TMCNet:  DIALOGIC INC. - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

[November 14, 2012]

DIALOGIC INC. - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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


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

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

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

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

Industry Background The telecommunications industry has traditionally been highly regulated.

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

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

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

23-------------------------------------------------------------------------------- Table of Contents Our products meet specific customer requirements and certain industry standards, and are subject to various laws, restrictions and regulations, including, but not limited to, environmental protection, import-export controls, and political and economic boundaries, which are more fully discussed in "Item 1A. Risk Factors." Our Products Our products include both Next-Generation products that serve the growing mobile and IP networks and also connect these disparate networks together, as well as Legacy products that serve the TDM networks.

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

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

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

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

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

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

We have expanded upon our experience with voice solutions to include data and video. We believe that the continued demand for services by mobile users will drive increasing demand for bandwidth and, as a result, we have continued to invest in data optimization products for our portfolio to enable mobile operators to expand their bandwidth in the mobile backhaul access portion of the network. We are also actively expanding products enabling video applications to mobile devices. Our customers and partners are 24-------------------------------------------------------------------------------- Table of Contents increasingly adding video to value-added service application and our products support key video codecs, perform video transcoding and transrating functions from one codec type to another, and enable video play/record and video conferencing. We also support the new voice functionality such as high definition voice codecs.

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

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

The accompanying unaudited condensed consolidated financial statements have been prepared assuming that we will continue as a going concern. For the nine months ended September 30, 2012, we incurred a net loss of $33.1 million and cash used in operating activities was $7.9 million. As of September 30, 2012, our cash and cash equivalent balance was $2.7 million, of which $2.2 million was held by subsidiaries outside the U.S. and could be subject to tax implications if repatriated to the U.S. As of September 30, 2012, current bank indebtedness was $10.7 million and debt with related parties, net of discount, was $64.2 million.

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

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

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

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

In order for us to meet the debt repayment requirements under the Term Loan Agreement and the Revolving Credit Agreement, we will need to raise additional capital by refinancing its debt, raising equity capital or selling assets.

Uncertainty in future credit markets may negatively impact our ability to access debt financing or to refinance existing indebtedness in the future on favorable 25 -------------------------------------------------------------------------------- Table of Contents terms, or at all. If additional capital is raised through the issuance of debt securities or other debt financing, the terms of such debt may include different financial covenants, restrictions and financial ratios other than what we currently operate under. Any equity financing transaction could result in additional dilution to our existing stockholders.

Results of Operations (amounts in 000's) Comparison of Three Months Ended September 30, 2012 and September 30, 2011 Revenue Three Months Ended September 30, 2012 2011 Period-to-Period Change % of Total % of Total (USD and $000's) Amount Revenue Amount Revenue Amount Percentage Revenue: Products $ 32,140 76 % $ 36,604 77 % $ (4,464 ) (12 )% Services 10,251 24 10,817 23 (566 ) (5 ) Total revenue $ 42,391 100 % $ 47,421 100 % $ (5,030 ) (11 )% Legacy vs. Next-Gen Legacy $ 13,527 32 % $ 17,239 36 % $ (3,712 ) (22 )% Next-Gen 28,864 68 30,182 64 (1,318 ) (4 ) Total revenue $ 42,391 100 % $ 47,421 100 % $ (5,030 ) (11 )% Revenue by geography: Americas $ 17,867 42 % $ 20,445 43 % $ (2,578 ) (13 )% Europe, Middle East and Africa 13,350 31 16,381 35 (3,031 ) (19 ) Asia Pacific 11,174 27 10,595 22 579 5 Total revenue $ 42,391 100 % $ 47,421 100 % $ (5,030 ) (11 )% Revenue Total revenue of $42.4 million for the three months ended September 30, 2012 decreased by $5.0 million, or 11%, from $47.4 million for the three months ended September 30, 2011.

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

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

26-------------------------------------------------------------------------------- Table of Contents Cost of Revenue and Gross Profit Three Months Ended September 30, 2012 2011 Period-to-Period Change % of Total % of Total Related Related (USD and $000's) Amount Revenue Amount Revenue Amount Percentage Cost of Revenues: Products $ 11,070 34 % $ 13,700 38 % $ (2,630 ) (19 )% Services 5,118 50 5,358 50 (240 ) (4 ) Total cost of revenues $ 16,188 38 % $ 19,058 40 % $ (2,870 ) (15 )% Gross Profit: Products $ 21,070 66 % $ 22,904 62 % $ (1,834 ) (8 )% Services 5,133 50 5,459 50 (326 ) (6 ) Total gross profit $ 26,203 62 % $ 28,363 60 % $ (2,160 ) (8 )% Cost of Revenue Total cost of revenue of $16.2 million for the three months ended September 30, 2012 decreased by 15% or $2.9 million from $19.1 million for the three months ended September 30, 2011.

