Edgar Filing: RADISYS CORP

9.30.2011 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q



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



For the quarterly period ended	September 30, 2011



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



For the transition period from		to



Commission File Number:	0-26844

RADISYS CORPORATION

(Exact name of registrant as specified in its charter)



OREGON		93-0945232
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

5435 N.E. Dawson Creek Drive, Hillsboro, OR		97124
(Address of principal executive offices)		(Zip Code)

(503) 615-1100
(Registrant's telephone number, including area code)


(Former name, former address and former fiscal year, if changed since last report)

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [x] No [ ]

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



Large accelerated filer	[ ]		Accelerated filer	[x]
Non-accelerated filer	[ ]	(Do not check if a smaller reporting company)	Smaller reporting company	[ ]

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

Number of shares of common stock outstanding as of November 1, 2011: 27,736,226

RADISYS CORPORATION

FORM 10-Q

TABLE OF CONTENTS



		Page
PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)
Consolidated Statements of Income – Three and Nine Months Ended September 30, 2011 and 2010		3
Condensed Consolidated Balance Sheets – September 30, 2011 and December 31, 2010		4
Consolidated Statement of Changes in Shareholders’ Equity – Nine Months Ended September 30, 2011		5
Consolidated Statements of Cash Flows – Nine Months Ended September 30, 2011 and 2010		6
Notes to Consolidated Financial Statements		7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		24
Item 3. Quantitative and Qualitative Disclosures About Market Risk		40
Item 4. Controls and Procedures		41

PART II. OTHER INFORMATION
Item 1A. Risk Factors		42
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		41
Item 5. Other Information		41
Item 6. Exhibits		44
Signatures		45

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

RADISYS CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share amounts, unaudited)



	For the Three Months Ended						For the Nine Months Ended
	September 30,						September 30,
	2011			2010			2011			2010
Revenues	$	97,876		$	75,167		$	251,359		$	217,485
Cost of sales:
Cost of sales	66,610			50,740			173,777			147,089
Amortization of purchased technology	3,283			1,630			5,610			5,018
Total cost of sales	69,893			52,370			179,387			152,107
Gross margin	27,983			22,797			71,972			65,378
Research and development	12,955			9,863			31,562			29,174
Selling, general and administrative	15,610			11,225			37,520			34,030
Intangible assets amortization	1,234			192			1,618			538
Restructuring and acquisition-related charges, net	5,758			(228		)	8,279			(203		)
Gain on the liquidation of a foreign subsidiary	(2,081		)	—			(2,081		)	—
Income (loss) from operations	(5,493		)	1,745			(4,926		)	1,839
Interest expense	(458		)	(462		)	(1,410		)	(1,578		)
Interest income	6			59			97			566
Other income (expense), net	327			(55		)	187			(34		)
Income (loss) before income tax benefit	(5,618		)	1,287			(6,052		)	793
Income tax benefit	(8,383		)	(884		)	(8,478		)	(920		)
Net income	$	2,765		$	2,171		$	2,426		$	1,713
Net income per share:
Basic	$	0.10		$	0.09		$	0.10		$	0.07
Diluted	$	0.10		$	0.09		$	0.09		$	0.07
Weighted average shares outstanding:
Basic	26,432			24,212			25,038			24,088
Diluted	27,820			24,400			25,595			24,310

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

RADISYS CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, unaudited)



	September 30, 2011			December 31, 2010

ASSETS
Current assets:
Cash and cash equivalents	$	55,902		$	129,078
Accounts receivable, net	58,805			42,855
Other receivables	4,643			1,665
Inventories, net	30,281			15,178
Inventory deposit, net	6,674			6,194
Other current assets	5,354			4,612
Deferred tax assets, net	5,151			551
Total current assets	166,810			200,133
Property and equipment, net	12,271			9,487
Goodwill	26,155			160
Intangible assets, net	89,086			7,088
Long-term deferred tax assets, net	13,166			16,005
Other assets	7,744			8,055
Total assets	$	315,232		$	240,928

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	52,762		$	29,190
Accrued wages and bonuses	9,600			6,556
Deferred income	9,437			4,424
Other accrued liabilities	15,836			12,914
Total current liabilities	87,635			53,084
Long-term liabilities:
2013 convertible senior notes	50,000			50,000
Other long-term liabilities	8,515			450
Total long-term liabilities	58,515			50,450
Total liabilities	146,150			103,534
Commitments and contingencies (Note 9)
Shareholders’ equity:
Common stock — no par value, 100,000 shares authorized; 27,735 and 24,351 shares issued and outstanding at September 30, 2011 and December 31, 2010	299,063			266,945
Accumulated deficit	(132,257		)	(134,683		)
Accumulated other comprehensive income:
Cumulative translation adjustments	2,486			4,739
Unrealized gain (loss) on hedge instruments	(210		)	393
Total accumulated other comprehensive income	2,276			5,132
Total shareholders’ equity	169,082			137,394
Total liabilities and shareholders’ equity	$	315,232		$	240,928

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

RADISYS CORPORATION

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY

(In thousands, unaudited)



	Common stock					Accumulated Deficit			Accumulated Other Comprehensive Income			Total			Total Comprehensive Loss (1)
	Shares		Amount			Accumulated Deficit			Accumulated Other Comprehensive Income			Total			Total Comprehensive Loss (1)
Balances, December 31, 2010	24,351		$	266,945		$	(134,683	)	$	5,132		$	137,394
Shares issued pursuant to benefit plans	187		1,324						—			1,324
Stock-based compensation associated with employee benefit plans	—		4,038						—			4,038
Vesting of restricted stock units	67		—						—			—
Restricted share forfeitures for tax settlements	(17	)	(142		)				—			(142		)
Repurchases of common stock	(518	)	(3,920		)				—			(3,920		)
Shares issued for acquisitions	3,665		30,818									30,818
Net adjustment for fair value of hedge derivatives	—		—						(603		)	(603		)	(603		)
Gain on liquidation of foreign subsidiary	—		—						(2,081		)	(2,081		)	(2,081		)
Translation adjustments	—		—						(172		)	(172		)	(172		)
Net income for the period	—		—			2,426			—			2,426			2,426
Balances, September 30, 2011	27,735		$	299,063		$	(132,257	)	$	2,276		$	169,082
Total comprehensive loss for the nine months ended September 30, 2011															$	(430	)

(1) For the three and nine months ended September 30, 2011 and 2010, total comprehensive income (loss) consisted of the following:



	For the Three Months Ended					For the Nine Months Ended
	September 30,					September 30,
	2011			2010		2011			2010
Net income for the period	$	2,765		$	2,171	$	2,426		$	1,713
Net adjustment for fair value of hedge derivatives	(660		)	134		(603		)	(484		)
Gain on liquidation of foreign subsidiary	(2,081		)	—		(2,081		)	—
Translation adjustments	(428		)	301		(172		)	24
Total comprehensive income (loss)	$	(404	)	$	2,606	$	(430	)	$	1,253

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

RADISYS CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands, unaudited)



	For the Nine Months Ended
	September 30,
	2011			2010
Cash flows from operating activities:
Net income	$	2,426		$	1,713
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	11,199			9,337
Inventory valuation allowance	1,637			1,003
Deferred income taxes	(878		)	158
Deferred tax valuation allowance reversal	(7,557		)	—
Tax liability adjustments	—			(1,029		)
Non-cash interest expense	336			336
Gain on the liquidation of a foreign subsidiary	(2,081		)	—
Loss (gain) on disposal of property and equipment	121			(398		)
Loss on ARS settlement right	—			7,833
Gain on ARS	—			(7,854		)
Stock-based compensation expense	4,038			4,880
Other	1,286			366
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable	(2,514		)	1,310
Other receivables	(1,781		)	1,524
Inventories	(11,705		)	1,497
Inventory deposit	(480		)	(3,371		)
Other current assets	254			(567		)
Accounts payable	18,151			5,673
Accrued wages and bonuses	125			(1,180		)
Accrued restructuring	1,958			(2,510		)
Deferred income	2,574			1,649
Other accrued liabilities	(3,194		)	(1,116		)
Net cash provided by operating activities	13,915			19,254
Cash flows from investing activities:
Acquisitions, net of cash acquired	(79,298		)	(3,385		)
Proceeds from sale of auction rate securities	—			62,175
Capital expenditures	(4,289		)	(3,283		)
Purchase of long-term assets	(500		)	(3,189		)
Proceeds from the sale of property and equipment	—			450
Net cash provided by (used in) investing activities	(84,087		)	52,768
Cash flows from financing activities:
Borrowings on line of credit	—			13,738
Payments on line of credit	—			(55,025		)
Repurchases of common stock	(3,920		)	—
Proceeds from issuance of common stock	1,324			2,130
Other financing activities	(408		)	(329		)
Net cash used in financing activities	(3,004		)	(39,486		)
Effect of exchange rate changes on cash	—			49
Net increase (decrease) in cash and cash equivalents	(73,176		)	32,585
Cash and cash equivalents, beginning of period	129,078			100,672
Cash and cash equivalents, end of period	$	55,902		$	133,257
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest	$	1,375		$	1,375
Income taxes	$	538		$	524
Supplemental disclosure of non-cash investing and financing activities:
Issuance of common stock for acquisitions	$	30,818		$	—
Capital lease obligation	$	120		$	—

