Form 10-K

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ¨ No þ

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

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10 K. ¨

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

Large accelerated filer ¨ Accelerated filer ¨ Non-accelerated filer ¨ Smaller reporting company þ

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

The aggregate market value of the registrant’s voting and non-voting common equity held by non-affiliates of the registrant at June 30, 2012, based on the closing price of such stock on the NASDAQ Global Market on such date, was approximately $7.2 million. The calculation of the aggregate market value of voting and non-voting common equity held by non-affiliates of the registrant excludes shares of common stock held by each officer, director and stockholder that the registrant concluded were affiliates on that date. The determination of affiliate status is not a conclusive determination for other purposes.

As of March 8, 2013, 15,863,894 shares of the registrant’s common stock were outstanding.

Portions of the registrant’s definitive proxy statement for its 2013 annual meeting of stockholders to be filed pursuant to Regulation 14A with the Securities and Exchange Commission not later than 120 days after the registrant’s fiscal year ended December 31, 2012, are incorporated by reference into Part III of this Form 10-K.

This Annual Report on Form 10-K of Dialogic Inc. and its subsidiaries (the “Company,” “us,” “we,” or “our”) contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. These forward-looking statements are made pursuant to safe harbor provisions of the Private Securities Litigation Reform Act of 1995. All statements in this Annual Report on Form 10-K, including those made by our management, other than statements of historical fact, are forward-looking statements, including specifically forward looking statements regarding:

Forward-looking statements are based on management’s estimates, projections and assumptions as of the date hereof and include the assumptions that underlie such statements. Forward-looking statements may contain words such as “may,” “will,” “should,” “could,” “would,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” and “continue,” the negative of these terms, or other comparable terminology. Any expectations based on these forward-looking statements are subject to risks and uncertainties and other important factors, including those discussed below and in the section titled “Item 1A. Risk Factors” and other documents we file from time to time with the Securities and Exchange Commission, or the SEC, such as our quarterly reports on Form 10-Q and our current reports on Form 8-K. Such risks, uncertainties and changes in condition, significance, value and effect could cause our actual results to differ materially from those expressed herein and in ways not readily foreseeable. Readers are urged not to place undue reliance on these forward-looking statements, which speak only as of the date of this Annual Report on Form 10-K and are based on information currently and reasonably known to us. We undertake no obligation to revise or update any forward-looking statements in order to reflect any event or circumstance that may arise after the date of this Annual Report on Form 10-K. Readers are urged to carefully review and consider the various disclosures made in this Annual Report, which attempt to advise interested parties of the risks and factors that may affect our business, financial condition, results of operations and prospects.

The following select abbreviations or acronyms are used within Part I, Item 1 — Business; Part I, Item 1A — Risk Factors; and Part II, Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations in this Annual Report on Form 10-K.

Dialogic, 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, supercharge 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 VoIP and other media rich services. These service providers also utilize our 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 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 IVR/ IVVR.

We sell our products to both service provider and enterprise customers and sell directly and indirectly through distribution partners such as TEMs, VARs and other channel partners. Our customers supercharge 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. Companies we have acquired or our subsidiaries have acquired have been providing products and services for nearly 25 years.

On October 1, 2010, we completed our business combination with Dialogic Corporation, a British Columbia corporation, in accordance with the terms of an acquisition agreement dated May 12, 2010. We acquired all of Dialogic Corporation’s outstanding common and preferred shares in exchange for an aggregate of approximately 22.1 million shares of our common stock, after giving effect to the stock split described below and, accordingly, Dialogic Corporation became our wholly-owned subsidiary. All outstanding options to purchase Dialogic Corporation common shares were cancelled and new options to purchase shares of our common stock were granted. After taking into account the issuance of stock options to purchase our common stock in exchange for Dialogic Corporation options at October 1, 2010, the former Dialogic Corporation shareholders and option holders held approximately 70% and our existing stockholders held approximately 30% of our outstanding securities following the combination. As of October 1, 2010, there were approximately 31.0 million shares of our common stock issued and outstanding, after taking into account the effect of the one-for-five reverse stock split approved by the our stockholders on September 30, 2010. As of October 1, 2010, we changed our name from Veraz Networks, Inc. to Dialogic Inc. and on October 4, 2010, our common stock began trading on The NASDAQ Global Market under the symbol “DLGC”. Our business combination with Dialogic Corporation was accounted for as a reverse acquisition under the acquisition method of accounting whereby Dialogic Corporation was considered the accounting acquirer in accordance with U.S. generally accepted accounting principles, or U.S. GAAP.

The telecommunications industry has traditionally been highly regulated. In recent years, however, 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 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 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 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 boundaries, which are more fully discussed in “Item 1A. Risk Factors.”

Our products include both Next-Generation products that serve advanced mobile and IP networks and also 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:

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, 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 experience 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 and, as a result, we have continued to invest in network congestion solutions for our portfolio 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.

Sales and Services. We sell our products via a direct sales force to service providers, and to TEMs and ISVs who perform system integration. Additionally, we utilize regional distributors worldwide to sell our products to other ISVs, VARs, and SIs. Our distribution model allows us to develop and maintain key partnership relationships with select, high-volume customers while offering our products to a global customer base in a cost effective manner. Our direct sales force and global distributors are supported by our customer support team that operates in 16 locations in nine countries worldwide. Our customer support team provides pre-sales training, technical support, and network configuration support to our customers as required.

Marketing. We have invested significant resources to reorient our go-to-market strategy around an innovative new concept called “Network Fuel”. Network Fuel is a differentiated approach built on the belief that technologies and services must enhance the capabilities of existing networks. With Network Fuel, service providers and application developers can capitalize on the high-quality, media-rich experience subscribers demand while maximizing investments and creating a competitive edge. Network Fuel represents a new attitude toward solving the most daunting challenge faced by today’s network operators: executing advanced services using the resources and technology they currently have. We seek to revitalize key elements of their network and transform it into a service delivery machine.

Our marketing and product management teams focus their efforts on increasing awareness of us and our Network Fuel strategy, generating qualified sales leads and heightening solution awareness. The marketing teams establish relationships with local partners to communicate product enhancements and capabilities and work closely with our engineers.

As of December 31, 2012, our sales and marketing organization consisted of 148 employees located in the United States and in more than 20 other countries around the world. Sales and marketing expenses totaled $41.5 million for 2012 and $54.3 million for 2011.

Continued investment in research and development is critical to remaining a leader in the market segments within which we compete. Our global research and development team is located in 8 different locations within five countries and is responsible for designing, developing, and enhancing our solutions, testing and quality assurance, and ensuring interoperability with third-party hardware and software products as well as current and emerging industry standards.

As of December 31, 2012, we had 241 employees primarily devoted to research and development activities. Research and development expenses totaled $42.8 million for 2012 and $54.6 million for 2011.

Our target customers include service providers as well as enterprise customers and indirect channel partners such as TEMs, ISVs, VARs, and SIs engaged in the sale of communications technology equipment to service provider and enterprise end customers. Our global presence allows us to distribute our products and support our customers worldwide. In 2012, our solutions were sold to over 609 customers in over 118 countries.

Revenue from customers located outside of the United States represented 54% of our total revenue for both the years ended December 31, 2012 and 2011, respectively. No customer accounted for over 10% of our revenue during the years ended December 31, 2012 and 2011, respectively. No customer accounted for over 10% of our accounts receivable as of December 31, 2012. One customer accounted for 12% of our accounts receivable as of December 31, 2011.

The market for communication solutions and communications-enabling technology solutions is highly competitive and characterized by continuous technological change. We believe that the principal competitive factors in our industry include product

features, price, customer service (including technical support and product warranty), and product availability. We believe that we compete favorably within each of these categories. We compete with a number of vendors across our various product lines including Acme Packet, Inc., Alcatel-Lucent, Audiocodes Ltd., Cisco Systems, Inc. Genband Inc., Huawei Technologies Co. Ltd., Radisys Corporation, Metaswitch Networks and Sonus Networks, Inc., among others.

Our success and ability to compete within our industry is dependent in part on our ability to develop, maintain and protect our technology via intellectual property. We rely on a combination of U.S. and foreign patent, trademark, trade secret and copyright law, as well as agreements and contracts, for safeguarding our technology and to endeavor to protect us against claims initiated by others relating to intellectual property. Our general policy has been to seek to patent inventions relating to technology that we expect to incorporate in our products and/or that we believe may be otherwise of value within our industry. We have an internal invention disclosure process and patent committee to identify and evaluate inventions developed by our employees and to determine which of these inventions we will seek to patent.

As of December 31, 2012, we owned approximately 102 issued U.S. patents, approximately 57 issued foreign patents within 23 patent families, and have approximately 80 patent applications pending worldwide. Our already issued patents and any patents that may be granted on our currently pending patent applications will expire approximately over the course of the next 20 years. We also have registered trademarks and pending applications to seek trademark registrations in the United States and various foreign countries of perceived interest and/or relevance. Among the registered trademarks are those for brands, such as Dialogic, Brooktrout, I-GATE, and Diva, under which we sell and/or market certain products. We also have registered and seek to register trademarks for terms that are used in connection with our product and/or corporate marketing efforts, including, most recently, applying to register the term “Network Fuel”.

Patents, by definition, have a fixed term, and the terms of some of our patents have already expired. As this continues to occur, and although we strive to offset the expiration of patents by obtaining new patents and filing new patent applications, technology covered by the expiring patents will no longer be patented and, as discussed further in “Risk Factors,” the expiration of a patent can result in increased competition and an adverse impact on revenues, cash flows and earnings. Trademarks do not have a fixed term; however, we expect to allow some of our current registered and pending trademarks to expire or become abandoned in the coming years, and although it is possible that such expiration could carry with it associated risks, it is expected that such risks will be minimal, if any, to the extent that such trademarks relate to company names (such as Veraz, Cantata, Snowshore and NMS Communications), which are no longer focal points in selling and marketing our products or our company.

We have incorporated third-party licensed technology into certain of our current products. From time to time, we may be required to license additional technology from third parties to develop new products or to enhance existing products. Based on experience and standard industry practice, we believe that licenses to use third-party technology generally can be obtained on commercially reasonable terms. The risks associated with third-party licenses are more fully discussed in “Item 1A. Risk Factors.”

We use a combination of internal and external manufacturing. We use third-party contract manufacturers to produce our electronics, which are then configured and distributed from our internal facilities. We also produce a number of products using a direct fulfillment model, which we are expanding to other products. Our integration and distribution facilities are situated in Parsippany, New Jersey and Hyannis, Massachusetts in the U.S. and internationally in Dublin, Ireland and Petach Tikva, Israel. Our Quality Management System is certified to ISO 9001:2008 and includes both product development facilities and manufacturing facilities. In addition, our Environment Management System is certified to ISO 14001:2004 for the facilities listed above. Our primary contract manufacturers are based in Wisconsin and Migdal-Haemek, Israel. Both of these manufacturers are certified to ISO 9001:2008 and the facilities in Wisconsin and Israel, where products are manufactured, are also certified to ISO 14001:2004.

We have made, and will continue to make, expenditures for environmental compliance and protection. We do not expect that such expenditures will have a material effect on our capital expenditures or results of operations in the foreseeable future.

As of December 31, 2012, we had a total of 684 employees, including 148 in sales and marketing, 241 in research and development, 200 in manufacturing operations and services and 95 in a general and administrative capacity. We had 359 employees in

the United States and Canada and 325 employees in the rest of the world, with the majority of such non-North American employees being located in Europe and Asia. We also employ 23 temporary employees and consultants on a contract basis. None of our employees are represented by a labor union with respect to his or her employment except in locations where all employees are generally part of a collective bargaining agreement, such as in France, Slovenia, Spain and Brazil. As required in certain foreign countries, national collective agreements may apply to certain of our employees. We have not experienced any work stoppages and consider our relations with our employees to be good.

We maintain a website at www.dialogic.com. Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act are available free of charge through our website, as soon as reasonably practicable after such reports are electronically filed with or furnished to the SEC. Our website and the information contained in it and connected to it shall not be deemed incorporated by reference into this Annual Report on Form 10-K. Further copies of the reports are located at the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. Information on the operation of the Public Reference Room can be obtained by calling the SEC at 1-800-SEC-0330. The SEC maintains a website that contains reports, proxy and information statements, and other information regarding our filings, at www.sec.gov.

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 Annual Report on Form 10-K. 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 Annual Report on Form 10-K. 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 profits and our losses could continue. Without sufficient additional capital to apply to repay our indebtedness, we may be required to significantly scale back our operations, significantly reduce our headcount, seek protection under the provisions of the U.S. Bankruptcy Code, and/or discontinue many of our activities which could negatively affect our business and prospects. Our current capital raising efforts may not be successful in raising additional capital on favorable terms, or at all.

We have experienced significant losses in the past and never sustained profits. For the years ended December 31, 2012 and 2011, we recorded net losses of $37.8 million and $54.8 million, respectively. As of December 31, 2012, we had $11.7 million in current bank indebtedness and $66.5 million in long-term debt, net of discount. If we fail to comply with the covenants under the Third Amendment (the “Third Amendment”) to the Third Amended and Restated Credit Agreement (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 the Convertible notes or Notes resulted in substantial dilution to our stockholders and any additional equity financing would also likely be substantially dilutive to our stockholders, particularly in light of the prices at which our common stock has been recently trading. In

addition, if we raise additional funds through the sale of equity securities, new investors could have rights senior to our existing stockholders. The terms of any future financings may restrict our ability to raise additional capital, which could delay or prevent the further development or marketing of our products and services. Our need to raise capital before the repayment of our debt becomes due may require us to accept terms that may harm our business or be disadvantageous to our current stockholders, particularly in light of the current illiquidity and instability in the global financial markets.