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

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

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

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

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

27 -------------------------------------------------------------------------------- Table of Contents Operating Expenses Three Months Ended September 30, 2012 2011 Period-to-Period Change % of Total % of Total Amount Revenue Amount Revenue Amount Percentage Research and development, net $ 9,266 21 % $ 13,540 29 % $ (4,274 ) (32 )% Sales and marketing 9,261 21 12,664 27 (3,403 ) (27 ) General and administrative 7,375 17 9,391 20 (2,016 ) (21 ) Restructuring charges 457 1 1,674 4 (1,217 ) (73 ) Total operating expenses $ 26,359 61 % $ 37,269 79 % $ (10,910 ) (29 )% Research and Development Expenses Research and development expenses of $9.3 million, or 21% of total revenue, for the three months ended September 30, 2012 decreased by $4.3 million, or 32%, from $13.5 million, or 29%, of total revenue for the three months ended September 30, 2011. The change was primarily the result of a decrease in salaries and benefits of $2.9 million associated with a decrease in departmental headcount, as the result of our restructuring efforts.

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

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

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

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

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

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

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

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

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

Comparison of Nine Months Ended September 30, 2012 and September 30, 2011 Revenue Nine Months Ended September 30, 2012 2011 Period-to-Period Change % of Total % of Total (USD and $000's) Amount Revenue Amount Revenue Amount Percentage Revenue: Products $ 92,249 76 % $ 118,428 80 % $ (26,179 ) (22 )% Services 29,808 24 29,644 20 164 1 Total revenue $ 122,057 100 % $ 148,072 100 % $ (26,015 ) (18 )% Legacy vs. Next-Gen Legacy $ 42,830 35 % $ 52,319 35 % $ (9,489 ) (18 )% Next-Gen 79,227 65 95,753 65 (16,526 ) (17 ) Total revenue $ 122,057 100 % $ 148,072 100 % $ (26,015 ) (18 )% Revenue by geography: Americas $ 55,775 46 % $ 66,310 45 % $ (10,535 ) (16 )% Europe, Middle East and Africa 39,128 32 50,113 34 (10,985 ) (22 ) Asia Pacific 27,154 22 31,649 21 (4,495 ) (14 ) Total revenue $ 122,057 100 % $ 148,072 100 % $ (26,015 ) (18 )% Revenue Total revenue of $122.1 million for the nine months ended September 30, 2012 decreased by $26.0 million, or 18%, from $148.1 million for the nine months ended September 30, 2011.

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

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

Cost of Revenue and Gross Profit Nine Months Ended September 30, 2012 2011 Period-to-Period Change % of Total % of Total Related Related (USD and $000's) Amount Revenue Amount Revenue Amount Percentage Cost of Revenues: Products $ 38,038 41 % $ 45,237 38 % $ (7,199 ) (16 )% Services 15,267 51 16,215 55 (948 ) (6 ) Total cost of revenues $ 53,305 43 % $ 61,452 42 % $ (8,147 ) (13 )% Gross Profit: Products $ 54,211 59 % $ 73,191 62 % $ (18,980 ) (26 )% Services 14,541 49 13,429 45 1,112 8 Total gross profit $ 68,752 57 % $ 86,620 58 % $ (17,868 ) (21 )% Cost of Revenue Total cost of revenue of $53.3 million for the nine months ended September 30, 2012 decreased by 13% or $8.2 million from $61.5 million for the nine months ended September 30, 2011.

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

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

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

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

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

30-------------------------------------------------------------------------------- Table of Contents Operating Expenses Nine Months Ended September 30, 2012 2011 Period-to-Period Change % of Total % of Total Amount Revenue Amount Revenue Amount Percentage Research and development, net $ 33,459 27 % $ 42,262 29 % $ (8,803 ) (21 )% Sales and marketing 31,935 26 41,829 28 (9,894 ) (24 ) General and administrative 23,766 19 27,552 19 (3,786 ) (14 ) Restructuring charges 4,760 4 6,421 4 (1,661 ) (26 ) Total operating expenses $ 93,920 76 % $ 118,064 80 % $ (24,144 ) (20 )% Research and Development Expenses Research and development expenses of $33.5 million, or 27% of total revenue, for the nine months ended September 30, 2012 decreased by $8.8 million, or 21%, from $42.3 million, or 29% of total revenue for the nine months ended September 30, 2011. The decrease was primarily the result of a $6.8 million decrease in salaries and benefits associated with a decrease in departmental headcount, as the result of our integration and restructuring efforts.

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

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

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

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

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

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

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

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

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

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

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

Financial Position Liquidity and Capital Resources As of September 30, 2012, we had cash and cash equivalents of $2.7 million, compared to $10.4 million of cash and cash equivalents as of December 31, 2011.