Refer to Note 2 - Acquisition of Continuous Computing Corporation for other non-cash impacts associated with the acquisition

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

RADISYS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1 — Significant Accounting Policies

Radisys Corporation (the “Company” or “Radisys”) has adhered to the accounting policies set forth in its Annual Report on Form 10-K for the year ended December 31, 2010 in preparing the accompanying interim consolidated financial statements. The preparation of these statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. Actual results could differ from those estimates. Additionally, the accompanying financial data as of September 30, 2011 and for the three and nine months ended September 30, 2011 and 2010 has been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been omitted pursuant to such rules and regulations. However, the Company believes that the disclosures are adequate to make the information presented not misleading. These consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2010.

The financial information included herein reflects all normal recurring adjustments that are, in the opinion of management, necessary for a fair presentation of the results for interim periods.

Contingent Consideration

Contingent consideration is recorded at the acquisition date estimated fair value of the contingent payment for all acquisitions. The fair value of the contingent consideration is remeasured each reporting period with any adjustments in fair value included in the Company’s Consolidated Statement of Income.

Recent Accounting Pronouncements

In May 2011, the Financial Accounting Standards Board ("FASB") issued Accounting Standard Update ("ASU") No. 2011-04, "Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards," that amends some fair value measurement principles and disclosure requirements. This ASU states that the concepts of highest and best use and valuation premise are only relevant when measuring the fair value of nonfinancial assets and prohibits the grouping of financial instruments for purposes of determining their fair values when the unit of account is specified in other guidance. The provisions of this ASU will be applied prospectively for interim and annual periods beginning after December 15, 2011, with early adoption prohibited. The standard is not expected to have a material impact on the Company's financial position or results of operations.

In June 2011, the FASB issued ASU No. 2011-05, “Comprehensive Income”. ASU 2011-05 requires that all non-owner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements, eliminating the option to present other comprehensive income in the statement of changes in stockholders' equity. The provisions of this ASU will be applied retrospectively for interim and annual periods beginning after December 15, 2011, with early application permitted. The standard is not expected to have a material impact on the Company's financial position or results of operations; however it will change the manner in which the Company presents comprehensive income.

In September 2011, the FASB issued ASU No. 2011-08, “Intangibles-Goodwill and Other” that will allow an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. Under these amendments, an entity would not be required to calculate the fair value of a reporting unit unless the entity determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. The amendments include a number of events and circumstances for an entity to consider in conducting the qualitative assessment. The guidance is effective for fiscal years beginning after December 15, 2011 with early adoption permitted. The standard is not expected to have a material impact on the Company's financial position or results of operations; however it will change the manner in which we assess goodwill for impairment.

Note 2 — Acquisition of Continuous Computing Corporation

On July 8, 2011, the Company acquired 100% of the outstanding shares of Continuous Computing Corporation ("Continuous Computing"), a developer of communications systems consisting of highly integrated ATCA platforms and Trillium protocol software. The Company expects the acquisition to accelerate our strategy to deliver more differentiated platforms and solutions. Continuous Computing also brings expansion into high growth markets with many new customers, creating meaningful customer diversification.

Under the terms of the acquisition agreement, the Company paid approximately $81.5 million in cash and 2,321,016 in shares of our common stock. The aggregate cash amount consisted of $73.0 million plus an $8.5 million working capital adjustment. The Company also deposited an additional 1,344,444 shares of its common stock into an escrow account and subject to any indemnification claims, one-half of the shares held therein will be released one year after the closing of the acquisition with the remainder to be released six months thereafter. The common stock issued to former shareholders of Continuous Computing has a fair value of $30.8 million, based on the closing price of the Company's common stock on July 8, 2011 of $8.39 per share.

In addition, the Company has agreed to make certain earn-out payments based on the amount of product royalty revenues generated by a specified set of contracts associated with certain of Continuous Computing's products over a period of 36 months after closing. Earn-out payments will be made in cash in three installments following the 18-, 24- and 36-month anniversaries of the closing date, and in each case will equal the amount of such royalty revenues during the immediately preceding 18-month, six-month or 12-month period, as applicable, except that, in lieu of making any and all earn-out payments, the Company may elect at any time prior to the fifth business day following the 18-month anniversary of the closing date to make a one-time payment in cash and/or issuance of common stock with a combined aggregate value of $15 million. The estimated fair value of this contingent consideration at the acquisition date was $7.4 million and is included in other long-term liabilities in the Consolidated Balance Sheet at September 30, 2011. See Note 3 - Fair Value of Financial Instruments for additional information regarding the valuation of the contingent consideration liability.

In connection with the acquisition, the Company assumed Continuous Computing's stock incentive plan as to stock options held by continuing employees of Continuous Computing that were not vested on or prior to June 30, 2011, which were converted into options to acquire approximately 322,000 shares of the Company's common stock. See Note 12 - Stock-based Compensation for additional information regarding the valuation of the assumed options.

The total preliminary acquisition consideration is as follows (in thousands):



Cash paid for initial consideration	$	73,009
Working capital adjustment	8,504
Fair value of contingent consideration (earn-out payments)	7,400
Share consideration payable upon closing:
3.7 million Radisys common shares	30,753
Fair value of stock options	65
Total preliminary purchase price	$	119,731

Preliminary Purchase Price Allocation

The Company accounted for the transaction using the acquisition method and, accordingly, the consideration has been allocated to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values. The purchase price was allocated using the information available and is preliminary. The Company may adjust the preliminary purchase price allocation if additional information is obtained during the measurement period (up to one year from the acquisition date) regarding, among other things, assets valuations, liabilities assumed and revisions to preliminary estimates.

Continuous Computing is subject to legal and regulatory requirements, including but not limited to those related to taxation in each of the jurisdictions in the countries in which it operated. The Company has conducted a preliminary assessment of liabilities arising from these tax matters in each of these jurisdictions, and has recognized provisional amounts in its initial accounting for the acquisition of Continuous Computing for the identified liabilities. However, the Company is continuing its review of these matters during the measurement period, and if new information is obtained about facts and circumstances that existed at the acquisition date identifies adjustments to the liabilities initially recognized, as well as any additional liabilities that existed as the acquisition date, the acquisition accounting will be revised to reflect the resulting adjustments to the provisional tax amounts initially recognized.

The purchase price in excess of the fair value of the tangible and identified intangible assets acquired less liabilities assumed is recognized as goodwill. The preliminary allocation of the total purchase price is as follows (in thousands):



Total preliminary purchase price					$	119,731

Fair value of net tangible assets acquired and liabilities assumed:
	Cash and cash equivalents	$	2,214
	Accounts receivable	13,433
	Inventories	4,036
	Prepaid expenses and other current assets	3,393
	Fixed assets	2,304
	Other assets	614
	Accounts payable	(5,368		)
	Accrued expenses	(6,802		)
	Deferred revenue	(1,825		)
	Other long-term liabilities	(702		)
					11,297
Fair value of identifiable intangible assets acquired					89,240
Net deferred tax liability					(6,801		)
Goodwill					$	25,995

The goodwill created by the transaction of $26.0 million is not deductible for tax purposes. Key factors that make up the goodwill created by the transaction include expected synergies from the combination of operations and the knowledge and experience of the acquired workforce and infrastructure.