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

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

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

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

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

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:

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.

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

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

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

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

for a minimum of the last 10 consecutive business days, from April 20, 2012 to May 4, 2012, the market value of our publicly held shares has been $15.0 million or greater and that this matter is now closed.

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

On December 26, 2012, we received a Staff Determination Letter from the Staff notifying us that we have not regained compliance with the Market Value Rule except for 15 trading days from August 15 through September 5, 2012, for which the Staff determined to exercise its discretionary authority and not deem the Company in compliance with the Market Value Rule. The December 26, 2012 Staff Determination Letter also stated that our securities would be scheduled for delisting from The NASDAQ Global Market and would be suspended at the opening of business on January 4, 2013, unless we requested an appeal of Staff’s decision to the Hearings Panel, or the Panel, in accordance with the procedures set forth in the NASDAQ Listing Rule 5800 Series. Accordingly, we had requested a hearing before the Panel; and appeared before the Panel at a hearing on March 7, 2013. On March 15, 2013, the Panel rendered its decision and allowed us to continue to be listed on The NASDAQ Global Market, subject to the condition that, on or before April 15, 2013, we demonstrate to the Panel that we have regained compliance with the Market Value Rule. There can be no assurance that we will be able to regain compliance with the Market Value Rule before April 15, 2013, or that we will be able to obtain a further extension from the Panel if we have not regained compliance by that date.

If we cannot regain compliance with the Market Value Rule before April 15, 2013 and do not obtain a further extension from the Panel, our common stock will be delisted from NASDAQ, and traded in the over-the-counter market on either the OTCQB market or the OTCBB. 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. If our common stock were to be delisted by NASDAQ, we could face significant material adverse consequences, including:

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.

As adjusted for the 5-for-1 reverse stock split, effected on September 14, 2012, our common stock traded as high as $6.80 and as low as $1.26 per share during the twelve months ended December 31, 2012. Some of the factors leading to this volatility include:

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:

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

telecommunications industry may cause our operating results to fluctuate from period to period, which also may increase the volatility of the price of our common stock and harm our business.

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

For the years ended December 31, 2012 and 2011, we used cash of $5.5 million and $10.5 million, respectively, to fund our operating activities. We have made significant efforts to reduce costs and reduce headcount and streamline operations for the last several years and continued to focus on reducing costs during 2012. We successfully reduced quarterly operating costs from $38.6 million to $26.3 million (excluding restructuring charges) per quarter between the first quarter of 2011 and the fourth quarter of 2012. However, we may not be able to continue to reduce spending as planned and unanticipated costs may occur. Any restructuring efforts to focus on key products may not prove successful due to a variety of factors, including risks that a smaller workforce may have difficulty successfully completing research and development efforts and adequately monitoring our development and commercialization efforts. In addition, we may, in the future, decide to restructure operations and further reduce expenses by taking such measures as additional reductions in our workforce and reductions in other spending. Any restructuring places a substantial strain on remaining management and employees and on operational resources, and there is a risk that our business will be adversely affected by the diversion of management time to the restructuring efforts. There can be no assurance that following any restructuring we will have sufficient cash resources to allow us to fund our operations or repay our outstanding indebtedness as planned.

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

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

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

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

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

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

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

Internal controls over financial reporting, or Internal Controls, are procedures which are designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. GAAP and includes those policies and procedures that: (1) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. GAAP, and that receipts and expenditures

are being made only in accordance with authorizations of our management and directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on its financial statements.

Management, with the participation of our principal executive officer and principal financial officer, has conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework set forth in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission as of December 31, 2012. Based on this evaluation, management concluded that the material weakness identified in connection with its evaluation of our internal controls as of December 31, 2011 had been remediated. Public Company Accounting Oversight Board Auditing Standard No. 5, defines a material weakness as a deficiency or a combination of deficiencies in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. The material weakness identified during 2011 related to the fact that, while we had initiated procedures to document and review the system of internal controls, those procedures were not in place for a sufficient amount of time to adequately assess the operating effectiveness.

Management has taken measures to remediate the material weakness previously identified, which included engaging an outside consultant to further review the design effectiveness of our internal controls and perform sufficient testing to determine the operating effectiveness of internal control over financial reporting for the year ending December 31, 2012.

Our management, including our Chief Executive Officer and Chief Financial Officer, do not expect that our disclosure controls or Internal Controls will prevent all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and we cannot make assurances that any design will succeed in achieving our stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

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

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

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

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

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:

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 76% of our outstanding common stock (assuming exercise of outstanding warrants to purchase our common stock) as of December 31, 2012.

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

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

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

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

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

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

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

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

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

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

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

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

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

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:

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

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

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

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

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

Many factors out of our control could interfere with our ability to market, license, implement or support our products with any of our partners, which in turn could harm our business. These factors include, but are not limited to, a change in the business strategy of one of our partners, the introduction of competitive product offerings by other companies that are sold through one of our partners, potential contract defaults by one of our partners, or changes in ownership or management of one of our distribution partners. Some of our competitors may have stronger relationships with our distribution partners than we do, and we have limited control, if any, as to whether those partners implement our products rather than our competitors’ products or whether they devote resources to market and support our competitors’ products rather than our offerings. In addition, we recognize a portion of our revenue based on a sell-through model using information provided by our partners and recognize a significant portion on a sell-in basis, particularly when selling in to

established VARs, independent software vendors, technology equipment manufacturers and other partners with whom we have a significant history. If those partners provide us with inaccurate or untimely information, the amount or timing of our revenues could be adversely impacted and our operating results may be harmed.

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

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

As a public company, we are subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act and NASDAQ Listing Standards. The requirements of these rules and regulations will increase our legal and financial compliance costs, make some activities more difficult, time-consuming or costly and may also place undue strain on our personnel, systems and resources. The Exchange Act requires, among other things, that we file annual, quarterly and current reports with respect to our business and financial condition. The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal control over financial reporting. As a public company, our systems of internal controls over financial reporting will be required to be periodically assessed and reported on by management and may be subject to annual audits by our independent auditors. During the course of our evaluation, we may identify areas requiring improvement, and may be required to design enhanced processes and controls to address issues identified through this review. This could result in significant delays and cost to us and require us to divert substantial resources, including management time, from other activities. As of December 31, 2011, we had identified a material weakness in our Internal Controls. This material weakness has been successfully remediated as of December 31, 2012. Moreover, effective internal controls are necessary for us to produce reliable financial reports and are important to help prevent fraud. As a result, our failure to satisfy the requirements of Section 404 on a timely basis could result in the loss of investor confidence in the reliability of our financial statements, which in turn could harm the market value of our common stock. Any failure to maintain effective internal controls also could impair our ability to manage our business and harm our financial results.

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

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

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

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

For the years ended December 31, 2012 and 2011, revenue from outside of the Americas was $87.1 million and $107.2 million, respectively, or 54% of our total revenue. 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:

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:

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:

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, will become effective on March 16, 2013. Accordingly, it is not clear what impact the Leahy-Smith Act will have on the operation of our business and the protection and enforcement of our intellectual property. However, the Leahy-Smith Act and its implementation could increase the uncertainties and costs surrounding the prosecution of our patent applications and the enforcement or defense of our issued patents, all of which could have a material adverse effect on our business and financial condition.

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

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

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

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:

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 2012 and 2011, 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.

As of December 31, 2012, we occupied 380,522 square feet of building space in 32 locations in 20 countries. We lease our facilities under various leases that expire between 2013 and 2020. The leases generally provide for base monthly rents with annual escalation clauses based upon fixed amounts or cost of living increases. For further information concerning lease obligations, see Note 8 to the consolidated financial statements.

Our U.S. facilities account for 269,790 square feet, the largest of which is 148,322 square feet at our administration, engineering, operations and sales facility located in Parsippany, New Jersey. Our corporate headquarters in Milpitas, California amounted to 34,481 square feet. Our non-US facilities accounted for 110,732 square feet, the largest of which is 40,688 square feet at our administration, engineering, operations and sales facility located in Tel Aviv, Israel. We do not own any real estate and believe that our current facilities are adequate for our present purposes.

Other than the SEC Informal Inquiry, we are not a party to any material legal proceeding. From time to time, we may be engaged in various legal proceedings incidental to our normal business activity.

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Our common stock is listed and traded on The NASDAQ Global Market under the symbol “DLGC”. The following table summarizes the high and low sales prices for our common stock as reported by The NASDAQ Global Market for the periods indicated, all of which have been adjusted to reflect the 5-for-1 reverse stock split approved by our stockholders on September 14, 2012 and effected on September 14, 2012.

As of March 8, 2013, there were approximately 63 record holders of our common stock. The number of record holders does not include individuals whose stock is in nominee or “street name” accounts through brokers.

We have never declared or paid any cash dividends on our common stock. We currently intend to retain any earnings to finance future growth, and therefore do not expect to pay cash dividends on our common stock in the foreseeable future. Under the Revolving Credit Agreement, we cannot declare or pay any cash dividends without the consent of the Revolving Credit Lender.

There were no sales of unregistered securities by us that were not previously included in a quarterly report on Form 10-Q or in a current report on Form 8-K.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of our operation should be read in conjunction with the consolidated financial statements and the notes to those statements included elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those contained in these forward-looking statements due to a number of factors, including those discussed in Part I, Item 1A “Risk Factors” and elsewhere in this report.

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. Companies we have acquired have been providing products and services for nearly 25 years.

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. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. We base our estimates on historical experience, knowledge of current conditions and beliefs of what could occur in the future given available information. If actual results differ significantly from management’s estimates and projections, there could be a material effect on our financial statements. The accounting policies that we believe are the most critical to aid in fully understanding and evaluating our reported financial results, and which required the most subjective judgment by us, are the following:

We derive substantially all of our revenue from the sale of hardware/ software, licensing of software and professional services. Our products are sold directly through our own sales force and independently through distribution partners.

We recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred and, if applicable, acceptance is received, the fee is fixed or determinable, and collectability is probable. In making these judgments, we evaluate these criteria as follows:

During the first quarter of 2011, we prospectively adopted the guidance of Accounting Standards Update, or ASU No. 2009-13, Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements, or ASU No. 2009-13 and ASU No. 2009-14, Software (Topic 985): Certain Revenue Arrangement That Include Software Elements, or ASU No. 2009-14.

The amendments in ASU No. 2009-14 provided that tangible products containing software components and non-software components that function together to deliver the tangible product’s essential functionality are no longer within the scope of the software revenue recognition guidance in Accounting Standards Codification, or ASC Topic 985-605, Software Revenue Recognition, or ASC 985-605 and should follow the guidance in ASU No. 2009-13 for multiple-element arrangements. All non-essential and standalone software components will continue to be accounted for under the guidance of ASC 985-605.

ASU No. 2009-13 established a selling price hierarchy for determining the selling price of a deliverable in a revenue arrangement. The selling price for each deliverable is based on vendor-specific objective evidence, or VSOE, if available, third-party evidence, or TPE, if VSOE is not available, or our estimated selling price, or ESP, if neither VSOE nor TPE are available. The amendments in ASU No. 2009-13 eliminated the residual method of allocating arrangement consideration and required that it be allocated at inception of the arrangement to all deliverables using the relative selling price method. The relative selling price method allocates any discount in the arrangement proportionately to each deliverable on the basis of the deliverable’s estimated selling price.

Our products typically have both hardware and software and components that function together to deliver the product’s essential functionality. Although our products are primarily marketed based on the software elements contained therein, the hardware sold, generally cannot be used apart from the software. Many of our sales involve multiple-element arrangements that include product, maintenance and professional services. We may enter into sales transactions that do not contain tangible hardware components, which continue to be accounted for under guidance of ASC 985-605.

Multiple-deliverable revenue guidance requires the evaluation of each deliverable in an arrangement to determine whether such deliverable represents a separate unit of accounting. The delivered item constitutes a separate unit of accounting when it has stand-alone value to the customer. If the arrangement includes a general refund or return right relative to the delivered item and the delivery and performance of the undelivered items are considered probable and substantially in our control, the delivered element constitutes a separate unit of accounting. In instances when the aforementioned criteria are not met, the deliverable is combined with the undelivered elements and revenue recognition is determined for the combination as a single unit of accounting. Most of our products qualify as single deliverables because they are sold as a single tangible product containing both hardware and software to deliver the product’s essential functionality and have standalone value to the customers, accordingly, revenue is recognized when the applicable revenue recognition criteria are met. Hardware and software expansion and spare or replacement parts are treated as separate units of accounting because they have standalone value to the customer and general right of return does not exist; therefore, revenue is recognized upon delivery for these components assuming all other revenue recognition criteria are also met.

The total arrangement fees are allocated to all the deliverables based on their respective relative selling prices. The relative selling price is determined using VSOE, when available. We generally use VSOE to derive the selling price for its maintenance and professional services deliverables. VSOE for maintenance is based on contractual stated renewal rates, whereas professional services are based on historical pricing for standalone professional service transactions. When VSOE cannot be established, we attempt to determine the TPE for the deliverables. TPE is determined based on prices for similar deliverables, sold by competitors. Generally, our offerings differ from those of our competitors and comparable pricing of our competitors is often not available.