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

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

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

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

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

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

If we should default on any of the covenants contained in the Term Loan and Revolving Credit Agreements, we do not anticipate having sufficient cash and cash equivalents to repay the debt should the revolving credit lender and related party term loan lenders accelerate the maturity dates and we would be forced to restructure these agreements and/or seek alternative sources of financing. There can be no assurances that restructuring of the debt or alternative financing will be available on acceptable terms or at all. This could harm us by: • increasing our vulnerability to adverse economic conditions in our industry or the economy in general; • requiring substantial amounts of cash to be used for debt servicing, rather than other purposes, including operations; • limiting our ability to plan for, or react to, changes in our business and industry; and • influencing investor and customer perceptions about our financial stability and limiting our ability to obtain financing or acquire customers.

Unfavorable economic and market conditions in the United States and the rest of world could impact our business in a number of ways, including: • deferment of purchases and orders by customers; • negative impact from increased financial pressures on distributors and resellers of our product; and • negative impact from increased financial pressures on key suppliers.

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

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

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

Operating Activities Net cash used in operating activities of $7.9 million for the nine months ended September 30, 2012 was primarily attributable to our net loss of $33.1 million, partially offset by adjustments for non-cash items aggregating to $13.1 million.

Operating assets decreased by $18.4 million and operating liabilities decreased by $6.4 million. The decrease in operating assets relates to inventory of $9.7 million, accounts receivable of $7.0 million and other current assets of $1.7 million. The decrease in operating liabilities is primarily attributable to decreases of $5.0 million in accounts payable and accrued liabilities, deferred revenue of $1.6 million, income taxes payable of $0.7 million and interest payable of $0.4 million, partially offset by an increase in other long-term liabilities of $1.4 million.

33 -------------------------------------------------------------------------------- Table of Contents Net cash used in operating activities of $11.1 million for the nine months ended September 30, 2011 was primarily attributable to our net loss of $45.6 million, partially offset by adjustments for non-cash items aggregating to $19.5 million.

Operating assets decreased by $22.9 million and operating liabilities decreased by $7.8 million. The decrease in operating assets relates to accounts receivable of $11.8 million, other current assets of $5.1 million and inventory of $5.9 million. The decrease in operating liabilities is primarily attributable to decreases of $3.0 million in deferred revenue, accounts payable and accrued liabilities of $4.9 million, and income taxes payable of $0.2 million, partially offset by an increase in interest payable, related parties of $0.3 million.

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

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

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

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

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

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

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

Prior to Subsequent to Restructuring Restructuring Term Loan, principal $ 94,093 $ 61,135 Term Loan Debt Discount (7,657 ) (2,530 ) 86,436 58,605 Convertible Notes, carrying value - 32,905 - 32,905 Shareholder Loans 5,074 - Total long-term 91,510 91,510 Accrued interest payable-term loan 260 260 $ 91,770 $ 91,770 34 -------------------------------------------------------------------------------- Table of Contents The conversion feature embedded in the Notes was not required to be bifurcated on the restructuring closing date and separately measured as a derivative liability, as we have sufficient authorized and unissued common shares to satisfy conversion of the Notes among other criteria that were met. Further, stockholders owning greater than 50% of our common stock agreed to the conversion, and as a result, on August 8, 2012, the Notes were converted into equity.

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

The Notes had an interest at the rate of 1% per annum, compounded annually, and were convertible into shares of our common stock, par value $0.001 per share.

The conversion price of the Notes was generally $5.00 per share, except that the Notes issued to the Term Lenders in exchange for the cancellation of the Interest Amount had a conversion price of $4.35 per share, in each case as adjusted for any stock split, reverse stock split, stock dividend, recapitalization, reclassification, combination or other similar transaction.

Under the terms of the Notes, the principal and all accrued but unpaid interest automatically converted into shares of Common Stock upon stockholder approval of the Private Placement, which approval was obtained at the Company's 2012 Annual Meeting of Stockholders on August 8, 2012.

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

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

The Certificate authorizes one share of Series D-1 Preferred Share, which is non-voting and is not convertible into other shares of our capital stock, or Common Stock. However, following stockholder approval of the Private Placement, if it occurs, the holder of the Series D-1 Preferred Share has the right to designate certain members of the Board as follows: • four directors to the Board (each director to the Board designated and elected pursuant by the Holder, a "Series D-1 Director", and all such directors, or the Series D-1 Directors at any time while the Holder (together with its affiliates) beneficially owns in the aggregate at least 45% of the then issued and outstanding shares of Common Stock (assuming (x) the exercise in full of all warrants then exercisable by the Holder and any affiliates thereof and (z) conversion or exercise, as applicable, of any other securities of the Company that by their terms are convertible or exercisable into shares of Common Stock that are held by the Holder, collectively, or the Fully Diluted Common Stock; • three Series D-1 Directors at any time while the Holder (together with its affiliates) beneficially owns in the aggregate at least 30% and less than 45% of the Fully Diluted Common Stock; • two Series D-1 Directors at any time while the Holder (together with its affiliates) beneficially owns in the aggregate at least 10% and less than 30% of the Fully Diluted Common Stock; or • one Series D-1 Director at any time while the Holder (together with its affiliates) beneficially owns in the aggregate at least three percent and less than 10% of the Fully Diluted Common Stock.

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

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

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

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

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

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