Valuation of Intangible Assets Acquired

The following table summarizes the intangible assets acquired in connection with the acquisition (in thousands):



	Fair Value		Estimated Life (yrs)
Developed technology:
ATCA developed technology	$	33,600	7
Trillium developed technology	18,500		7
Software developed technology	1,850		7
Legacy developed technology	1,300		2
Total developed technology	55,250
Customer relationships	25,500		6
Trade name	7,900		10
Backlog	590		0.5
Total intangible assets subject to amortization	$	89,240

The Company is amortizing purchased technology and backlog to amortization of purchased technology in the Consolidated Income Statements over the respective estimated life of each intangible asset. Customer relationships and trade name are being amortized to intangible assets amortization in the Consolidated Statements of Income over the respective estimated life of each intangible asset.

Transaction-Related Expenses

The Company has incurred significant transaction costs directly related to the Continuous Computing transaction. The

incremental expenses related to legal, accounting and valuation services, and investment banking fees. During the three and nine months ended September, 2011, the Company incurred restructuring costs associated with severance and other related compensation charges. In addition, the Company has incurred significant integration-related costs which include expenses associated with operational consolidation, training, re-branding, and consulting. These charges are included in cost of sales and restructuring and acquisition-related charges, net on the Consolidated Statements of Income.

The table below presents the amounts related to these expenses included in our Consolidated Statements of Income (in thousands):



	For the Three Months Ended				For the Nine Months Ended
	September 30,				September 30,
	2011		2010		2011		2010
Cost of sales	$	212	$	—	$	212	$	—
Restructuring and acquisition-related charges, net
Transaction costs	1,719		—		3,347		—
Restructuring costs	3,411		—		4,311		—
Integration-related costs	644		—		644		—
Total restructuring and acquisition-related charges, net	5,774		—		8,302		—
Total transaction-related expenses	$	5,986	$	—	$	8,514	$	—

Unaudited Actual and Pro Forma Information

Our consolidated revenues for the three and nine months ended September 30, 2011 included $15.3 million from Continuous Computing subsequent to the acquisition date. The following table presents the unaudited pro forma results for the periods set forth below. The unaudited pro forma financial information combines the results of operations as though the acquisition had occurred on January 1, 2010. No pro forma adjustments have been made for our incremental transaction, restructuring or integration-related costs. The pro forma financial information is presented for informational purposes only and is not indicative of the results of operations that would have been achieved if the acquisition had occurred on January 1, 2010: (in thousands, except per share data):



	Actual		Pro-Forma			Pro-Forma
	For the Three Months Ended					For the Nine Months Ended
	September 30,					September 30,
	2011		2010			2011			2010
Revenues	$	97,876	$	89,507		$	282,363		$	259,317
Net income (loss)	$	2,765	$	(1,253	)	$	(5,126	)	$	(7,115	)
Net income (loss) per share:
Basic	$	0.10	$	(0.05	)	$	(0.19	)	$	(0.27	)
Diluted	$	0.10	$	(0.05	)	$	(0.19	)	$	(0.27	)

Note 3 — Fair Value of Financial Instruments

The Company measures at fair value certain financial assets and liabilities. GAAP specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company's market assumptions. These two types of inputs have created the following fair-value hierarchy:

Level 1— Quoted prices for identical instruments in active markets;

Level 2— Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets; and

Level 3— Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.

Foreign currency forward contracts are measured at fair value using models based on observable market inputs such as foreign currency exchange rates; therefore, they are classified within Level 2 of the valuation hierarchy. The cash surrender value of life insurance contracts is measured at fair value using quoted market prices for similar instruments; therefore, they are classified within Level 2 of the valuation hierarchy.

The contingent consideration liability represents future amounts we may be required to pay in conjunction with the acquisition of Continuous Computing and is based on the amount of royalty revenues generated by a specified set of contracts associated with certain of Continuous Computing's products over a period of 36 months after closing. The Company estimates the fair value of the contingent consideration liability using a probability-weighted scenario of estimated qualifying earn-out revenues calculated at net present value (level 3 of the fair value hierarchy).

The following table summarizes the fair value measurements for the Company's financial instruments (in thousands):



	Fair Value Measurements as of September 30, 2011
	Total			Level 1		Level 2			Level 3
Cash surrender value of life insurance contracts	$	3,282		$	—	$	3,282		$	—
Foreign currency forward contracts	(264		)	—		(264		)	—
Contingent consideration liability	(7,446		)	—		—			(7,446		)
Total	$	(4,428	)	$	—	$	3,018		$	(7,446	)



	Fair Value Measurements as of December 31, 2010
	Total		Level 1		Level 2		Level 3
Cash surrender value of life insurance contracts	$	3,618	$	—	$	3,618	$	—
Foreign currency forward contracts	432		—		432		—
Total	$	4,050	$	—	$	4,050	$	—

The following table summarizes our Level 3 activity for the Company's contingent consideration liability (in thousands):



	Level 3
Balance at December 31, 2010	$	—
Additions	7,400
Increase in liability due to re-measurement	26
Interest accretion	20
Balance at September 30, 2011	$	7,446

The Company records all gains and losses and interest accretion on the contingent consideration liability to restructuring and acquisition-related charges,net in the Consolidated Income Statements.

Note 4 — Accounts Receivable and Other Receivables

Accounts receivable consists of sales to the Company's customers which are generally based on standard terms and conditions. Accounts receivable balances consisted of the following (in thousands):



	September 30, 2011			December 31, 2010
Accounts receivable, gross	$	59,648		$	43,788
Less: allowance for doubtful accounts	(843		)	(933		)
Accounts receivable, net	$	58,805		$	42,855

As of September 30, 2011 and December 31, 2010, the balance in other receivables was $4.6 million and $1.7 million. Other receivables consisted primarily of non-trade receivables including receivables for inventory transferred to the Company's contract manufacturing partners. There is no revenue recorded associated with non-trade receivables.

Note 5 — Inventories

Inventories consisted of the following (in thousands):



	September 30, 2011			December 31, 2010
Raw materials	$	14,012		$	8,204
Work-in-process	121			—
Finished goods	21,011			10,521
	35,144			18,725
Less: inventory valuation allowance	(4,863		)	(3,547		)
Inventories, net	$	30,281		$	15,178



	September 30, 2011			December 31, 2010
Inventory deposit ^(A)	$	9,569		$	8,468
Less: inventory deposit valuation allowance	(2,895		)	(2,274		)
Inventory deposit, net	$	6,674		$	6,194



(A)	The Company is contractually obligated to reimburse its contract manufacturers for the cost of excess inventory that has been purchased as a result of the Company's forecasted demand when there is no alternative use. The Company's inventory deposit represents a cash deposit paid to its contract manufacturers for inventory in excess of near term demand. The deposit is recorded net of adverse purchase commitment liabilities, and therefore the net balance of the deposit represents inventory the Company believes will be utilized. The deposit will be applied against future adverse purchase commitments owed to the Company's contract manufacturers or reduced based on the usage of inventory. See Note 9 - Commitments and Contingencies for additional information regarding the Company's adverse purchase commitment liability.

Consigned inventory is held at third-party locations, including the Company's contract manufacturing partners and customers. The Company retains title to the inventory until purchased by the third-party. Consigned inventory, consisting of raw materials and finished goods, was $5.3 million and $3.0 million at September 30, 2011 and December 31, 2010.

The Company recorded the following charges associated with the valuation of inventory, inventory deposit and the adverse purchase commitment liability (in thousands):



	For the Three Months Ended				For the Nine Months Ended
	September 30,				September 30,
	2011		2010		2011		2010
Inventory, net	$	815	$	186	$	1,637	$	1,003
Inventory deposit, net	394		686		802		1,522
Adverse purchase commitments	28		203		825		264

Note 6 — Accrued Restructuring

Accrued restructuring, which is included in other accrued liabilities in the accompanying Consolidated Balance Sheets as of September 30, 2011 and December 31, 2010, consisted of the following (in thousands):



	September 30, 2011		December 31, 2010
2009 restructuring charges	$	78	$	240
Fourth quarter 2010 restructuring charge	427		1,814
Continuous Computing restructuring charge	3,507		—
Total accrued restructuring charges	$	4,012	$	2,054

The Company evaluates the adequacy of the accrued restructuring charges on a quarterly basis. The Company records certain reclassifications between categories and reversals to the accrued restructuring charges based on the results of the evaluation. The total accrued restructuring charges for each restructuring event are not affected by reclassifications. Reversals are recorded in the period in which the Company determines that expected restructuring obligations are less than the amounts accrued.