When we are unable to establish selling price using VSOE or TPE, we use ESP in our allocation of arrangement fees. The ESP for a deliverable is determined as the price at which we would transact, if the products or services were sold on a standalone basis. The ESP

for each deliverable is determined using an average historical discounted selling price based on several factors, including but not limited to, marketing strategy, customer considerations and pricing practices in a region. For arrangements with contingent revenue provisions (a portion of the relative selling price of a delivered item is contingent upon the delivery of additional items or meeting other specified performance conditions), revenue recognized on delivered items is limited to the non-contingent amount.

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

We have agreements with certain distributors which allow for stock rotation rights. The stock rotation rights permit the distributors to return a defined percentage of their purchases. Most distributors must exchange this stock for orders of an equal or greater amount. We recognize an allowance for stock rotation rights based on historical experience. The provision is recorded as a reduction in revenue in the period during which the related revenue is recognized.

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

Revenue is primarily recognized net of sales taxes. Revenue includes amounts billed to customers for shipping and handling. Shipping and handling costs are included in cost of revenue in the accompanying consolidated statements of operations and comprehensive loss.

Accounts receivable consist of amounts due from normal business activities. We maintain an allowance for estimated losses resulting from the inability of our customers to make required payments. We estimate uncollectible amounts based upon historical bad debts, evaluation of current customer receivable balances, age of customer receivable balances, the customer’s financial condition and current economic trends. We review our allowance for doubtful accounts on a regular basis. Account balances are charged off against the allowance after all means of collection has been made and the potential for recovery is considered remote. Historically, the allowance for doubtful accounts has been adequate to cover the actual losses from uncollectible accounts.

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. We provide for inventory losses based on obsolescence and levels in excess of forecasted demand. In assessing the net realizable value of inventory, we are required to make judgments as to future demand requirements and compare these with the current or committed inventory levels.

Long-lived assets, such as property and equipment, and intangible assets, are assessed for recoverability when events or changes in circumstances occur that indicate that the carrying value of the asset may not be recoverable. The assessment of possible impairment is based upon the ability to recover the cost of the asset from the expected future undiscounted cash flows of related operations. In the event undiscounted cash flow projections indicate impairment, we would record an impairment charge based on the fair value of the assets at the date of the impairment.

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, such as trade names, on an annual basis or more frequently if impairment indicators arise during the year. Our annual impairment testing is conducted during the last quarter of the fiscal year.

The impairment test for goodwill involves a two-step approach. Under the first step, we determine the fair value of the reporting unit to which goodwill has been assigned and then compares the fair value to the unit’s carrying value, including goodwill. Fair value is generally determined utilizing a discounted cash flow approach, based on management’s best estimate of the highest and best use of future revenues and operating expenses, discounted at an appropriate market participant risk adjusted rate. If the fair value exceeds the

carrying value, no impairment loss is recognized. If the carrying value exceeds the fair value, the goodwill of the reporting unit is considered potentially impaired and the second step is performed to measure the impairment loss.

Under the second step, the implied fair value of goodwill is calculated by deducting the fair value of all tangible and intangible net assets, including any unrecognized intangible assets, of the reporting unit from the fair value of the unit as determined in the first step. The implied fair value of goodwill is then compared to the carrying value of goodwill. If the implied fair value of goodwill is less than the carrying value of goodwill, we would recognize an impairment loss equal to the difference.

Considerable judgment is required to estimate discounted future operating cash flows. Judgment is also required in determining whether an event has occurred that may impair the value of intangible assets, long-lived assets and goodwill. Factors that could indicate impairment may exist include significant underperformance relative to plan or long-term projections, strategic changes in business strategy, significant negative industry or economic trends and a significant change in circumstances relative to a large customer. We must make assumptions about future cash flows, future operating plans, discount rates and other factors in the models and valuation reports. To the extent these future projections and estimates change, the estimated amounts of impairment could differ from current estimates.

Our annual testing for impairment of goodwill, intangible assets, with indefinite and definite useful lives, indicated that no impairment existed for the years ended December 31, 2012 and 2011.

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, or RSUs, fair value is determined based on the stock price on grant date. We recognize the compensation cost of stock-based awards on a straight-line basis over 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 the grant for the period commensurate with the expected term. The computation of expected volatility is based on the historical volatility of our 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. We will continue to use the simplified method until we have enough historical experience to provide a reasonable estimate of expected term. We have not paid, and do not anticipate paying, cash dividends on our 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.

Generally, stock options and RSUs vest over four years in equal installments on each of the first through fourth anniversaries of the vesting commencement date. Upon vesting, all RSUs will convert into an equivalent number of shares of common stock.

We account for income taxes using the asset and liability approach, which requires the recognition of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in our financial statements or tax returns. The measurement of current and deferred tax liabilities and assets are based on provisions of the enacted tax law. A valuation allowance is provided if, based on the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. A change in taxable income in future periods that is significantly different from that projected may cause adjustments to the valuation allowance that could materially increase or decrease future income tax expense.

We classify interest and penalties related to uncertain tax contingencies as a component of income tax expense in the consolidated statements of operations and comprehensive loss. Income tax reserves for uncertain tax positions are recorded whenever there is a difference between amounts reported in our tax returns and the amounts we believe we would likely pay in the event of an examination by the taxing authorities. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in the recognition or measurement are reflected in the period in which the change occurs.

Total revenue of $160.0 million for the year ended December 31, 2012 decreased by $38.1 million, or 19%, from $198.1 million for the year ended December 31, 2011.

Our product revenue was 76% of total revenue at $121.2 million for the year ended December 31, 2012, compared to 79% of total revenue, or $157.1 million for the year ended December 31, 2011, a decrease of $35.9 million, or 23%. The decrease in product revenue is primarily attributable to an expected decline in demand for our Legacy products, as well as project timing and associated revenue recognition of Next-Gen products.

Our services revenue was 24% of total revenue at $38.7 million for the year ended December 31, 2012, compared to 21% of total revenue, or $41.0 million for the year ended December 31, 2011, a decrease of $2.3 million, or 6%. 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.

Total cost of revenue of $68.2 million for the year ended December 31, 2012 decreased by 17% or $14.2 million from $82.4 million for the year ended December 31, 2011.

Cost of product revenue of $48.5 million for the year ended December 31, 2012 decreased by 20% or $12.5 million from $61.0 million for the year ended December 31, 2011. 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, partially offset by a $5.3 million non-recurring charge during the year ended December 31, 2012, of which $4.7 million related to excess and obsolete inventory provision and $0.6 million related to capitalized overhead.

Cost of services revenue of $19.7 million for the year ended December 31, 2012 decreased by 8% or $1.7 million from $21.4 million for the year ended December 31, 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 of $91.7 million for the year ended December 31, 2012 decreased by $23.9 million, or 21%, from $115.7 million for the year ended December 31, 2011. Gross profit margin decreased from 58% of total revenue for the year ended December 31, 2011 to 57% of total revenue for the year ended December 31, 2012.

For the year ended December 31, 2012, product gross profit decreased by 24%, or $23.4 million, from $96.1 million for the year ended December 31, 2011 to $72.7 million for the year ended December 31, 2012. Gross profit margin decreased from 61% of total product revenue for the year ended December 31, 2011 to 60% of total product revenue for the year ended December 31, 2012. The decrease in gross profit on product revenue is primarily a result of an overall decline in product revenue, as well as the non-recurring charge of $5.3 million related to excess and obsolete inventory and capitalized overhead, as discussed above.

For the year ended December 31, 2012, services gross profit slightly decreased by 3%, or $0.6 million from $19.6 million for the year ended December 31, 2011 to $19.0 million for the year ended December 31, 2012, due to revenue recognized on a contract for which there were no associated costs incurred during the prior year period. 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 48% of total services revenue for the year ended December 31, 2011 to 49% of total services revenue for the year ended December 31, 2012, primarily due to improved efficiencies gained from our integration efforts.

Research and development expenses of $42.8 million, or 27% of total revenue, for the year ended December 31, 2012 decreased by $11.8 million, or 22%, from $54.6 million, or 28% of total revenue for the year ended December 31, 2011. The decrease was primarily the result of an $8.8 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 2013, as a result of the reduction in headcount that took place in January 2013.

Sales and marketing expenses of $41.5 million, or 26% of total revenue, for the year ended December 31, 2012 decreased by $12.8 million, or 24%, from $54.3 million, or 27% of total revenue for the year ended December 31, 2011. The change in sales and marketing expenses is primarily attributable to decreases in salaries and employee benefits of $5.9 million, sales commissions of $1.1 million, and travel and entertainment of $1.3 million.

We expect that sales and marketing expenses, as a percentage of total revenue to remain consistent in 2013.

General and administrative expenses of $31.2 million, or 19% of total revenue, for the year ended December 31, 2012 decreased by $4.7 million, or 13%, from $35.9 million, or 18% of total revenue for the year ended December 31, 2011. The change is primarily attributable to decreased expenses for legal and consulting fees of $1.8 million and salaries and employee benefits of $1.5 million.

We expect that general and administrative expenses, on an absolute dollar basis and as a percentage of total revenue, will decrease in 2013 as we continue to integrate our general and administrative operations during the year and gain efficiencies in lower overhead and employee costs.

For the year ended December 31, 2012, we recorded employee separation costs and other costs related to employee termination benefits in the amount of $5.8 million. Substantially, all of these costs are expected to be cash expenditures. For the year ended December 31, 2011, we recorded employee separation costs and other costs related to employee termination benefits in the amount of $3.7 million. As of December 31, 2012 and 2011, $2.5 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 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 year ended December 31, 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 year ended December 31, 2011, the Company incurred expense of $3.5 million related to lease and facility exits costs for our Salem, New Hampshire and Parsippany, New Jersey facilities. As of December 31, 2012 and 2011, we had a liability in the amount of $3.1 million and $2.9 million, respectively, which was accrued for lease and facility exit costs. As of December 31, 2012, $1.2 million was reflected as a component of accrued liabilities and $1.9 million was reflected as a component of other long-term liabilities in the accompanying 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 long-term liabilities in the accompanying consolidated balance sheets.

Interest expense decreased by $7.3 million or 40%, from $18.0 million for the year ended December 31, 2011 to $10.7 million for the year ended December 31, 2012. The decrease is primarily attributable to lower interest rates for the year ended December 31, 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 year ended December 31, 2011 to 4.97% for the year ended December 31, 2012.

The change in fair value of warrants represented a gain of $5.1 million for the year ended December 31, 2012, as a result of a decline in our stock price from grant date to December 31, 2012. There was no such activity in the corresponding period of 2011, as no warrants were outstanding.

Foreign exchange loss was $1.4 million for the year ended December 31, 2012, compared to a loss of $0.3 million for the year ended December 31, 2011.

For the years ended December 31, 2012 and 2011, we recorded a provision for income taxes of $0.2 million and $0.3 million, respectively. The tax provision for the year ended December 31, 2012 was primarily attributable to our profitable foreign operations. The tax provision for the year ended December 31, 2011 was primarily attributable to our profitable foreign operation, partially offset by a decrease in the reserve for uncertain tax positions. There was no deferred provision recorded for the years ended December 31, 2012 or 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. 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 profits. As of December 31, 2012, we had cash and cash equivalents of $6.5 million, compared to $10.4 million of cash and cash equivalents as of December 31, 2011. During the year ended December 31, 2012, we used net cash in operating activities of $5.5 million. As of December 31, 2012, we had borrowed $11.7 million under our Revolving Credit Agreement and the unused line of credit totaled $13.3 million, of which $6.4 million was available to us. During the year ended December 31, 2012, our borrowings under the Revolving Credit Agreement decreased by $0.8 million. As of December 31, 2012, our long-term debt with related parties was $66.5 million, net of discount, and during the year ended December 31, 2012, we borrowed $4.5 million under the Term Loan Agreement. During the year ended December 31, 2012, we paid $5.2 million to service the interest payments on the Term Loan and Revolving Credit Agreements.

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.

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 pursuant to a 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.

On March 1, 2013, we entered into a lockup agreement, or Lock-Up Agreement with the Term Loan Lenders whereby the Term Loan Lenders agreed, for a period, or Lock-Up Period, commencing on March 7, 2013 and ending on the date that our stockholders approve the issuance of 1,442,172 shares to the Term Loan Lenders pursuant to the Subscription Agreement, not sell or otherwise dispose of any of the shares, or vote or grant any proxy with respect to any of the shares at any meeting of stockholders or by written consent for any purpose or action during the Lock-Up Period. Pursuant to the Lock-Up Agreement, we agreed that, during the Lock-Up Period, we will not declare any dividends or make any distributions to the Term Loan Lenders with respect to the shares.

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 year ended December 31, 2012, designed to improve our future operating performance.

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.

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 2013. 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.

Net cash used in operating activities of $5.5 million for the year ended December 31, 2012 was primarily attributable to our net loss of $37.8 million, partially offset by adjustments for non-cash items aggregating to $15.3 million. Operating assets decreased by $23.1 million and operating liabilities decreased by $6.2 million. The decrease in operating assets relates to accounts receivable of $11.5 million, inventory of $11.1 million, and prepaid expenses and other current assets of $0.5 million. The decrease in operating liabilities is primarily attributable to decreases of $4.5 million in accounts payable and accrued liabilities, deferred revenue of $2.4 million, income taxes payable of $0.6 million and interest payable of $0.4 million, partially offset by an increase in other long-term liabilities of $1.7 million.

