	Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Exchange Act.					X
32.1#	Certification of Chief Executive Officer and Chief Financial Officer pursuant to 13a-14(b) or 15d-14(b) of the Exchange Act.					X
101.INS†	XBRL Instance Document					X
101.SCH†	XBRL Taxonomy Extension Schema Linkbase Document					X
10 1.CAL†	XBRL Taxonomy Extension Calculation Linkbase Document					X
10 1.DEF†	XBRL Taxonomy Extension Definition Linkbase Document					X
10 1.LAB†	XBRL Taxonomy Extension Labels Linkbase Document					X
10 1.PRE†	XBRL Taxonomy Extension Presentation Linkbase Document					X



Delaware	94-3409691
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification Number)



Large accelerated filer	¨	Accelerated filer	¨

Non-accelerated filer	¨	Smaller reporting company	x