2009 Restructurings

During the second and fourth quarters of 2009, the Company undertook various restructuring activities. To date, the Company has incurred restructuring costs of $3.7 million which has consisted primarily of severance and related payroll costs, healthcare benefits, relocation incentives, and equipment moving costs.

The following table summarizes the changes to the 2009 restructuring costs for the nine months ended September 30, 2011 (in thousands):



	Employee Termination and Related Costs
Balance accrued as of December 31, 2010	$	240
Additions	61
Reversals	(78		)
Expenditures	(145		)
Balance accrued as of September 30, 2011	$	78

Fourth Quarter 2010 Restructuring

During the fourth quarter of 2010, the Company initiated a restructuring plan that included the elimination of 67 positions at various locations throughout the company. The primary focus of this initiative was to align expenses with the Company’s 2011 operating plan objectives, which included the need to reduce the Company's infrastructure associated with the maturity of the Company's legacy communication networks products, as well as the consolidation of its contract manufacturers. To date, the Company has incurred total fourth quarter 2010 restructuring costs of $2.0 million, which consisted of severance and related payroll costs as well as healthcare benefits. The Company expects all activities associated with this restructuring plan to be substantially completed by the end of 2011.

During the three and nine months ended September 30, 2011, the Company recorded expense of $21,000 and a net reversal of $6,000 for previously estimated amounts associated with the fourth quarter 2010 restructuring plan. The activity reflects the re-assignment of employees initially included in the plan and changes in previously estimated amounts for employee severance and associated payroll costs.

The following table summarizes the changes to the fourth quarter 2010 restructuring costs during the nine months ended September 30, 2011 (in thousands):



	Employee Termination and Related Costs
Balance accrued as of December 31, 2010	$	1,814
Additions	248
Reversals	(254		)
Expenditures	(1,381		)
Balance accrued as of September 30, 2011	$	427

Continuous Computing Related Restructuring

During the second quarter of 2011, the Company initiated a restructuring plan associated with the acquisition of Continuous Computing. This plan includes multiple phases and the full scope of the plan is expected to be finalized by the end of the fourth quarter. At the end of the third quarter the plan included the identification of 114 positions at various locations that will be eliminated. The primary intent of these integration activities was to better align our operations and headcount with expected synergies to be realized as a direct result of the Company's acquisition of Continuous Computing, as more fully discussed in Note 2 - Acquisition of Continuous Computing Corporation. In addition, these integration activities align with the Company's corporate objective to transfer a significant portion of its research and development activities to offshore lower cost geographies. During the three and nine months ended September 30, 2011, the Company recorded restructuring costs of $3.4 million and $4.3 million, which consisted of severance, healthcare benefits, related payroll costs and legal fees. The Company expects additional charges associated with the restructuring plan to be substantially completed by the first quarter of 2012.

The following table summarizes activity associated with the Continuous Computing restructuring initiative during the nine months ended September 30, 2011 (in thousands):



	Employee Termination and Related Costs
Additions	$	4,316
Reversals	(5		)
Expenditures	(804		)
Balance accrued as of September 30, 2011	$	3,507

Note 7 — Short-Term Borrowings

Silicon Valley Bank

On November 1, 2011 the Company entered into a $40.0 million secured revolving line of credit agreement (the “Agreement”) with Silicon Valley Bank (“SVB”) to replace the Company's existing line of credit with SVB. The new Agreement matures on September 30, 2014 and is subject to a borrowing base and secured by the Company's accounts receivable. The secured revolving credit facility is available for cash borrowings, with $20.0 million of the Agreement available on a non-formula basis and the remaining $20.0 million subject to a borrowing formula based upon eligible accounts receivable. Eligible accounts receivable (as defined in the Agreement) include 100% of US and 65% of foreign (including Continuous Computing) accounts receivable, limited to concentration by certain customers, not greater than 60 days past due and no greater than 120 days from original invoice date. Borrowings under the Agreement bear interest at the prime rate, which was 3.25% as of September 30, 2011, or LIBOR, which was 0.24% as of September 30, 2011, plus 1.25%, with either interest rate determined by the Company's election. The Company is required to make interest payments monthly. The Company is further required to pay a commitment fee equal to $35,000 on the closing date of the agreement and annually thereafter and to pay quarterly in arrears an unused facility fee in an amount equal to 0.375% per year of the unused amount of the facility.

The Agreement requires the Company to make and maintain certain financial covenants, representations, warranties and other agreements that are customary in credit agreements of this type. The Agreement also requires the Company to maintain the following specific financial covenants:


•	minimum quarterly liquidity ratio of 1.25 during the term of the agreement. The liquidity ratio is defined as cash, cash equivalents and short term investments (with cash and cash equivalents held by the Company's foreign subsidiaries not to exceed $10.0 million and excluding any investments held by the Company's foreign

subsidiaries) plus eligible accounts receivable (as defined in the Agreement), divided by the sum of obligations to SVB;

•

minimum two quarter positive rolling EBITDA (earnings before interest, taxes, depreciation, amortization, stock based compensation, goodwill impairment charges, and non cash restructuring and integration expenses associated with the acquisition of Continuous Computing) of $3.0 million beginning with the quarter ending December 31, 2012. Prior to December 31, 2012, the minimum two quarter rolling EBITDA requirements increase on a quarterly basis with the quarter ending September 30, 2011 as follows: ($8.3) million, ($8.5) million, ($2.1) million, ($0.5) million and $2.0 million; and


•	capital expenditures may not exceed $11.0 million in fiscal 2011 and $8.0 million in subsequent fiscal years.

As of September 30, 2011 and December 31, 2010, the Company had no outstanding balances or letters of credit issued on its behalf under the agreement that existed on those dates.

Note 8 - Convertible Debt

2013 Convertible Senior Notes

During February 2008, the Company offered and sold in a public offering pursuant to the shelf registration statement $55.0 million aggregate principal amount of 2.75% convertible senior notes due 2013 (the “2013 convertible senior notes”). Interest is payable semi-annually, in arrears, on each August 15 and February 15, beginning on August 15, 2008, to the holders of record at the close of business on the preceding August 1 and February 1, respectively. The 2013 convertible senior notes mature on February 15, 2013. Holders of the 2013 convertible senior notes may convert their notes into a number of shares of the Company's common stock determined as set forth in the indenture governing the notes at their option on any day to and including the business day prior to the maturity date. The 2013 convertible senior notes are initially convertible into 76.7448 shares of the Company's common stock per $1,000 principal amount of the notes (which is equivalent to a conversion price of approximately $13.03 per share), subject to adjustment upon the occurrence of certain events. Upon the occurrence of a fundamental change, holders of the 2013 convertible senior notes may require the Company to repurchase some or all of their notes for cash at a price equal to 100% of the principal amount of the notes being repurchased, plus accrued and unpaid interest, if any. In addition, if certain fundamental changes occur, the Company may be required in certain circumstances to increase the conversion rate for any 2013 convertible senior notes converted in connection with such fundamental changes by a specified number of shares of the Company's common stock. The 2013 convertible senior notes are the Company's general unsecured obligations and rank equal in right of payment to all of its existing and future senior indebtedness, and senior in right of payment to the Company's future subordinated debt. The Company's obligations under the 2013 convertible senior notes are not guaranteed by, and are effectively subordinated in right of payment to all existing and future obligations of its subsidiaries and are effectively subordinated in right of payment to its future secured indebtedness to the extent of the assets securing such debt.