Net cash used in operating activities of $10.5 million for the year ended December 31, 2011 was primarily attributable to our net loss of $54.8 million, offset by adjustments for non-cash items aggregating to $25.6 million for items such as depreciation, amortization, stock-based compensation, PIK interest on long-term debt, allowance for doubtful accounts, deferred income taxes and other non-cash charges, which amounted to $29.2 million, before net changes in operating assets and liabilities. Operating assets decreased by $20.5 million and operating liabilities decreased by $1.8 million. The decrease in operating assets, relates to accounts receivable of $7.0 million, inventory of $6.9 million, and prepaid expenses and other current assets of $6.6 million. The decrease in our operating liabilities is primarily attributable to a decrease of $2.2 million in accounts payable and accrued liabilities, decrease of $1.5 million in deferred revenue, decrease in income taxes payable of $0.3 million, partially offset by an increase of $1.8 million in other long-term liabilities and $0.5 million in interest payable, related parties.

Net cash used in investing activities of $0.6 million for the year ended December 31, 2012 consisted primarily of an increase of $0.6 million related to restricted cash, offset by $1.1 million related to the purchase of property and equipment and $0.1 million of intangible asset purchases.

Net cash used in investing activities of $3.7 million for the year ended December 31, 2011 consisted primarily of a decrease of $0.8 million related to restricted cash, $2.6 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.

Net cash provided by financing activities of $2.2 million for the year ended December 31, 2012 included $4.5 million in proceeds from our long-term debt and $0.1 million from the sale of ESPP shares, partially offset by net payments to our Revolving Credit Agreement of $0.8 million and debt issuance costs of $1.5 million.

Net cash used in financing activities of $0.02 million for the year ended December 31, 2011 included $0.3 million in payments on our Revolving Credit Agreement facility, partially offset by $0.3 million in proceeds from the exercise of stock options and sale of ESPP shares.

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.

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 had sufficient authorized and unissued common shares to satisfy conversion of the Notes among other criteria that were met. On August 8, 2012, upon stockholder approval, the Notes were converted into equity.

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 our 2012 Annual Meeting of Stockholders on August 8, 2012.

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, the holder of the Series D-1 Preferred Share has the right to designate certain members of the Board as follows:

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

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

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

At December 31, 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.

See Note 2 of the Consolidated Financial Statements for a full description of the recent accounting pronouncements including the expected date of adoption and effect on results of operations and financial condition.

We have audited the accompanying consolidated balance sheets of Dialogic Inc. (the Company) and subsidiaries as of December 31, 2012 and 2011, and the related consolidated statements of operations and comprehensive loss, stockholders’ deficit, and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Dialogic Inc. and subsidiaries as of December 31, 2012 and 2011, and the results of their operations and their cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles.

The accompanying notes are an integral part of these consolidated financial statements.

Dialogic, 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.

The Company sells its products to both enterprise and service provider customers and sells both directly and indirectly through distribution partners such as TEMs, VARs and other channel partners. Its customers enhance their enterprise communications solutions, their networks, or their value-added services with our 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. Companies we have acquired have been providing products and services for nearly 25 years.

The accompanying consolidated financial statements reflect the application of certain significant accounting policies as described below and elsewhere in these notes to the consolidated financial statements.

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

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

The 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 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.

The Company has experienced significant losses in the past and has not sustained profits. The Company is also highly leveraged, with $11.7 million in current bank indebtedness and $66.5 million in long-term debt, net of discount. As discussed further in Note 5, during 2012 the Company amended the second amended and restated credit agreement dated October 1, 2010 (the “Term Loan Agreement”) with Obsidian, LLC, as agent, and Special Value Expansion Fund, LLC, Special Value Opportunities Fund, LLC, and Tennenbaum Opportunities Partners V, LP, as lenders (collectively the “Term Lenders”), which among other things, reduced the stated interest rate to 10% from 15%, revised the financial covenants, provided for additional borrowings, and effectively converted $39.5 million face value debt into equity.

On February 7, 2013, the Company 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 and subject to the Lock-Up 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 our liquidity, leverage and future operating cash flow. The Company also took certain restructuring actions during the year ended December 31, 2012 (see Note 6 for further discussion), designed to improve our future operating performance.

As discussed further in Notes 4 and 5, the Company is 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). 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 thereafter. 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 forecasts of EBITDA are reduced from anticipated levels, the covenants may not be met and the Company would be required to reclassify its long-term debt under the Term Loan Agreement to current liabilities on the consolidated balance sheet.

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

bankruptcy proceeding. The funds resulting from the liquidation of its assets would be used first to pay off the debt owed to secured creditors, including the Term Lenders and the Revolving Credit Lender, followed by any unsecured creditors, before any funds would be available to pay its stockholders. If the Company is required to liquidate under the federal bankruptcy laws, it is unlikely that stockholders would receive any value for their shares.

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

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

Certain amounts in the accompanying 2011 consolidated financial statements have been reclassified to conform to the current period presentation.

The Company considers all highly liquid investments purchased with an original or remaining maturity of three months or less at the date of purchase to be cash equivalents. Restricted cash represents collateral securing guarantee arrangements with banks. The amounts 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.

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, accounts receivable, bank indebtedness, accounts payable and accrued liabilities and interest payable approximate fair value because of their generally short maturities. For cash equivalents, the estimated fair values are based on market prices. The fair value of the revolving credit facility 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.

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 assets and liabilities that were measured at fair value on a recurring basis as of December 31, 2012 and 2011:

The Company measured its available-for-sale securities at fair value on a recurring basis and has determined that these financial assets should be classified as level 1 in the fair value hierarchy.

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 December 31, 2012 using the Black-Scholes method of valuation using the following assumptions. As of December 31, 2011, there were no warrants outstanding.

Credit risk results from the possibility that a loss may occur from the failure of another party to perform according to the terms of the contract. Financial instruments that are exposed to credit risk consist primarily of cash and cash equivalents and accounts receivable. Cash and cash equivalents are maintained with several financial institutions. Deposits held with financial institutions may exceed the amount of insurance provided on such deposits. Generally, these deposits may be redeemed upon demand and therefore bear minimal risk. To manage accounts receivable risk, the Company evaluates the creditworthiness of its customers and maintains an allowance for doubtful accounts.

No customers accounted for over 10% of the Company’s revenue for the years ended December 31, 2012 and 2011. No customer accounted for more than 10% of accounts receivable as of December 31, 2012. One customer accounted for 12% of the Company’s accounts receivable as of December 31, 2011.

As of December 31, 2012 and 2011, accounts receivable aggregating approximately $16.8 million and $10.9 million were insured for credit risk, which are amounts that represent total insured accounts receivable less an average co-insurance amount of 10%, subject to the terms of the insurance agreement. Under the terms of the insurance agreement, the Company is required to pay a premium equal to 0.13% of consolidated revenue.

Accounts receivable consist of amounts due from normal business activities. The Company maintains an allowance for estimated losses resulting from the inability of its customers to make required payments. The Company estimates uncollectible amounts based upon historical bad debts, evaluation of current customer receivable balances, age of customer receivable balances, the customer’s financial condition and current economic trends. The Company reviews its allowance for doubtful accounts on a regular basis.

Account balances are charged off against the allowance after all means of collection has been made and the potential for recovery is considered remote. Historically, the allowance for doubtful accounts has been adequate to cover the actual losses from uncollectible accounts.

The following table sets forth the change in the allowance for doubtful account for the years ended December 31, 2012 and 2011:

The Company provides for inventory losses based on obsolescence and levels in excess of forecasted demand. In assessing the net realizable value of inventory, the Company is required to make judgments as to future demand requirements and compare these with the current or committed inventory levels. During the year ended December 31, 2012, the Company recorded a charge of $5.3 million for the write-down of excess and obsolete inventory and capitalized overhead, which was recorded as a component of cost of product revenue in the accompanying consolidated statements of operations and comprehensive loss.

Title and risk of loss of inventory generally transfer to the customer when the product is shipped. However, when certain revenue arrangements require evidence of customer acceptance where the services have been identified as critical to the functionality, the Company classifies the delivered product as inventory in the accompanying consolidated financial statements. The revenue associated with such delivered product is deferred as a result of not meeting the revenue recognition criteria (see further discussion below).

During the period between product shipment and acceptance, the Company will recognize all labor-related expenses as incurred, but defers the cost of the related equipment and classifies such deferred costs as “Work in process” a component of inventory in the accompanying consolidated financial statements. These deferred costs are then expensed in the same period that the deferred revenue is recognized as revenue (generally upon customer acceptance or in the case of contingent revenue provisions, when amounts are no longer contingent). In arrangements for which revenue recognition is limited to amounts due and payable because of extended payment terms, all related inventory costs are expensed at the date of customer acceptance.

Property and equipment are stated at cost, less accumulated depreciation. Depreciation is calculated using the straight-line method over the estimated useful lives, which are as follows:

Upon retirement or disposal, the cost of the asset disposed and the related accumulated depreciation are removed from the accounts, and any gain or loss is reflected as a component of general and administrative expenses in the accompanying consolidated financial statements. Expenditures for repairs and maintenance are expensed as incurred.

The following table sets forth the components of property and equipment, net as of December 31, 2012 and 2011:

Depreciation expense was $3.2 million and $4.8 million for the years ended December 31, 2012 and 2011, respectively.

The Company conducts assessments of the recoverability of long-lived assets when events or changes in circumstances occur that indicate that the carrying value of the asset may not be recoverable. The assessment of possible impairment is based upon the ability to recover the cost of the asset from the expected future undiscounted cash flows of related operations. In the event undiscounted cash flow projections indicate impairment, the Company would record an impairment charge based on the fair value of the assets at the date of the impairment.

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. The Company performs its annual test on December 31 each fiscal year.

The impairment test for goodwill involves a two-step approach. Under the first step, the Company determines the fair value of the reporting unit to which goodwill has been assigned and then compares the fair value to the unit’s carrying value, including goodwill. Fair value is generally determined utilizing a discounted cash flow approach, based on management’s best estimate of the highest and best use of future revenues and operating expenses, discounted at an appropriate market participant risk adjusted rate. For 2012, the Company used a weighted approach of 80% discounted cash flows and 20% market. If the fair value exceeds the carrying value, no impairment loss is recognized. If the carrying value exceeds the fair value, the goodwill of the reporting unit is considered potentially impaired and the second step is performed to measure the impairment loss.

Under the second step, the implied fair value of goodwill is calculated by deducting the fair value of all tangible and intangible net assets, including any unrecognized intangible assets, of the reporting unit from the fair value of the unit as determined in the first step. The implied fair value of goodwill is then compared to the carrying value of goodwill. If the implied fair value of goodwill is less than the carrying value of goodwill, the Company recognizes an impairment loss equal to the difference.

The Company has determined that it has one reporting unit, Dialogic Inc., which is the consolidated entity. Based on the results of the annual goodwill impairment test for the years ended December 31, 2012 and 2011, the fair value of the Company exceeds its carrying value; and therefore no impairment exists for the years ended December 31, 2012 and 2011.

The following table sets forth the changes in the carrying amount of goodwill during the years ended December 31, 2012 and 2011:

For the year ended December 31, 2011, the Company decreased goodwill by $0.4 million, as a result of fair value adjustments related to certain liabilities. There was no change in the carrying value of goodwill for year ended December 31, 2012.

The Company maintains certain indefinite-lived assets, trade names, which are subject to annual impairment tests. The Company estimated fair value of its indefinite-lived assets using the relief from royalty method. Based on the results of the annual impairment test, the estimated fair value of the Company’s indefinite-lived intangible assets were greater than the carrying values.

During the year ended December 31, 2012, the Company recorded additional amortization expense of $0.5 million for a change in useful lives of technology assets, which was recorded as a component of cost of product revenue in the accompanying consolidated statement of operations and comprehensive loss. The Company wrote-off the gross intangible asset in the amount of $2.3 million and accumulated amortization in the amount of $2.3 million. There were no other changes to the useful lives of the remaining intangible asset categories.

The following tables set forth components of intangible assets as of December 31, 2012 and 2011:

Intangible assets with finite lives are amortized on a straight-line basis over their estimated useful lives, which range in term from 1 to 6 years. For the years ended December 31, 2012 and 2011, amortization expense related to intangible assets was $8.3 million and $13.8 million, respectively. The following table sets forth estimated amortization expense for intangible assets subject to amortization for each of the next five years ending December 31 and thereafter.

The Company derives substantially all of its revenue from the sale of hardware/ software, licensing of software and professional services. The Company’s products are sold directly through its own sales force and independently through distribution partners.

The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred and, if applicable, acceptance is received, the fee is fixed or determinable, and collectability is probable. In making these judgments, the Company evaluates these criteria as follows:

During the first quarter of 2011, the Company prospectively adopted the guidance of Accounting Standards Update (“ASU”) No. 2009-13, Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements (“ASU No. 2009-13”) and ASU No. 2009-14, Software (Topic 985): Certain Revenue Arrangement That Include Software Elements (“ASU No. 2009-14”).

The amendments in ASU No. 2009-14 provided that tangible products containing software components and non-software components that function together to deliver the tangible product’s essential functionality are no longer within the scope of the software revenue recognition guidance in Accounting Standards Codification (“ASC”) Topic 985-605, Software Revenue Recognition (“ASC 985-605”) and should follow the guidance in ASU No. 2009-13 for multiple-element arrangements. All non-essential and standalone software components will continue to be accounted for under the guidance of ASC 985-605.

(“TPE”) if VSOE is not available, or the Company’s estimated selling price (“ESP”) if neither VSOE nor TPE are available. The amendments in ASU No. 2009-13 eliminated the residual method of allocating arrangement consideration and required that it be allocated at inception of the arrangement to all deliverables using the relative selling price method. The relative selling price method allocates any discount in the arrangement proportionately to each deliverable on the basis of the deliverable’s estimated selling price.