In connection with the issuance of the 2013 convertible senior notes, the Company entered into a capped call transaction with a hedge counterparty. The capped call transaction is expected to reduce the potential dilution upon conversion of the 2013 convertible senior notes in the event that the market value per share of the Company's common stock, as measured under the terms of the capped call transaction, at the time of exercise is greater than the strike price of the capped call transaction of approximately $13.03. The strike price of the capped call transaction corresponds to the initial conversion price of the 2013 convertible senior notes and is subject to certain adjustments similar to those contained in the notes. The capped call transaction provides for net-share settlement in the event that the volume-weighted average price per share of the Company's common stock on the settlement date exceeds the strike price of approximately $13.03 per share. In such event, the hedge counterparty would deliver to the Company a number of shares equal to a formula determined by the quotient resulting from (a) the shares being settled times the difference between the volume-weighted average price on the settlement date and the strike price of approximately $13.03 per share, divided by (b) the volume-weighted average price on the settlement date. If the volume-weighted average price on the settlement date equals or exceeds the cap price of $23.085 per share, the difference in (a) would be $23.085 minus $13.03, or $10.055. If the market value per share of the Company's common stock exceeds the cap price of the capped call transaction of $23.085, as measured under the terms of the capped call transaction, the dilution mitigation under the capped call transaction will be limited, which means that there would be dilution to the extent that the then market value per share of the Company's common stock exceeds the cap price of the capped call transaction. Although the capped call transaction covers approximately 4.2 million shares, in order to facilitate an orderly settlement process, the shares are divided into tranches of approximately 211,000 shares each, settling on the twenty consecutive trading days prior to the date of maturity of the Company's convertible notes. Thus, on each settlement date, approximately 211,000 shares would be settled, assuming a volume-weighted average price on such settlement date of $23.085. Assuming a volume-weighted average price of $23.085, the

hedge counterparty would deliver to the Company approximately 91,904 shares on each settlement date, calculated as follows: 211,000 x ($23.085 - $13.03)/$23.085 = 91,904.

The following table outlines the effective interest rate, contractually stated interest costs, and costs related to the amortization of issuance costs for the Company's 2013 convertible senior notes:



	For the Three Months Ended						For the Nine Months Ended
	September 30,						September 30,
	2011			2010			2011			2010
Effective interest rate	3.64		%	3.64		%	3.64		%	3.64		%
Contractually stated interest costs	$	344		$	344		$	1,032		$	1,032
Amortization of interest costs	$	112		$	112		$	336		$	336

As of September 30, 2011 and December 31, 2010, the Company had outstanding 2013 convertible senior notes with a face value of $50.0 million. As of September 30, 2011 and December 31, 2010, the fair value of the Company's 2013 convertible senior notes was $44.9 million and $49.1 million.

Note 9 - Commitments and Contingencies

Adverse Purchase Commitments

The Company is contractually obligated to reimburse its contract manufacturers for the cost of excess inventory used in the manufacture of the Company's products, if there is no alternative use. This liability, referred to as adverse purchase commitments, is provided for in other accrued liabilities in the accompanying Consolidated Balance Sheets. Estimates for adverse purchase commitments are derived from reports received on a quarterly basis from the Company's contract manufacturers. Increases to this liability are charged to cost of goods sold. When and if the Company takes possession of inventory reserved for in this liability, the liability is transferred from other accrued liabilities to the excess and obsolete inventory valuation allowance. Adverse purchase commitments amounted to $1.1 million and $1.3 million at September 30, 2011 and December 31, 2010.

Guarantees and Indemnification Obligations

As permitted under Oregon law, the Company has agreements whereby it indemnifies its officers, directors and certain finance employees for certain events or occurrences while an officer, director or employee is or was serving in such capacity at the request of the Company. The term of the indemnification period is for the officer's, director's or employee's lifetime. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited; however, the Company has a Director and Officer insurance policy that limits its exposure and enables the Company to recover a portion of any future amounts paid. To date, the Company has not incurred any costs associated with these indemnification agreements and, as a result, management believes the estimated fair value of these indemnification agreements is minimal. Accordingly, the Company has not recorded any liabilities for these agreements as of September 30, 2011.

The Company enters into standard indemnification agreements in its ordinary course of business. Pursuant to these agreements, the Company indemnifies, holds harmless, and agrees to reimburse the indemnified party for losses suffered or incurred by the indemnified party, generally the Company's business partners or customers, in connection with patent, copyright or other intellectual property infringement claims by any third party with respect to the Company's current products, as well as claims relating to property damage or personal injury resulting from the performance of services by us or the Company's subcontractors. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is generally limited. Historically, the Company's costs to defend lawsuits or settle claims relating to such indemnity agreements have been minimal and accordingly management believes the estimated fair value of the agreements is immaterial.

The Company provides for the estimated cost of product warranties at the time it recognizes revenue. Products are generally sold with warranty coverage for a period of 24 months after shipment. Parts and labor are covered under the terms of the warranty agreement. The workmanship of the Company's products produced by contract manufacturers is covered under warranties provided by the contract manufacturer for a specified period of time ranging from 12 to 15 months. The warranty provision is based on historical experience. The Company engages in extensive product quality programs and processes, including actively monitoring and evaluating the quality of its components suppliers; however ongoing failure rates, material usage and service delivery costs incurred in correcting product failure, as well as specific product class failures out of the Company's baseline experience affect the estimated warranty obligation. If actual product failure rates, material usage or service delivery costs differ from estimates, revisions to the estimated warranty liability would be required.

The following is a summary of the change in the Company's warranty accrual reserve (in thousands):



	For the Nine Months Ended
	September 30,
	2011			2010
Warranty liability balance, beginning of the period	$	3,025		$	2,810
Product warranty accruals	2,205			2,739
Continuous Computing beginning balance	817			—
Utilization of accrual	(2,345		)	(2,678		)
Warranty liability balance, end of the period	$	3,702		$	2,871

The warranty liability balance is included in other accrued liabilities in the accompanying Consolidated Balance Sheets as of September 30, 2011 and December 31, 2010.

Note 10 — Basic and Diluted Net Income per Share

A reconciliation of the numerator and the denominator used to calculate basic and diluted net income per share is as follows (in thousands, except per share amounts):



	For the Three Months Ended				For the Nine Months Ended
	September 30,				September 30,
	2011		2010		2011		2010
Numerator — Basic
Net income, basic	$	2,765	$	2,171	$	2,426	$	1,713
Numerator — Diluted
Net income, basic	$	2,765	$	2,171	$	2,426	$	1,713
Interest on convertible notes, net of tax benefit ^(A)	—		—		—		—
Net income, diluted	$	2,765	$	2,171	$	2,426	$	1,713
Denominator — Basic
Weighted average shares used to calculate net income
per share, basic	26,432		24,212		25,038		24,088
Denominator — Diluted
Weighted average shares used to calculate net income
per share, basic	26,432		24,212		25,038		24,088
Effect of escrow shares	1,242		—		414		—
Effect of convertible notes ^(A)	—		—		—		—
Effect of dilutive restricted stock ^(B)	84		141		88		153
Effect of dilutive stock options ^(B)	62		47		55		69
Weighted average shares used to calculate net income
per share, diluted	27,820		24,400		25,595		24,310
Net income per share
Basic	$	0.10	$	0.09	$	0.10	$	0.07
Diluted ^{(A), (B)}	$	0.10	$	0.09	$	0.09	$	0.07



(A)	For the three and nine months September 30, 2011 and 2010, 3.8 million as-if converted shares associated with the Company's 2013 convertible senior notes were excluded from the calculation as their effect would have been anti-dilutive.
(B)	For the three and nine months ended September 30, 2011 and 2010, the following equity awards, by type, were excluded from the calculation, as their effect would have been anti-dilutive (in thousands):



	For the Three Months Ended		For the Nine Months Ended
	September 30,		September 30,
	2011	2010	2011	2010
Stock options	2,953	2,183	2,962	2,260
Restricted stock	1,404	—	1,400	—
Total equity award shares excluded	4,357	2,183	4,362	2,260

Note 11 — Income Taxes

The Company's effective tax rate for the three months ended September 30, 2011 and 2010, differs from the statutory rate primarily due to a full valuation allowance provided against its United States (“U.S.”) net deferred tax assets, Canadian research and experimental development claims, the impact of stock option expense, the amortization of goodwill for tax purposes and taxes on foreign income that differ from the U.S. tax rate. In addition to the aforementioned items, the effective tax rate for the three months ended September 30, 2011 differs from the statutory rate due to a partial release of the Company's valuation allowance provided against its U.S. net deferred tax assets as a result of the purchase accounting associated with the acquisition of Continuous Computing. Purchase accounting includes the establishment of a deferred tax liability due to the book tax basis differences related to specifically identified non-goodwill intangibles resulting from the acquisition. The net liability from the acquisition created an additional source of income to utilize our deferred tax assets. As such, authoritative guidance requires the Company to record the impact on the Company's deferred tax assets outside of purchase accounting. An income tax benefit of $7.6 million was recognized upon the partial valuation allowance release.