The Company’s products typically have both hardware and software and components that function together to deliver the product’s essential functionality. Although the Company’s products are primarily marketed based on the software elements contained therein, the hardware sold, generally cannot be used apart from the software. Many of the Company’s sales involve multiple-element arrangements that include product, maintenance and professional services. The Company may enter into sales transactions that do not contain tangible hardware components, which will continue to be accounted for under guidance of ASC 985-605.

Multiple-deliverable revenue guidance requires the evaluation of each deliverable in an arrangement to determine whether such deliverable represents a separate unit of accounting. The delivered item constitutes a separate unit of accounting when it has stand-alone value to the customer. If the arrangement includes a general refund or return right relative to the delivered item and the delivery and performance of the undelivered items are considered probable and substantially in the Company’s control, the delivered element constitutes a separate unit of accounting. In instances when the aforementioned criteria are not met, the deliverable is combined with the undelivered elements and revenue recognition is determined for the combination as a single unit of accounting. Most of the Company’s products qualify as a single deliverable because they are sold as a single tangible product containing both hardware and software to deliver the product’s essential functionality and have standalone value to the customer, accordingly, revenue is recognized when the applicable revenue recognition criteria are met. Hardware and software expansion and spare or replacement parts are treated as separate units of accounting because they have standalone value to the customer and general right of return does not exist; therefore, revenue is recognized upon delivery for these components assuming all other revenue recognition criteria are also met.

The total arrangement fees are allocated to all the deliverables based on their respective relative selling prices. The relative selling price is determined using VSOE, when available. The Company generally uses VSOE to derive the selling price for its maintenance and professional services deliverables. VSOE for maintenance is based on contractual stated renewal rates, whereas professional services are based on historical pricing for standalone professional service transactions. When VSOE cannot be established, the Company attempts to determine the TPE for the deliverables. TPE is determined based on prices for similar deliverables, sold by competitors. Generally, the Company’s offerings differ from those of its competitors and comparable pricing of its competitors is often not available.

When the Company is unable to establish selling price using VSOE or TPE, the Company uses ESP in its allocation of arrangement fees. The ESP for a deliverable is determined as the price at which the Company would transact if the products or services were sold on a standalone basis. The ESP for each deliverable is determined using an average historical discounted selling price based on several factors, including but not limited to, marketing strategy, customer considerations and pricing practices in a region. For arrangements with contingent revenue provisions (a portion of the relative selling price of a delivered item is contingent upon the delivery of additional items or meeting other specified performance conditions), revenue recognized on delivered items is limited to the non-contingent amount.

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

The Company has agreements with certain distributors which allow for stock rotation rights. The stock rotation rights permit the distributors to return a defined percentage of their purchases. Most distributors must exchange this stock for orders of an equal or greater amount. The Company recognizes an allowance for stock rotation rights based on historical experience. The provision is recorded as a reduction in revenue in the period during which the related revenue is recognized.

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

Revenue is primarily recognized net of sales taxes. Revenue includes amounts billed to customers for shipping and handling. Shipping and handling fees represented less than 1% of revenues in each of the years ended December 31, 2012 and 2011. Shipping and handling costs are included in cost of revenue in the accompanying consolidated statements of operations and comprehensive loss.

Deferred revenue represents fixed or determinable amounts billed to or collected from customers for which the related revenue has not been recognized because one or more of the revenue recognition criteria have not been met. Advances paid by customers prior to the delivery of product and services, due to existing legal arrangements for futures sales as of the balance sheet date, are classified as deferred revenue. Revenue from maintenance contracts is presented as deferred revenue and is recognized on a straight-line basis over the term of the contract. The current portion of deferred revenue is expected to be recognized as revenue within 12 months from the balance sheet date. As of December 31, 2012 and 2011, the long-term portion of deferred revenue amounted to $2.3 million and $1.8 million, respectively, which was included as a component of other long-term liabilities in the accompanying consolidated balance sheets.

The Company’s products are generally subject to warranties, and liabilities are established for the estimated future cost of repair or replacement through charges to cost of revenue at the time the related sale is recognized. Factors considered in determining appropriate accruals for product warranty obligations include the size of the installed base of products subject to warranty protection, historical and projected warranty claim rates, historical and projected cost-per-claim, and knowledge of specific product failures that are outside of the Company’s typical experience. The Company assesses the adequacy of its preexisting warranty liabilities and adjusts the amounts as necessary based on actual experience and changes in future estimates.

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 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 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 years ended December 31, 2012 and 2011:

Research and development expenses are charged to expense as incurred. These costs include payroll, employee benefits, equipment depreciation, materials, and other personnel-related costs associated with product development. Costs incurred with respect to internally developed technology and engineering services included in research and development are expensed as incurred.

The Company records grants received from the Office of the Chief Scientist of the Israeli Ministry of Industry, Trade, and Labor, (“OCS”), as a reduction of research and development expenses, based on the estimated reimbursable cost incurred. Royalties payable to the OCS are classified as cost of revenue in the accompanying consolidated statements of operations and comprehensive loss.

The Company’s revenues, expenses, assets and liabilities are primarily denominated in U.S. dollars, and as a result, the Company adopted the U.S. dollar as its functional and reporting currency. The Company has identified one foreign subsidiary in Brazil where the functional currency is their local reporting currency. Those assets and liabilities are translated at exchange rates in effect at the balance sheet date and income and expenses are translated at average exchange rates. The effect of these translation adjustments are included in accumulated other comprehensive loss in the accompanying consolidated balance sheets.

For foreign subsidiaries using the U.S. dollar as their functional currency, transactions and monetary balances denominated in non-U.S. dollar currencies are remeasured into U.S. dollars using current exchange rates. Monetary assets and liabilities are revalued into the functional currency at each balance sheet date using the exchange rate in effect at that date, with any resulting exchange gains or losses being credited or charged to the foreign exchange loss, net in the accompanying consolidated statements of operations.

The Company accounts for income taxes using the asset and liability approach, which requires the recognition of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in the Company’s financial statements or tax returns. The measurement of current and deferred tax liabilities and assets are based on provisions of the enacted tax law. A valuation allowance is provided if, based on the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. A change in taxable income in future periods that is significantly different from that projected may cause adjustments to the valuation allowance that could materially increase or decrease future income tax expense.

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

Comprehensive loss consists of two components, net loss and foreign currency translation adjustments from its subsidiary not using the U.S. dollar as their functional currency.

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.

In July 2012, the Financial Accounting Standard Board (“FASB”) issued ASU No. 2012-02, Intangibles — Goodwill and Other (Topic 350) — Testing Indefinite-Lived Intangible Assets for Impairment (“ASU 2012-02”), to allow entities to use a qualitative approach to test indefinite-lived intangible assets for impairment. ASU 2012-02 permits an entity to first perform a qualitative assessment to determine whether it is more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying value. If it is concluded that this is the case, it is necessary to perform the currently prescribed quantitative impairment test by comparing the fair value of the indefinite-lived intangible asset with its carrying value. Otherwise, the quantitative impairment test is not required. The Company plans to adopt ASU 2012-02 by the fourth quarter of fiscal 2013 and does not believe that the adoption will have a material effect on the consolidated financial statements.

The following table summarizes the Company’s accrued liabilities as of December 31, 2012 and 2011.

The Company has a working capital facility, the Revolving Credit Agreement with the Revolving Credit Lender. As of December 31, 2012, the borrowing base under the Revolving Credit Agreement amounted to $18.1 million, the Company borrowed $11.7 million, and the unused line of credit totaled $13.3 million, of which $6.4 million was available for additional borrowings. As of December 31, 2011, the borrowing base under the Revolving Credit Agreement amounted to $14.9 million, the Company borrowed $12.5 million, and the unused line of credit totaled $12.5 million, of which $2.4 million was available for additional borrowings.

On March 22, 2012, the Company entered into a Consent and Seventeenth Amendment (“Seventeenth Amendment”) to the Revolving Credit Agreement. Under the Seventeenth Amendment, the Revolving Credit Lender waived the events of default existing under the Revolving Credit Agreement as of March 22, 2012 and agreed to certain amendments to the Revolving Credit Agreement. Specifically, pursuant to the Seventeenth Amendment, the Revolving Credit Agreement maturity date was amended and extended to the earlier of (i) March 31, 2015 or (ii) maturity of the Indebtedness (by acceleration or otherwise) under the Term Loan Agreement. The Company’s debt under the Revolving Credit Agreement may not exceed the lesser of (i) $25.0 million, which is referred to as the “Maximum Revolver Amount” or (ii) 85% of the aggregate amount of eligible accounts receivable, reduced by certain reserves and offsets and subject to certain caps in the case of accounts receivable owed to the Company and certain guarantors of the Revolving Credit Agreement, which is referred to as the “Borrowing Base.”

On April 11, 2012, the Company and certain of its subsidiaries entered into an Eighteenth Amendment to Revolving Credit Agreement (the “Eighteenth Amendment”), with the Revolving Credit Lender. Pursuant to the Eighteenth Amendment, the Revolving Credit Agreement was amended to permit the Company to issue convertible notes (the “Notes”) in the Private Placement, as described in greater detail in Note 5 below.

On November 13, 2012, the Company and certain of its subsidiaries entered into a Nineteenth Amendment to Revolving Credit Agreement (the “Nineteenth Amendment”) with the Revolving Credit Lender. Pursuant to the Nineteenth Amendment , the Revolving Credit Agreement was amended to postpone the application of certain financial covenants, including the minimum EBITDA and the minimum liquidity covenants, from the fiscal quarter ending March 31, 2013 to the fiscal quarter ending June 30, 2013 provided that the average amount of Availability (as defined in the Revolving Credit Agreement) plus any unencumbered cash held by Dialogic Corporation or any Guarantor (as defined in the Revolving Credit Agreement ) (in the United States or any foreign jurisdiction) for the 30-day period immediately preceding the end of a fiscal quarter exceeds $2.5 million. The Revolving Credit Agreement was also amended to reduce the Borrowing Base by an availability block in the amount of $0.25 million at all times from the Nineteenth Amendment Effective Date through compliance with the financial covenants for the period ending June 30, 2013. In addition the definition of Triggering Event in the Revolving Credit Agreement was amended to add as of any date of determination that Qualified Cash (as defined in the Revolving Credit Agreement) is at any time less than $2.5 million.

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 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.

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 described above. The Company may repay the facility at its own option with 30 days’ notice to the Revolving Credit Lender.

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

Interest Rates and Fees. At the Company’s election, revolving credit loans may bear interest at a rate equal to the prime rate plus 1.5% or at a rate equal to reserve-adjusted 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%. Dialogic Corporation pays the Revolving Credit Lender a monthly fee on the unused portion of the maximum revolver amount, as well as a monthly collateral management fee and an annual deferred closing fee.

For the years ended December 31, 2012 and 2011, the Company recorded interest expense in the amount of $0.6 million and $0.7 million, respectively, related to the Revolving Credit Agreement. Average interest rates for the years ended December 31, 2012 and 2011 were 4.97% and 5.75%, respectively.

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

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

Minimum EBITDA. Defined as earnings plus interest expense, taxes, depreciation, amortization, foreign exchange gain or loss and subject to certain additional adjustments in accordance with U.S. GAAP. 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.

As of December 31, 2011, Dialogic Corporation was in default under the Revolving Credit Agreement. Specifically, Dialogic Corporation had breached all of the financial covenants under the Term Loan Agreement as of December 31, 2011, which constitutes a breach under the terms of the Revolving Credit Agreement, and the Minimum EBITDA covenant under the Revolving Credit Agreement. The events of default existing under the Revolving Credit Agreement as of December 31, 2011 were waived by the Revolving Credit Lender pursuant to the Seventeenth Amendment. During the year ended December 31, 2011, the Company amortized an additional $0.4 million of deferred debt issuance costs related to the accelerated amortization as a result of the breach of the covenants under the Term Loan Agreement.

For the years ended December 31, 2012 and 2011, the Company recorded amortization of deferred debt issuance costs related to the Revolving Credit Agreement of $0.1 million and $0.6 million, respectively. As of December 31, 2012 and 2011, deferred debt issuance costs amounted to $0.1 million and $0.3 million, respectively and were included as a component of other assets in the accompanying consolidated balance sheets.

On March 22, 2012, the Company entered into a third amended and restated Term Loan Agreement with the Term Lenders, which among other things lowered stated interest rate to 10% from 15%, extended the maturity date to March 31, 2015 and established new covenants. Tennenbaum Capital Partners, LLC (“Tennenbaum”), a private equity firm, manages the funds of the Term Lenders. Tennenbaum also owned approximately 46% of the Company’s common stock as of December 31, 2012. One Managing Partner for Tennenbaum also serves as a member of the Company’s Board of Directors. In connection with entering into the third amended and restated Term Loan Amendment, the Company issued to the Term Lenders warrants to purchase 3.6 million shares of common stock with an exercise price of $5.00 per share.

The fair value of the warrants at issuance of $7.1 million reduced the carrying amount of the Term Loan as a debt discount and is accreted to interest expense over the life of the Term Loan. The warrants have been determined to qualify as a liability and, therefore, have been classified as such in the accompanying 2012 consolidated balance sheet. The fair value of the warrants is determined at the end of each reporting period and the change in fair value is recorded as a change in fair value of warrants in the consolidated

statement of operations and comprehensive loss. The fair value of the warrants was $2.0 million as of December 31, 2012 and the Company recorded a gain of $5.1 million for the year ended December 31, 2012, respectively, to reflect the change in fair value, which is recorded as a component of other income (expense), net in the accompanying consolidated statement of operations and comprehensive loss.