The Company utilizes the asset and liability method of accounting for income taxes. The Company records deferred tax assets to the extent it believes these assets will more likely than not be realized. In making such determination, the Company considers all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies, and recent financial performance. Based upon the Company's review of all positive and negative evidence, including its projected three year U.S. cumulative pre-tax book loss and taxable loss, it concluded that a full valuation allowance should continue to be recorded against its U.S. net deferred tax assets at September 30, 2011. In certain other foreign jurisdictions, where the Company does not have cumulative losses or other negative evidence, the Company had net deferred tax assets of $18.3 million at September 30, 2011 and $16.6 million at December 31, 2010. In the future, if the Company determines that it is more likely than not that it will realize its U.S. net deferred tax assets, it will reverse the applicable portion of the valuation allowance and recognize an income tax benefit in the period in which such determination is made.

The Company's unrecognized tax benefits and related interest and penalties during the three months ended September 30, 2011 increased by $2.2 million due to uncertain tax positions associated with the acquisition of Continuous Computing as part of the purchase accounting adjustments which was partially offset by a $1.1 million decrease related to the effective settlement of an examination by the Canadian Revenue Agency ("CRA"). The ending balance for the unrecognized tax benefits was approximately $2.0 million at September 30, 2011. The related interest and penalties were $180,000 and $154,000, respectively. The uncertain tax positions that are reasonably possible to decrease in the next twelve months are insignificant.

The CRA completed an examination of the Company for tax years 2006 through 2008 during the three months ended September 30, 2011. During the three months ended December 31, 2010, the CRA issued proposed adjustment notices. During the three months ended June 30, 2011, the CRA reissued the proposed adjustments and the Company, as of June 30, 2011, was in the process of reaching an agreement with CRA with respect to the tax carry-forward attributes to be utilized in future tax years. The Company agreed to the proposed adjustments and effectively settled the examination during the three months ended September 30, 2011. The effective settlement did not have a significant impact on the Company's financial statements. The Company is not currently under examination by tax authorities in any other jurisdictions.

The Company is currently under tax examination in India from the acquisition of Continuous Computing. The periods covered under examination are the Company's financial years 2004 through 2008. The examination is in various stages of appellate proceedings and all material uncertain tax positions associated with the examination have been taken into account in the ending balance of the unrecognized tax benefits at September 30, 2011. The Company is not under examination by tax authorities in any other jurisdictions.

Note 12 — Stock-based Compensation

On June 15, 2011 the Company's stockholders approved an amendment to the RadiSys Corporation 2007 Stock Plan. The amendment increased the number of shares of the Company's common stock reserved and authorized for issuance under the

plan from 3.7 million to 4.7 million.

On May 3, 2011 the Company registered 600,000 shares of its common stock under the RadiSys Corporation Inducement Stock Plan for CCPU Employees (the "CCPU Plan"). The CCPU Plan was adopted without shareholder approval in reliance upon the exception provided under Nasdaq Listing Rule 5635(c)(4) relating to awards granted in connection with the hiring of new employees, including grants to transferred employees in connection with a merger or acquisition. Awards under the CCPU Plan are made only to employees of Continuous Computing or its subsidiaries and became effective upon the completion of the acquisition. The CCPU Plan provides for the issuance of stock options, restricted shares and restricted stock units.

The Company assumed the stock plans of Continuous Computing during the three and nine months ended September 30, 2011. Under the terms of the Company's merger agreement with Continuous Computing, options outstanding under these plans were converted to options to purchase shares of the Company's common stock. Options issued under these plans vest over four years from the original grant date and have an expiration date of 10 years from the original grant date. The exercise price of each converted option is equal to the product of the original exercise price and the original number of options granted divided by the number of converted options received. These stock plans have been suspended and no future awards will be granted under these plans. A total of 322,000 shares of common stock have been authorized and issued under the Continuous Computing plans.

In accordance with the merger agreement the options were required to be converted into multiple awards on the acquisition date, with the resulting awards being non-contingent and contingent options. Both the non-contingent and contingent awards continue to vest under the original service conditions of the awards. However, the contingent awards contain post-vesting restrictions tied to payment of certain merger contingencies such as the earn-out and indemnification agreements. The assumed options were valued using a Black-Scholes option-pricing model. In addition, we utilized the Finnerty Asian Put Option Approach to estimate the discount associated with the post-vesting restrictions for the contingent options. The resulting discount applied was 10%.

The following table summarizes awards granted and assumed under all of the Company's stock plans (in thousands):



	For the Three Months Ended		For the Nine Months Ended
	September 30,		September 30,
	2011	2010	2011	2010
Stock options	242	20	303	78
Restricted stock	497	79	693	113
Continuous Computing assumed options	322	—	322	—
Total	1,061	99	1,318	191

Stock-based compensation was recognized and allocated as follows (in thousands):



	For the Three Months Ended				For the Nine Months Ended
	September 30,				September 30,
	2011		2010		2011		2010
Cost of sales	$	217	$	194	$	572	$	640
Research and development	464		302		1,070		1,010
Selling, general and administrative	1,220		944		2,396		3,230
Total	$	1,901	$	1,440	$	4,038	$	4,880

Note 13 — Common Stock Repurchase Program

In December 2010, the Board of Directors authorized the repurchase of up to $20 million of the Company's common stock through open-market transactions and privately negotiated transactions from time to time at the discretion of management. The duration of the repurchase program is two years, although it may be extended, suspended or discontinued without prior notice, at the discretion of the Board. Under the program, the Company repurchased common stock with a value of $3.9 million during the nine months ended September 30, 2011, leaving $16.1 million available for future repurchases of the Company's common stock.

Note 14 — Hedging

The Company’s activities expose it to a variety of market risks, including the effects of changes in foreign currency exchange rates. The Company manages these risks through the use of forward exchange contracts, designated as foreign currency cash flow hedges, in an attempt to reduce the potentially adverse effects of foreign currency exchange rate fluctuations that occur in the normal course of business. As such, the Company’s hedging activities are all employed solely for risk management purposes. All hedging transactions are conducted with, in the opinion of management, financially stable and reputable financial institutions. For the year ended December 31, 2010 and for the nine months ended September 30, 2011, the only hedge instruments executed by the Company are associated with its exposure to fluctuations in the Canadian Dollar which result from obligations such as payroll and rent paid in Canadian Dollars.

These derivatives are recognized on the balance sheet at their fair value. Unrealized gain positions are recorded as other current assets and unrealized loss positions are recorded as other current liabilities. Changes in the fair values of the outstanding derivatives that are highly effective are recorded in other comprehensive income (loss) until net income is affected by the variability of the cash flows of the hedged transaction. Typically, hedge ineffectiveness could result when the amount of the Company’s hedge contracts exceed the Company’s forecasted or actual transactions for which the hedge contracts were designed to hedge. Once a hedge contract matures the associated gain (loss) on the contract will remain in other comprehensive income (loss) until the underlying hedged transaction affects net income (loss), at which time the gain (loss) will be recorded to the expense line item being hedged, which is primarily R&D. The Company only enters into derivative contracts in order to hedge foreign currency exposure. If the Company entered into a contract for speculative reasons or if the Company’s current hedge position becomes ineffective, changes in the fair values of the derivatives would be recognized in earnings in the current period.

During the three months ended September 30, 2011, the Company did not enter into any new foreign currency contracts, while during the nine months ended September 30, 2011, the Company entered into 12 new foreign currency forward contracts, with total contractual values of $2.2 million. During the three and nine months ended September 30, 2010, the Company entered into 12 and 44 new foreign currency forward contracts, with total contractual values of $2.3 million and $6.8 million. As of September 30, 2011, the maximum term over which the Company is hedging exposures to the variability of cash flows for its forecasted and recorded transactions is 14 months.

The Company assesses, both at the inception of the hedge and on an ongoing basis, whether the derivatives that are used in hedging transactions have been highly effective in offsetting changes in the cash flows of hedged items and whether those derivatives are expected to remain highly effective in future periods. For the three and nine months ended September 30, 2011 and for the year ended December 31, 2010, the Company had no hedge ineffectiveness.