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

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

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 agreed to issue 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 below. 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 (i) the third quarter 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, the Company entered into a Subscription Agreement with the Term Lenders dated February 7, 2013 (the “Subscription Agreement”) whereby the Company agreed to issue to the Term Lenders an amount of common stock equal to the market value of 10.0% of the outstanding shares of the Company based on the closing bid price immediately prior to such issuance, as set out in the Subscription Agreement. 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 and subject to the Lock-Up Agreement.

The Company and the Term Loan Lenders also entered into a Registration Rights Agreement with the Term Loan 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.

On March 1, 2013, the Company entered into a lockup agreement (“Lock-Up Agreement”) with the Term Loan Lenders whereby the Term Loan Lenders agreed, for a period (“Lock-Up Period”) commencing on March 7, 2013 and ending on the date that the stockholders of the Company approve the issuance of 1,442,172 shares to the Term Loan Lenders pursuant to the Subscription Agreement, not sell or otherwise dispose of any of the shares, or vote or grant any proxy with respect to any of the shares at any meeting of stockholders or by written consent for any purpose or action during the Lock-Up Period. Pursuant to the Lock-Up Agreement, the Company agreed that, during the Lock-Up Period, the Company will not declare any dividends or make any distributions to the Term Loan Lenders with respect to the shares.

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. 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 and its subsidiaries, plus the prepayment premiums described above, except that no prepayment premium is required to be paid in respect of the first $35.0 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. Upon the occurrence and continuance of an event of default, the Term Loans will bear interest at a default rate equal to the applicable interest rate plus 2%.

For interest incurred during the three months ended September 30, 2012 and three months ended December 31, 2012, the Company was permitted, based on agreements with the Term Lender dated October 1, 2012 and December 28, 2012, respectively, to pay the cash interest due as PIK.

For the years ended December 31, 2012 and 2011, the Company recorded interest expense of $9.3 million and $15.7 million, respectively, related to the Term Loan Agreement of which $4.3 million and zero, respectively, related to accrued PIK interest; and $0.9 million and $2.4 million, respectively, related to amortization charges for deferred debt issuance costs and accretion of debt discount.

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

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

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.

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

During the years ended December 31, 2012 and 2011, the Company recorded interest expense related to these Stockholder Loans of $0.3 million and $0.9 million, respectively. There were no covenants or cross default provisions associated with the Stockholder Loans.

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

On April 11, 2012, the Company entered into a securities purchase agreement, as amended by a Letter Agreement with an effective date of May 10, 2012 (the “Purchase Agreement”) with accredited investors (the “Investors”), including certain related parties, pursuant to which the Company issued and sold $39.5 million aggregate principal amount of the Notes and one share of the Company’s Series D-1 Preferred Stock, par value $0.001 per share (the “Series D-1 Preferred Share”), to the Investors in a private placement (the “Private Placement”) in exchange for the cancellation of $38.0 million of Term Loans and Stockholder Loans. This exchange of debt was treated as a “Troubled Debt Restructuring” in accordance with FASB ASC 470-60, “Troubled Debt Restructurings by Debtors” (“ASC 470-60”), as the Company had been experiencing financial difficulty and the lenders granted a concession to the Company. The Company assessed the total future cash flows of the restructured debt as compared to the carrying amount of the original debt and determined the total future cash flows to be greater than the carrying amount at the date of the restructuring. Further, the effective interest rate for both the Term Loans and Stockholders Loans was higher before the restructuring than subsequent to the restructuring. As such, the carrying amount was not adjusted and no gain was recorded, consistent with troubled debt restructuring accounting.

The conversion feature embedded in the Notes was not required to be bifurcated on the restructuring closing date and separately measured as a derivative liability, as the Company had sufficient authorized and unissued common shares to satisfy conversion of the Notes among other criteria that were met. On August 8, 2012, the Notes were converted into equity in the amount of $33.0 million, including accrued interest at the time of conversion.

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

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

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

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

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

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

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

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

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 comprised of ongoing benefits and notified the affected employees. As a result, the Company recorded a charge in the amount of $2.3 million, during the fourth quarter of 2012, which is included as a component of restructuring charges in the accompanying consolidated statement of operations and comprehensive loss. The Company has undertaken such workforce reduction in order to reduce operating costs and focus its resources on a restructured business model. The Company estimates the cash expenditures in connection with these restructuring actions to be approximately $3.5 million, which is comprised of previously earned vacation, as well as restructuring charge detailed above. The Company expects the majority of the payments will be made by the end of the first quarter of 2013.

For the year ended December 31, 2012, the Company recorded employee separation costs and other costs related to employee termination benefits in the amount of $5.8 million. Such charges were recorded as a component of restructuring charges in the accompanying consolidated statements of operations and comprehensive loss. Substantially, all of these costs are expected to be cash expenditures. As of December 31, 2012, $2.5 million remained accrued and unpaid for these termination benefits, which are reflected as a component of accrued liabilities in the accompanying consolidated balance sheets.

For the year ended December 31, 2011, the Company recorded employee separation costs and other costs related to employee termination benefits in the amount of $3.7 million. As of December 31, 2011, $1.4 million was accrued and unpaid for termination benefits, which are reflected as a component of accrued liabilities in the accompanying consolidated balance sheets.

In an effort to reduce overall operating expenses, the Company decided it was beneficial to close or consolidate office space at certain locations. For the year ended December 31, 2012, the Company incurred expense of $1.2 million in lease and facility exit costs

related to the Company’s research and development facilities in Eatontown, New Jersey, Getzville, New York and Renningen, Germany. Such charges are recorded as a component of restructuring charges in the accompanying consolidated statements of operations and comprehensive loss.

For the year ended December 31, 2011, the Company incurred expense of $3.5 million, related to lease and facility exits costs for the Company’s Salem, New Hampshire and Parsippany, New Jersey facilities.

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 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 consolidated balance sheets.

The following table sets forth restructuring activity for the years ended December 31, 2012 and 2011:

The Company has in effect the 2006 Equity Incentive Plan (“2006 Plan”) under which it may grant incentive stock options (“ISOs”), nonqualified stock options (“NSOs”), and restricted stock units. Through December 31, 2012, the Company had reserved 1.2 million shares of common stock for issuance under the 2006 Plan. The shares reserved under the 2006 Plan automatically increases on each January 1, beginning in 2006 and continuing through January 1, 2016, by the lesser of 3% of the total number of shares of common stock outstanding as of December 31 of the preceding calendar year, or a number of shares determined by the Board of Directors, but not in excess of 3.0 million shares.

Options may be granted for periods of up to ten years and at prices equal to no less than 100% of the fair market value of the underlying common stock on the date of grant. Options granted generally become exercisable over a period of four years, based on continued employment, with 25% of the shares underlying such options vesting one year after the vesting commencement date and with the remaining 75% of the shares underlying such options vesting in equal monthly installments during the following three years. Options generally terminate three months following the end of a grantee’s continuous service to the Company.

The following table summarizes stock-based compensation expense by category for the years ended December 31, 2012 and 2011:

The following table sets forth the summary of stock options for the year ended December 31, 2012:

As of December 31, 2012 and 2011, the weighted-average grant date fair value for stock options outstanding was $10.40 and $16.76, respectively. For the years ended December 31, 2012 and 2011, stock-based compensation expense related to stock options was $1.0 million and $1.4 million, respectively. The total intrinsic value of options exercised was zero and $0.3 million during the years ended December 31, 2012 and 2011, respectively. As of December 31, 2012, $2.6 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 3.0 years.

The following table summarizes stock options outstanding as of December 31, 2012:

The following table summarizes restricted stock units outstanding as of December 31, 2012:

For the years ended December 31, 2012 and 2011, stock-based compensation expense related to restricted stock units was $1.4 million and $1.5 million, respectively. During the year ended December 31, 2012, the aggregate intrinsic value of vested restricted stock units was $0.3 million. As of December 31, 2012, $1.1 million of total unrecognized compensation expense related to non-vested restricted stock units granted to employees and directors is expected to be recognized over a weighted average period of 1.5 years.

The Company has in effect the 2006 Employee Stock Purchase Plan (“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. The total share-based compensation expense related to such purchases amounted to $0.02 million and $0.1 million, respectively, for the years ended December 31, 2012 and 2011.

As of December 31, 2012, 42,740 shares have been issued under this plan and 183,316 shares remained available for issuance under the 2006 ESPP.

The Company has several non-cancelable operating leases for facilities that are set to expire over the next 7 years. The leases generally contain renewal options ranging from one to three years and require the Company to pay all executory costs, such as maintenance and insurance. In addition, leases generally contain provisions for annual rent escalations based on fixed amounts or cost of living increases. The difference between the rent due under the stated periods of the leases compared to rent expense on a straight-line basis is recorded as deferred rent. As of December 31, 2012 and 2011, respectively, the current portion of deferred rent was $0.3 million and is included in accrued liabilities in the accompanying consolidated balance sheets. As of December 31, 2012 and 2011, the long-term portion of deferred rent was $0.9 million and $1.0 million, respectively, and is included in other long-term liabilities in the accompanying consolidated balances sheets. The minimum rental payments, exclusive of other occupancy charges, under the leases for the Company’s facilities and future lease payments required under other operating leases is as follows:

Rent expense for operating leases for the years ended December 31, 2012 and 2011 was $6.8 million and $8.1 million, respectively.

The Company’s research and development efforts in Israel have been partially financed through grants from the OCS. In return for the OCS’s participation, the 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. The grants received bear annual interest at LIBOR as of the date of approval. The grants are presented in the accompanying consolidated statements of operations and comprehensive loss, as an offset to related research and development expenses and were zero and $1.7 million, respectively for the year ended December 31, 2012 and 2011. Repayment of the grants is not required in the event that there are no sales of products developed within the framework of such funded programs. However, under certain limited circumstances, the OCS may withdraw its approval of a research program or amend the terms of its approval. Upon withdrawal of approval, the grant recipient may be required to refund the grant, in whole or in part, with or without interest, as the OCS determines.

Royalties payable to the OCS are recorded as sales are recognized and the associated royalty becomes due and are classified as cost of revenues. Royalty expenses relating to OCS grants included in cost of product revenues was $0.8 million and $0.9 million, respectively, for the years ended December 31, 2012 and 2011. As of December 31, 2012 and 2011, the royalty payable amounted to $1.0 million and $0.4 million, respectively. The maximum amount of the contingent liability under these grants potentially due to the Israeli Government (excluding interest) was $16.9 million and $17.6 million as of December 31, 2012 and 2011, respectively.

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

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

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

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 December 31, 2012 and 2011, the maximum potential amount of future payments the Company could be required to make under the guarantees, amounted to $0.9 million and $1.5 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.

The Company purchases raw material and components for its I-Gate 4000 line of media gateways, under binding purchase orders for each product covered by a product forecast. In addition to the inventory purchased, as of December 31, 2012 and 2011, the Company had open purchase commitments totaling $1.0 million and $1.5 million, respectively. There were no other purchase commitments as of December 31, 2012 and 2011.

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.

On March 28, 2011, the Company received a letter from the SEC informing the Company that the SEC was conducting an informal inquiry (“SEC Informal Inquiry”), and requesting that the Company preserve certain categories of records in connection with the SEC Informal Inquiry. In a follow up discussion with the SEC on March 30, 2011, the SEC informed the Company that the inquiry related to allegations of improper revenue recognition and potential violations of the Foreign Corrupt Practices Act of 1977, as amended, by former Veraz Networks Inc. business during periods prior to completion of the Company’s business combination with Dialogic Corporation. The Company’s Board of Directors (the “Board”), appointed a committee to review these issues, with the aid of counsel, and to make recommendations to the Board as to what, if any, remedial actions would be appropriate. The committee engaged Sheppard Mullin Richter & Hampton LLP (“Sheppard Mullin”), as outside counsel to the committee. The Board has taken the remedial actions recommended by Sheppard Mullin and the committee and the Company has updated and improved its compliance procedures. In addition, the Company produced documents to the Department of Justice (“DOJ”), relating to the SEC Informal Inquiry. Sheppard Mullin subsequently became counsel to the Company on this matter and with Sheppard Mullin; the Company continues to fully cooperate with the SEC and DOJ, in connection with the SEC Informal Inquiry. At the current time, the Company cannot determine the probability of or quantify the amount of any fines or penalties associated with the SEC matters discussed above. Based on information currently available to the Company, it believes that any of the allegations, even if true, would not have a material adverse effect on the accompanying consolidated financial statements.

The Company is subject to various claims that have arisen in the ordinary course of business. As of December 31, 2012 and 2011, the Company had a reserve of $0.3 million and $1.8 million, respectively, related to asserted third party claims. The asserted third party claims for which the reserve was taken were settled on March 23, 2012. The monetary settlement was for a total of $1.8 million and accordingly, the Company recorded an additional charge of $1.5 million during the fourth quarter of 2011. This amount was recorded in cost of product revenue in the accompanying consolidated statement of operations. The monetary settlement is being paid in installments over a 12-month period beginning in April 2012.

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 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:

The components of the Company’s loss before income taxes for the years ended December 31, 2012 and 2011 were as follows:

The Company’s provision (benefit) for income taxes for the years ended December 31, 2012 and 2011 were as follows:

The Company’s provision for income taxes for the years ended December 31, 2012 and 2011 is comprised of the following:

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial statement purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets as of December 31, 2012 and 2011 are as follows:

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” of being realized. The need for a valuation allowance is continually reviewed by management. The utilization of tax attributes by the Company is dependent on the generation of taxable income by the Company in the principal jurisdictions in which it operates and/or tax planning strategies. As required the Company has evaluated and weighted the positive and negative evidence

present at each period. In arriving at its conclusion the Company has given significant weight to the history of pretax losses. If circumstances change and management believes a larger or smaller deferred tax asset is justified, the reduction (increase) of the valuation allowance will result in an income tax benefit (expense).

At December 31, 2012, the Company had U.S. federal, state and foreign net operating loss carry forwards of approximately $113.4 million, $90.1 million and $268.4 million, respectively. These U.S. federal, state and foreign net operating loss carryforwards expire in varying amounts from 2021 to 2031, 2012 to 2031 and 2012 to indefinite, respectively. Foreign losses are primarily related to operations in Canada, Ireland and Israel.

At December 31, 2012, the Company had U.S. federal, state and foreign tax credits of approximately $2.9 million, $6.4 million and $5.9 million, respectively. The tax credits primarily relate to research tax credits and investment tax credits. The U.S. federal, state and foreign tax credits expire in varying amounts from 2022 to 2026, 2018 to 2027, and 2018 to indefinite, respectively. The Company has recorded a net deferred tax asset of $15.2 million related to these tax credits before consideration of a valuation allowance. As at December 31, 2012, the Company had $42.4 million of Canadian and $20.4 million of provincial reported unclaimed research and development expenditures available to reduce income for Canadian tax purposes in 2012, or thereafter. The Company has recorded a net deferred tax asset of $8.8 million related to these expenditures before consideration of a valuation allowance.

Utilization of the Company’s net operating loss carry forwards and tax credits are subject to annual limitation due to the ownership change limitations provided by the Internal Revenue Code (Section 382). The Company has preliminary determined the extent of such limitations and that an ownership change has occurred.

Unrecognized tax benefits represent uncertain tax positions for which reserve have been established. As of December 31, 2012 and 2011, the total liability for unrecognized tax benefits was $2.6 million and $2.5 million, respectively, of which all 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 return filed in various jurisdictions closes, sometimes without adjustments. During the year ended December 31, 2012, the unrecognized tax benefits were reduced by $1.6 million as a result of expiration of statute of limitations in several jurisdictions. This was offset in part by the establishment of reserves of $1.7 million for various matters in different jurisdictions.

The aggregate change in the gross consolidated liability for uncertain tax positions, inclusive of interest and penalties, is as follows:

The Company recognizes interest and penalties related to unrecognized tax benefits as a component of income tax expense in the accompanying consolidated statements of operation and comprehensive loss. As of December 31, 2012 and 2011, the reserve for uncertain tax positions included interest and penalties of $1.1 million and $0.6 million, respectively. Interest and penalty expense, net included was $0.5 million and $0.02 million for the years ended December 31, 2012 and 2011, respectively. As of December 31, 2012 and 2011, the Company classified the liability in the amount of $2.3 million and $2.5 million, respectively, as long term and $0.3 million and zero, respectively, as short term. The Company anticipates that during the next twelve months the total liability for unrecognized tax benefits may change by $0.4 million due to the expiration of different tax statutes or tax settlements. Any reduction due to expiring statutes would impact the Company’s effective tax rate.

The Company files U.S. federal income tax returns as well as income tax returns in various states and foreign jurisdictions. Additionally, any net operating losses and credits that were generated in prior years may also be subject to examination by the IRS, in the tax year the net operating loss and credits are utilized. In addition, the Company may be subject to examination in foreign jurisdictions for the years from 2004 through 2012.

Taxes on income earned by the Company’s subsidiaries in various countries have been accrued and are being paid in accordance with the laws of each country. Deferred income taxes are not provided on undistributed earnings of $46.1 million from certain foreign subsidiaries as of December 31, 2012, such unremitted earnings are to be indefinitely reinvested outside the United States. At this time, the Company has deemed it impracticable to determine the amount of any tax payable if these amounts were repatriated. Determination of the liability is largely dependent on circumstances under which the remittance occurs.

The Company has a 401(k) plan covering all eligible employees. The Company is not required to contribute to the plan and had made no contributions for the years ended December 31, 2012 or 2011.

On March 7, 2013, the Company appeared before the NASDAQ Hearings Panel (the “Panel”). On March 15, 2013, the Panel rendered its decision and allowed the Company to continue to be listed on the NASDAQ Global Market, subject to the condition that, on or before April 15, 2013, the Company demonstrate to the Panel that it has regained compliance with the Market Value Rule.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

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

Our management evaluated (with the participation of our Chief Executive Officer and Chief Financial Officer) our disclosure controls and procedures, and concluded that our disclosure controls and procedures were effective as of December 31, 2012, to provide reasonable assurance that the information required to be disclosed by us in reports that we file or submit under the Exchange Act, is recorded, processed, summarized, and reported within the time periods specified in Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined under Rule 13a-15(f) and Rule 15d-15(f) of the Exchange Act. Our internal control over financial reporting is a process designed under the supervision of our principal executive officer and principal financial officer to provide reasonable assurance regarding the (i) effectiveness and efficiency of operations, (ii) reliability of financial reporting and the preparation of our financial statements for external reporting purposes in accordance with U.S. GAAP, and (iii) compliance with applicable laws and regulations.

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 as of December 31, 2012 our internal controls over financial reporting were effective and the material weakness identified in connection with its evaluation of our internal controls as of December 31, 2011 had been remediated. Public Company Accounting Oversight Board Auditing Standard No. 5, defines a material weakness as a deficiency or a combination of deficiencies in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. The material weakness identified during 2011 related to the fact that, while we had initiated procedures to document and review the system of internal controls, those procedures were not in place for a sufficient amount of time to adequately assess the operating effectiveness.

This annual report does not include an attestation report of our independent registered public accounting firm regarding the effectiveness of our internal controls over financial reporting pursuant to temporary rules of the Securities and Exchange Commission that permit Dialogic to provide only management’s report in this annual report.

During our most recent fiscal quarter, there have been no 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 other than as otherwise set forth above.

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

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

We will file a definitive Proxy Statement for our 2013 Annual Meeting of Stockholder (“2013 Proxy Statement”) with the SEC, pursuant to Regulation 14A, not later than 120 days after the end of our fiscal year. Accordingly, certain information required by Part III has been omitted under General Instruction G(3) to Form 10-K. Only those sections of the 2013 Proxy Statement that specifically address the items set forth herein are incorporated by reference.

The information required by Item 10 is hereby incorporated by reference from our 2013 Proxy Statement under the captions “Election of Directors” “Information Regarding the Board of Directors and Corporate Governance,” “Executive Officers of the Company,” “Code of Conduct and Ethics” and “Section 16(a) Beneficial Ownership Reporting Compliance.”

The information required by Item 11 is hereby incorporated by reference from our 2013 Proxy Statement under the captions “Executive Compensation” and “Director Compensation.”

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The information required by Item 12 is hereby incorporated by reference from our 2013 Proxy Statement under the caption “Security Ownership of Certain Beneficial Owners and Management” and “Equity Compensation Plans.”

Item 13. Certain Relationships and Related Transactions, and Director Independence

The information required by Item 13 is hereby incorporated by reference from our 2013 Proxy Statement under the captions “Certain Relationships and Related Transactions” and “Information Regarding the Board of Directors and Corporate Governance.”

The information required by Item 14 is hereby incorporated by reference from our 2013 Proxy Statement under the caption “Principal Accountant Fees and Services.”

All financial statement schedules have been omitted, since the required information is not applicable.

The information required by this item is set forth on the exhibit index that follows the signature page of this report.

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.

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Kevin Cook and John Hanson, as his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place, and stead, in any and all capacities, to sign any and all amendments to this Report, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agent full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming that said attorney-in-fact and agent, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.


Title of Each Class		Name of Each Exchange on Which Registered
Common Stock, $0.001 par value		The NASDAQ Stock Market LLC


	Statement Regarding Forward-Looking Statements	ii
	Glossary of Terms	iii

PART I
Item 1.	Business	1
Item 1A.	Risk Factors	5
Item 1B.	Unresolved Staff Comments	23
Item 2.	Properties	23
Item 3.	Legal Proceedings	24
Item 4.	Mine Safety Disclosures	24

PART II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	25
Item 6.	Selected Financial Data	25
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	25
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	36
Item 8.	Financial Statements and Supplementary Data	37
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	71
Item 9A.	Controls and Procedures	71
Item 9B.	Other Information	71

PART III
Item 10.	Directors, Executive Officers and Corporate Governance	72
Item 11.	Executive Compensation	72
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	72
Item 13.	Certain Relationships and Related Transactions, and Director Independence	72
Item 14.	Principal Accountant Fees and Services	72

PART IV
Item 15.	Exhibits and Financial Statement Schedules	73
SIGNATURES		74


2G		Second Generation
3G		Third Generation
4G		Fourth Generation
API		Application Programming Interfaces
Codec		Coder-Decoder
DCME		Digital Circuit Multiplication Equipment
DTMF		Dual Tone Multi Frequency
HMP		Host Media Processing
IMS		IP Multimedia Subsystems
IP		Internet Protocol
ISV		Independent Software Vendor
IVR		Interactive Voice Response
IVVR		Interactive Voice and Video Response
NGN		Next Generation Network
NMS		Natural MicroSystems
OCS		Office of the Chief Scientist
PBX		Private Branch Exchange
PSTN		Public Switched Telephone Network
SIP		Session Initiation Protocol
SIs		Systems Integrators
SMS		Short Message Service
TDM		Time Division Multiplexing
TEM		Technology Equipment Manufacturer
VAR		Value Added Reseller
VoIP		Voice over Internet Protocol


	High		Low
Fiscal Year 2012
First quarter	$	6.80	$	3.60
Second quarter	$	6.65	$	3.10
Third quarter	$	3.80	$	2.25
Fourth quarter	$	2.52	$	1.26
Fiscal Year 2011
First quarter	$	25.55	$	19.55
Second quarter	$	26.20	$	19.40
Third quarter	$	22.35	$	9.25
Fourth quarter	$	12.45	$	5.05


	2012					2011					Period to-Period Change
(USD and $000’s)	Amount		% of Total Revenue			Amount		% of Total Revenue			Amount			Percentage
Revenue:
Product	$	121,229		76	%	$	157,088		79	%	$	(35,859	)		(23	)%
Services		38,740		24	%		40,996		21	%		(2,256	)		(6	)%

Total revenue	$	159,969		100	%		198,084		100	%		(38,115	)		(19	)%

Legacy vs. NextGen:
Legacy	$	55,411		35	%	$	69,730		35	%	$	(14,319	)		(21	)%
NextGen		104,558		65	%		128,354		65	%		(23,796	)		(19	)%

Total revenue	$	159,969		100	%	$	198,084		100	%		(38,115	)		(19	)%

Revenue by geography:
Americas	$	72,864		46	%	$	90,866		46	%	$	(18,002	)		(20	)%
Europe, Middle East and Africa		52,114		33	%		67,159		34	%		(15,045	)		(22	)%
Asia Pacific		34,991		22	%		40,059		20	%		(5,068	)		(13	)%

Total revenue	$	159,969		100	%	$	198,084		100	%	$	(38,115	)		(19	)%


	2012					2011					Period-to-Period Change
(USD and $000’s)	Amount		% of Related Revenue			Amount		% of Related Revenue			Amount			Percentage
Cost of Revenue:
Product	$	48,521		40	%	$	60,990		39	%	$	(12,469	)		(20	)%
Services		19,712		51	%		21,422		52	%		(1,710	)		(8	)%

Total cost of revenue	$	68,233		43	%	$	82,412		42	%	$	(14,179	)		(17	)%

Gross Profit:
Product	$	72,708		60	%	$	96,098		61	%	$	(23,390	)		(24	)%
Services		19,028		49	%		19,574		48	%		(546	)		(3	)%

Total gross profit	$	91,736		57	%	$	115,672		58	%	$	(23,936	)		(21	)%


	2012					2011					Period-to-Period Change
	Amount		% of Total Revenue			Amount		% of Total Revenue			Amount			Percentage
Research and development	$	42,785		27	%	$	54,562		28	%	$	(11,777	)		(22	)%
Sales and marketing		41,456		26	%		54,293		27	%		(12,837	)		(24	)%
General and administrative		31,180		19	%		35,921		18	%		(4,741	)		(13	)%
Restructuring charges		7,030		4	%		7,214		4	%		(184	)		(3	)%

Total operating expenses	$	122,451		77	%	$	151,990		77	%	$	(29,539	)		(19	)%


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

		86,436			58,605
Convertible notes, carrying value		—			32,905
Shareholder loans		5,074			—

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

	$	91,770		$	91,770


	Page
Report of Independent Registered Public Accounting Firm		38
Consolidated Financial Statements:
Consolidated Balance Sheets		39
Consolidated Statements of Operations and Comprehensive Loss		40
Consolidated Statements of Stockholders’ Deficit		41
Consolidated Statements of Cash Flows		42
Notes to Consolidated Financial Statements		43


	December 31,
	2012			2011
ASSETS
Current assets:
Cash and cash equivalents	$	6,501		$	10,353
Restricted cash		900			1,497
Accounts receivable, net of allowance of $1,217 and $3,622, respectively		34,248			47,460
Inventory		8,306			20,127
Prepaid expenses		4,639			3,580
Other current assets		4,354			5,577

Total current assets		58,948			88,594
Property and equipment, net		5,978			7,947
Intangible assets, net		25,089			33,267
Goodwill		31,223			31,223
Other assets		2,147			2,311