A summary of the aggregate contractual or notional amounts, balance sheet location and estimated fair values of derivative financial instruments designated as cash flow hedges at September 30, 2011 is as follows (in thousands):



	Contractual/Notional Amount		Consolidated Balance Sheet Classification	Estimated Fair Value
Type of Cash Flow Hedge	Contractual/Notional Amount		Consolidated Balance Sheet Classification	Asset		(Liability)
Foreign currency forward exchange contracts	$	8,281	Other accrued liabilities	$	—	$	(264	)

Contractual/Notional

Amount

Consolidated Balance Sheet

Classification

Estimated Fair Value

Type of Cash Flow Hedge

Asset

(Liability)

Foreign currency forward exchange contracts

12,547

Other current assets

432

—

The effect of derivative instruments on the consolidated financial statements for the three months ended September 30, 2011 was as follows (in thousands):



	Effective Portion						Ineffective Portion
Type of Cash Flow Hedge	Hedge Loss Recognized in Other Comprehensive Income			Consolidated Statement of Operations Classification of Gain (Loss) Reclassified from Accumulated Other Comprehensive Income	Hedge Gain Reclassified from Accumulated Other Comprehensive Income		Consolidated Statement of Operations Classification of Gain (Loss) Recognized	Hedge Gain (Loss) Recognized
Foreign currency forward exchange contracts	$	(660	)
				Cost of sales	$	18	None	$	—
				Research and development	109		None	—
				Selling, general and administrative	52		None	—

The effect of derivative instruments on the consolidated financial statements for the nine months ended September 30, 2011 was as follows (in thousands):



	Effective Portion						Ineffective Portion
Type of Cash Flow Hedge	Hedge Loss Recognized in Other Comprehensive Income			Consolidated Statement of Operations Classification of Gain (Loss) Reclassified from Accumulated Other Comprehensive Income	Hedge Gain Reclassified from Accumulated Other Comprehensive Income		Consolidated Statement of Operations Classification of Gain (Loss) Recognized	Hedge Gain (Loss) Recognized
Foreign currency forward exchange contracts	$	(603	)
				Cost of sales	$	53	None	$	—
				Research and development	339		None	—
				Selling, general and administrative	126		None	—

The effect of derivative instruments on the consolidated financial statements for the three months ended September 30, 2010 was as follows (in thousands):



	Effective Portion					Ineffective Portion
Type of Cash Flow Hedge	Hedge Gain Recognized in Other Comprehensive Income		Consolidated Statement of Operations Classification of Gain (Loss) Reclassified from Accumulated Other Comprehensive Income	Hedge Gain Reclassified from Accumulated Other Comprehensive Income		Consolidated Statement of Operations Classification of Gain (Loss) Recognized	Hedge Gain (Loss) Recognized
Foreign currency forward exchange contracts	$	134
			Cost of sales	$	21	None	$	—
			Research and development	145		None	—
			Selling, general and administrative	34		None	—

The effect of derivative instruments on the consolidated financial statements for the nine months ended September 30, 2010 was as follows (in thousands):



	Effective Portion						Ineffective Portion
Type of Cash Flow Hedge	Hedge Loss Recognized in Other Comprehensive Income			Consolidated Statement of Operations Classification of Gain (Loss) Reclassified from Accumulated Other Comprehensive Income	Hedge Gain Reclassified from Accumulated Other Comprehensive Income		Consolidated Statement of Operations Classification of Gain (Loss) Recognized	Hedge Gain (Loss) Recognized
Foreign currency forward exchange contracts	$	(484	)
				Cost of sales	$	80	None	$	—
				Research and development	543		None	—
				Selling, general and administrative	125		None	—

Over the next twelve months, the Company expects to reclassify into earnings a loss of approximately $218,000, currently recorded as other comprehensive income, as a result of the maturity of currently held forward exchange contracts.

The bank counterparties in these contracts expose the Company to credit-related losses in the event of their nonperformance. However, to mitigate that risk, the Company only contracts with counterparties who meet its minimum requirements regarding counterparty credit worthiness. In addition, the Company monitors credit ratings, credit spreads and potential downgrades prior to entering into any new hedging contracts.

Note 15 — Segment Information

The Company is one operating segment. This is because results of operations are provided and analyzed at a company-wide level. Key resources, decisions, and assessment of performance are also analyzed on a company-wide level. This is the way management organizes the Company for making operating decisions and assessing financial performance by the chief operating decision maker.

Revenues on a product and services basis are as follows (in thousands):



	For the Three Months Ended				For the Nine Months Ended
	September 30,				September 30,
	2011		2010		2011		2010
Hardware	$	89,751	$	68,770	$	231,349	$	198,169
Software royalties and licenses	3,543		4,029		9,534		12,470
Software maintenance	1,635		722		4,763		2,758
Engineering and other services	2,947		1,646		5,713		4,088
Total revenues	$	97,876	$	75,167	$	251,359	$	217,485

Generally, the Company’s customers are not the end-users of its products. The Company ultimately derives its revenues from two end markets as follows (in thousands):



	For the Three Months Ended				For the Nine Months Ended
	September 30,				September 30,
	2011		2010		2011		2010
Next Generation Communication Networks Products	$	53,626	$	30,857	$	116,155	$	90,093
Legacy Communication Networks Products	23,717		24,575		76,711		71,073
Total Communication Networks Products	77,343		55,432		192,866		161,166
Medical Products	8,447		8,403		21,291		24,738
Other Commercial Products	12,086		11,332		37,202		31,581
Total Commercial Products	20,533		19,735		58,493		56,319
Total revenues	$	97,876	$	75,167	$	251,359	$	217,485

Information about the Company’s geographic revenues and long-lived assets by geographical area is as follows (in

thousands):

Geographic Revenues



	For the Three Months Ended				For the Nine Months Ended
	September 30,				September 30,
	2011		2010		2011		2010
United States	$	29,693	$	24,468	$	72,050	$	74,019
Other North America	495		271		1,087		712
North America	30,188		24,739		73,137		74,731
Europe, the Middle East and Africa (“EMEA”)	21,337		20,937		63,133		59,961
Asia Pacific	46,351		29,491		115,089		82,793
Total	$	97,876	$	75,167	$	251,359	$	217,485

Long-lived assets by Geographic Area



	September 30, 2011		December 31, 2010
Property and equipment, net
United States	$	7,929	$	6,404
Other North America	610		716
EMEA	696		30
Asia Pacific	3,036		2,337
Total property and equipment, net	$	12,271	$	9,487
Goodwill
United States	$	25,995	$	—
EMEA	160		160
Total goodwill	$	26,155	$	160
Intangible assets, net
United States	$	86,845	$	1,552
Other North America	432		912
EMEA	1,809		4,624
Total intangible assets, net	$	89,086	$	7,088

The following customers accounted for more than 10% of the Company's total revenues:



	For the Three Months Ended				For the Nine Months Ended
	September 30,				September 30,
	2011		2010		2011		2010
Nokia Siemens Networks	29.1	%	42.0	%	40.2	%	39.2	%
NEI	NA		NA		NA		10.0	%

As of September 30, 2011 and December 31, 2010, Nokia Siemens Networks accounted for 31.6% and 32.0% of the Company's total accounts receivable balance.

Note 16 — Subsequent Event

On November 1, 2011, the Company entered into a $40.0 million secured revolving line of credit agreement with Silicon Valley Bank to replace the Company's existing line of credit agreement with Silicon Valley Bank. Refer to Note 7 - Short-Term Borrowings for a compete description of the terms and conditions of the new line of credit.

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Introduction and Overview

Radisys Corporation is a leading provider of innovative hardware and software platforms for Next Generation IP-based wireless, wireline and video networks. Our products include our market leading Advanced Telecommunications Computing Architecture ("ATCA") and Internet Protocol ("IP") Media Server platforms as well as application software for new IP-based communications services. These products enable customers to bring new high-value products and services to market with speed and flexibility using the latest technologies and with a lower investment. Radisys products are used in a wide variety of applications including 3G/4G/long term evolution ("LTE") wireless voice, data and video, Femtocell, Voice over Internet Protocol ("VoIP") and Video over IP communications and conferencing, Voice Quality Enhancement ("VQE"), and secure defense communications. Unless required by context, or as otherwise indicated, “we,” “us,” “our” and similar terms, as well as references to the “Company” and “Radisys” refer to Radisys Corporation and include all of our consolidated subsidiaries.

In July 2011, we acquired Continuous Computing Corporation ("Continuous Computing"), a developer of communications systems consisting of highly integrated ATCA platforms and Trillium protocol software coupled with software Professional Services to complement their full solution offering. Continuous Computing's key customer applications include 3G and 4G Wireless infrastructure, Small Cell base stations, Traffic Management, Internet Offload and Network Security. The acquisition is expected to accelerate the Company's strategy to deliver more differentiated platforms and solutions. Continuous Computing also brings expansion into high growth markets with many new customers, creating meaningful customer diversification.