Total assets	$	123,385		$	163,342

LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities:
Accounts payable	$	16,994		$	21,569
Accrued liabilities		21,270			22,449
Deferred revenue, current portion		12,742			14,872
Bank indebtedness		11,717			12,509
Income taxes payable		1,007			1,665
Interest payable, related parties		—			3,452

Total current liabilities		63,730			76,516
Long-term debt, related parties, net of discount		66,536			94,675
Warrants		1,985			—
Other long-term liabilities		8,978			7,587

Total liabilities		141,229			178,778
Commitments and contingencies
Preferred stock, $0.001 par value:
Authorized — 10,000,000 shares; Issued and outstanding — 1 share		—			—
Stockholders’ deficit:
Common stock, $0.001 par value:
Authorized — 200,000,000 shares; Issued and outstanding 14,415,652 and 6,295,230 shares, respectively		14			6
Additional paid-in capital		257,658			222,087
Accumulated other comprehensive loss		(22,423	)		(22,206	)
Accumulated deficit		(253,093	)		(215,323	)

Total stockholders’ deficit		(17,844	)		(15,436	)

Total liabilities and stockholders’ deficit	$	123,385		$	163,342


	Years Ended December 31,
	2012			2011
Revenue:
Products	$	121,229		$	157,088
Services		38,740			40,996

Total revenue		159,969			198,084
Cost of revenue:
Products		48,521			60,990
Services		19,712			21,422

Total cost of revenue		68,233			82,412

Gross profit		91,736			115,672

Operating expenses:
Research and development, net		42,785			54,562
Sales and marketing		41,456			54,293
General and administrative		31,180			35,921
Restructuring charges		7,030			7,214

Total operating expenses		122,451			151,990

Loss from operations		(30,715	)		(36,318	)

Other income (expense):
Interest and other income (expense), net		180			73
Interest expense		(10,730	)		(18,016	)
Change in fair value of warrants		5,086			—
Foreign exchange loss, net		(1,378	)		(266	)

Total other expense, net		(6,842	)		(18,209	)

Loss before provision (benefit) for income taxes		(37,557	)		(54,527	)
Income tax provision		213			282

Net loss	$	(37,770	)	$	(54,809	)

Net loss per share — basic and diluted	$	(4.04	)	$	(8.75	)

Weighted average shares of common stock used in calculation of net loss per share - basic and diluted		9,341			6,265

Other comprehensive loss:
Net loss	$	(37,770	)	$	(54,809	)
Foreign currency translation adjustment	$	(217	)		(135	)

Total comprehensive loss	$	(37,987	)	$	(54,944	)


	Common shares				Additional paid-in capital		Accumulated other comprehensive loss			Accumulated deficit			Total stockholders’ deficit
	Number		Amount		Additional paid-in capital		Accumulated other comprehensive loss			Accumulated deficit			Total stockholders’ deficit
Balance at December 31, 2010		6,232,610	$	6	$	218,777	$	(22,071	)	$	(160,514	)	$	36,198
Exercise of stock options		21,820		—		157		—			—			157
Release of common shares upon vesting of restricted stock units		25,902		—		—		—			—			—
ESPP Purchase		14,898		—		126		—			—			126
Stock-based compensation in connection with stock options granted to employees		—		—		1,446		—			—			1,446
Stock-based compensation in connection with restricted stock units granted to employees		—		—		1,496		—			—			1,496
Stock-based compensation in connection with ESPP shares granted to employees		—		—		85								85
Net loss		—		—		—		—			(54,809	)		(54,809	)
Foreign currency translation adjustment		—		—		—		(135	)		—			(135	)

Balance at December 31, 2011		6,295,230	$	6	$	222,087	$	(22,206	)	$	(215,323	)	$	(15,436	)
Conversion of long-term debt		8,020,712		8		33,026								33,034
Release of common shares upon vesting of restricted stock units		71,849		—		—								—
ESPP Purchase		27,861		—		56		—			—			56
Stock-based compensation in connection with stock options granted to employees		—		—		1,011		—			—			1,011
Stock-based compensation in connection with restricted stock units granted to employees		—		—		1,455		—			—			1,455
Stock-based compensation in connection with ESPP shares granted to employees		—		—		23								23
Net loss		—		—		—		—			(37,770	)		(37,770	)
Foreign currency translation adjustment		—		—		—		(217	)		—			(217	)

Balance at December 31, 2012		14,415,652	$	14	$	257,658	$	(22,423	)	$	(253,093	)	$	(17,844	)


	Years Ended December 31,
	2012			2011
Cash flows from operating activities:
Net loss	$	(37,770	)	$	(54,809	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		11,502			18,580
Stock-based compensation		2,489			3,027
Amortization of debt issuance costs and debt discount		803			3,046
Fair value adjustment to warrants		(5,086	)		—
Loss on disposal of fixed assets		364			—
Payment-in-kind interest expense on long-term debt		4,668			864
Bad debt expense, net		975			313
Deferred income taxes		(322	)		(550	)
Other non-cash charges		(48	)		313
Net changes in operating assets and liabilities
Accounts receivable		11,498			6,985
Inventory		11,119			6,880
Prepaid expenses and other current assets		480			6,603
Accounts payable and accrued liabilities		(4,541	)		(2,216	)
Deferred revenue		(2,378	)		(1,518	)
Income taxes payable		(606	)		(320	)
Interest payable, related parties		(416	)		499
Other long-term liabilities		1,725			1,780

Net cash used in operating activities		(5,544	)		(10,523	)

Cash flows from investing activities:
Restricted cash		597			(847	)
Purchases of property and equipment		(1,118	)		(2,614	)
Purchases of intangible assets		(73	)		(145	)
Other assets		—			(81	)

Net cash used in investing activities		(594	)		(3,687	)

Cash flows from financing activities:
Proceeds from exercise of stock options		—			157
Proceeds from issuance of ESPP shares		56			126
Payments of debt issuance costs		(1,531	)		—
Payments on bank indebtedness, net		(792	)		(298	)
Proceeds from long-term debt		4,500			—

Net cash provided by (used in) financing activities		2,233			(15	)

Effect of exchange rate changes on cash and cash equivalents		53			19

Net decrease in cash and cash equivalents		(3,852	)		(14,206	)
Cash and cash equivalents at beginning of period		10,353			24,559

Cash and cash equivalents at end of period	$	6,501		$	10,353

Supplemental disclosure of cash flow information:
Cash paid
Interest	$	5,446		$	13,394

Income taxes paid	$	714		$	777

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

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		$	—


December 31, 2012	Fair Value		Level 1		Level 2		Level 3
Assets:
Money Market Funds	$	4	$	4	$	—	$	—
Liabilities:
Warrants	$	1,985	$	—	$	1,985	$	—

December 31, 2011	Fair Value		Level 1		Level 2		Level 3
Assets:
Money Market Funds	$	4	$	4	$	—	$	—


Expected Term	4.25 years
Volatility	90.00	%
Dividend Yield	0	%
Risk-Free Interest Rate	0.72	%


	Beginning Balance		Provision		Write-offs			Ending Balance
Year ended December 31, 2012	$	3,622	$	975	$	(3,380	)	$	1,217
Year ended December 31, 2011	$	3,721	$	313	$	(412	)	$	3,622


Asset Classification		Estimated Useful Life
Computer equipment and software		3 years
Furniture and fixtures		3 years
Machinery and equipment		5 years
ERP systems		10 years
Leasehold improvements		Shorter of asset’s useful life or remaining life of lease


Balance, December 31, 2010	$	31,614
Fair value adjustments		(391	)

Balance, December 31, 2011	$	31,223

Balance, December 31, 2012	$	31,223


	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


	December 31, 2011
	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
Indefinite-lived intangibles:
Trade names	$	10,000	$	—		$	10,000

Finite-lived intangibles:
Technology		58,239		(42,529	)		15,710
Customer relationships		38,312		(30,994	)		7,318
Software licenses		3,489		(3,475	)		14
Patents		1,244		(1,019	)		225

	$	111,284	$	(78,017	)	$	33,267


2013	$	5,936
2014		5,006
2015		2,866
2016		427
2017		427
2018 and thereafter		427

Total	$	15,089


	Employee Termination/ Severance and Related Costs			Facilities Costs			Total
Balance, December 31, 2010	$	1,690		$	—		$	1,690
Charges to operations		3,669			3,545			7,214
Payments made during the year		(4,002	)		(603	)		(4,605	)

Balance, December 31, 2011		1,357			2,942			4,299
Charges to operations		5,847			1,183			7,030
Payments made during the year		(4,717	)		(994	)		(5,711	)

Balance, December 31, 2012	$	2,487		$	3,131		$	5,618


	Number of Options Outstanding			Weighted Average Exercise Price		Weighted Average Contractual Life (in years)
Balance, December 31, 2011		581		$	23.88		3.25
Granted		401		$	4.88
Exercised		—
Cancelled and forfeited		(150	)	$	24.00

Balance, December 31, 2012		832		$	14.70		7.57

Vested and expected to vest at December 31, 2012		789		$	15.17		7.48
Exercisable at December 31, 2012		312		$	27.23		4.89


			Options Outstanding						Exercisable Options
Range of Exercise Price			Number Outstanding		Weighted Average Remaining Contractual Life (in years)		Weighted Average Exercise Price		Number Exercisable		Weighted Average Exercise Price
$	3.15	$ 3.15		27		9.61	$	3.15		—	$	—
$	5.00	$ 5.00		385		8.78	$	5.00		27	$	5.00
$	5.90	$ 7.50		95		6.64	$	6.32		43	$	6.85
$	8.75	$ 23.95		125		7.85	$	16.63		54	$	16.74
$	24.75	$ 26.00		10		2.96	$	25.79		9	$	25.82
$	31.00	$ 31.00		141		5.69	$	31.00		130	$	31.00
$	32.50	$153.75		41		4.51	$	42.32		41	$	42.32
$	154.50	$154.50		6		3.55	$	154.50		6	$	154.50
$	200.00	$200.00		1		4.26	$	200.00		1	$	200.00
$	287.50	$287.50		1		2.87	$	287.50		1	$	287.50

$	3.15	$287.50		832						312


	Number of RSUs			Weighted Average Contractual Life (in years)		Weighted Average Grant Date Fair Value
Balance, December 31, 2011		131			1.34	$	21.08
Granted		196				$	3.87
Vested		(72	)			$	4.49
Forfeited or expired		(17	)			$	24.12

Balance, December 31, 2012		238			0.97	$	8.03


Years	Operating Leases
2013	$	6,524
2014		5,974
2015		5,641
2016		1,503
2017		1,063
Thereafter		1,190

	$	21,895


	DIALOGIC INC.

Date: March 22, 2013	By:	/s/ John T. Hanson
		Name:	John T. Hanson
		Title:	Principal Financial and Accounting Officer


Name	Title	Date

/s/ Kevin Cook Kevin Cook	Chief Executive Officer and Director (Principal Executive Officer)	March 22, 2013

/s/ John T. Hanson John T. Hanson	Principal Financial and Accounting Officer	March 22, 2013

/s/ Patrick Jones Patrick Jones	Chairman, Board of Directors and Director	March 22, 2013

/s/ Nick DeRoma Nick DeRoma	Director	March 22, 2013

/s/ Dion Joannou Dion Joannou	Director	March 22, 2013

/s/ Richard Piasentin Richard Piasentin	Director	March 22, 2013

/s/ Rajneesh Vig Rajneesh Vig	Director	March 22, 2013

/s/ W. Michael West W. Michael West	Director	March 22, 2013


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

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

3.1	Certificate of Amendment of Amended and Restated Certificate of Incorporation of Registrant.	8-K		001-33391		3.2		10/6/2000

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

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

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

4.1	Reference is made to Exhibits 3.1, 3.2, 3.3, 3.4, 3.5, 3.6, 3.7 and 3.8.

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

4.3	Amended and Restated Registration Rights Agreement, dated March 22, 2012, by and among Dialogic Inc. and the investors signatory thereto.	10-K		001-33391		4.3		4/16/2012

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

4.6	Form of Dialogic Inc. Warrant issued March 22, 2012.	10-Q		001-3391		10.11		5/15/2012

4.7	Securities Purchase Agreement, dated April 11, 2012, by and among Dialogic Inc. and the investors identified in the Schedule of Purchasers thereto.	8-K		001-33391		10.1		4/13/2012

4.8	Form of Dialogic Inc. Convertible Promissory Note issued April 11, 2012.	8-K		001-33391		10.2		4/13/2012

4.9	Registration Rights Agreement, dated February 7, 2013, by and among Dialogic Inc. and the buyers signatory thereto.	8-K		001-33391		4.1		2/11/2013

10.1*	2001 Equity Incentive Plan and forms of related agreements	S-1		333-138121		10.14		10/20/2006

10.2*	2003 Israeli Share Option Plan.	S-1/A		333-138121		10.15		3/16/2007

10.3*	2006 Equity Incentive Plan, as amended.	10-K		001-33391		10.3		4/16/2012

10.4*	Forms of 2006 Equity Incentive Plan agreements.	S-1		333-138121		10.16		10/20/2006

10.5*	2006 Employee Stock Purchase Plan, as amended	10-K		001-33391		10.5		4/16/2012

10.6*	Letter, dated November 29, 2007, issued by the Registrant and addressed to Mike West	10-K		001-33391		10.41		3/14/2008

10.7	Dialogic Support Agreement, dated May 12, 2010	8-K		001-33391		99.2		5/10/2010

10.8*	Service Agreement, dated December 30, 2010, between Nick Jensen and Registrant	8-K		001-33391		10.1		1/6/2011