The acquisition also brings us a new combined leadership team. Mike Dagenais, previously Continuous Computing's President and CEO, is now the Company's Chief Executive Officer. Mr. Dagenais brings over 25 years of experience in driving transformational change in the telecommunications industry, including prior executive and management positions at Optical Solutions, Convergent Networks, Lucent, and Nortel.

Our Markets

We provide application-ready software and hardware platforms to the following two markets:

Communication Networks

The communications networks market is comprised of two product categories: Next Generation and Legacy Communication Networks products. Included in the Next Generation Communication Networks product group are our ATCA, Media Server, Trillium Software, and corresponding professional services. Included in the Legacy Communication Networks product group are our legacy wireless products and all other Communication Networks revenues that are not included in the Next Generation Communication Networks group.

We enable applications in the ATCA market such as 3G/4G/LTE wireless voice, data and video, deep packet inspection (“DPI”), Femtocell, mobile video, VoIP and Video over IP communications and conferencing, VQE, worldwide interoperability for microwave access ("WiMax"), IP Video ("IPTV"), satellite, security and secure defense communications, among others.

We enable applications in the media server market such as conferencing, interactive voice and video network services, transcoding and VQE.

Our Trillium software protocols are the underlying signaling infrastructure that enables the communication between core network products and wireless communications devices. Trillium software protocols encompass all of the wireless communications software required for mobile devices to interwork with 3G and 4G/LTE core network providers.

Commercial Systems

The commercial market consists primarily of solutions and systems for the medical imaging, test and measurement, and aerospace and defense submarkets. Specific applications include:


•	Aerospace and defense: ruggedized terminals, small unmanned ground vehicles and other military applications


•	Small form factor communications


•	Medical imaging: X-Ray machines, MRI scanners, CT scan imaging equipment and ultrasound equipment

Market Drivers

We believe there are a number of fundamental drivers for growth in our target markets, including:

•

The increasing desire by original equipment manufacturers (“OEMs”) to utilize standards-based, merchant-supplied platforms to develop their systems. We believe more OEMs will see the advantage of combining their internal development efforts with merchant-supplied platforms from partners like Radisys to deliver a larger number of more valuable new products to get to market faster at a lower total cost.


•	Meaningful traffic growth in the network will require high density, high speed, and high performance systems. Radisys' ATCA 10G and 40G systems provide 2 to 10 times the density when compared to legacy systems.


•	The industry structure is changing in that Telecommunications Equipment Manufactures (“TEMs”) are focusing more on applications and network operations, while operators and carriers are focusing more on service and content delivery. Radisys is benefiting from these market shifts and is providing more platforms and solutions to TEMs.


•	Continued emergence, growth and evolution of applications utilizing 4G or LTE, WiMAX networks, Femtocell Gateways, VoIP, IP Communications, Mobile Video, Video Gateways, Video Conferencing, IPTV, IP interactive voice response ("IVR")/ Voice-to-text, IP Messaging, Network Surveillance, Network Security, Aerospace and Defense and Packet Inspection, all of which are supported by ATCA.

Our Solutions

We provide our customers with advanced software and hardware platforms that enable them to focus their resources and development efforts on their key areas of differentiation, bring more products and services to market with speed and flexibility, using the latest technologies with reduced product and delivery costs.

Our customers select our solutions because we provide:

Superior technology. We have been the first to market with many technological advancements such as the industry's first 10G common managed platforms, and we are a leader in areas such as IP conferencing and COM Express new product development. Our design capabilities extend to media processing and central processing units (“CPUs”), graphics processing units and network processing units (“NPUs”), digital signal processing and integrated software managed platforms, such as media and application servers, as well as many other areas.

Experienced technical resources. Our research and development ("R&D") staff has extensive experience in designing complex hardware and software solutions for the communications and commercial markets. We believe that our customers benefit from the broad array of IP and solutions that our R&D staff develop and support.

Reduced time to market. We offer standards-based, turn-key solutions such as ATCA and media server solutions for the communication networks market and COM Express solutions for the commercial market. These standards-based solutions combined with our strong technical resources provide our OEM customers with more flexibility and reduced time-to-market than if they developed these solutions internally.

Broad portfolio of products. Our product lines include a large portfolio of solutions including fully integrated platforms and application-ready systems with software rich content. Our product portfolio addresses a large range of customer requirements and applications. We believe that over time many of our customers will increasingly rely on a smaller set of suppliers who can address a broader set of their solution needs.

Long-term customer relationships. We understand what our customers need and work closely with them. Accordingly, we have developed and maintained long-term relationships with many Tier 1 and Tier 2 customers.

Our Strategy

To provide embedded wireless infrastructure solutions aimed at enabling our customers with the innovative and cost effective technologies necessary to solve growing capacity challenges. We believe that our combination of hardware and software expertise, along with our professional service capabilities, creates a compelling and unique offering that our customer's value and our competitors will find hard to duplicate. Our primary focus is the wireless telecom market; however,

we are also targeting other markets where we can add value with our product breadth. These include the defense and aerospace market and the public safety market, which includes police, fire, and security applications. As part of our strategy we will also further leverage our core competencies in hardware design by making renewed investments in medical and other commercial markets, which we expect will provide compelling solutions to our targeted customers while maximizing our infrastructure and developed technologies in these markets.

To develop our offering of higher value platform solutions and services. We continue to focus our investments in developing application-ready platform solutions that incorporate hardware and software developed by us. We intend to increasingly focus our development efforts on providing more software content, positioning us to provide more complete application-ready platforms that provide more value for our customers. The addition of our Trillium product offerings significantly increases the software and network expertise we can provide to our customers. We believe this, combined with our new professional services, will further enhance our strategy to accelerate our customer's efforts to bring their solutions to market as quickly as possible. These new offerings provide an additional revenue opportunity for us as well as new ways for us to collaborate with our customers. We believe revenues from these products have the potential to generate higher average selling prices and higher gross margins relative to the sale of boards or hardware centric platforms.

To leverage our professional service capabilities. We believe we can bring additional value to our customers across all of our product categories by leveraging our unique professional service capabilities. Our tier 2 and tier 3 customer base can benefit significantly by partnering with us as they seek to develop technologies and solutions to the growing wireless capacity issues.

To expand our global customer base. We continue to expand the number of customers that we work with, particularly as more customers become aware of the benefits of standards-based solutions. Our global reach allows us to market our solutions to most of the leading system vendors in our target markets. We are also expanding our customer base through entrance into adjacent markets like aerospace and defense.

To explore new partnerships and strategic acquisitions as a means to build leadership in our target markets. We continue to investigate partnerships and strategic relationships, which can expand the number of solutions we offer and increase our market reach. We also continue to evaluate potential acquisition opportunities to acquire new capabilities, which can help us achieve our strategic goals. For example, in the last five years, we acquired:


•	Continuous Computing, a developer of communications systems consisting of highly integrated ATCA platforms and Trillium protocol software coupled with software professional services;


•	the assets of privately-held Pactolus Communications Software Company ("Pactolus"), a developer of Next Generation IP communications solutions for converged time-division multiplexing/internet protocol ("TDM/IP") and session initiation protocol ("SIP") enabled VoIP networks;


•	certain assets of the Modular Communications Platform Division (“MCPD”) business from Intel Corporation (“Intel”), which included ATCA and compact peripheral component interconnect (“PCI”) product lines; and


•	Convedia Corporation or Convedia®, a closely-held vendor of IP media servers.

Financial Results

For the three and nine months ended September 30, 2011, the acquisition of Continuous Computing had a significant impact on our financial results. The increase in revenues for the three and nine months ended September 30, 2011 was largely attributable to revenues of $15.3 million contributed by Continuous Computing. Operating expenses increased significantly compared to the prior periods as a result of the acquisition; however, we expect these to decrease materially over the next twelve months as we finalize integration activities. Integration activities are proceeding as planned and we expect to continue to incur material restructuring and acquisition-related charges through the first quarter of 2012.

Total revenue for the three and nine months ended September 30, 2011 was $97.9 million and $251.4 million as compared to total revenue of $75.2 million and $217.5 million for the three and nine months ended September 30, 2010. Backlog grew 26.0% during the nine months ended September 30, 2011 to $55.3 million at September 30, 2011 from $43.9 million at December 31, 2010 . Backlog includes all purchase orders scheduled for delivery within 12 months. The increase in revenues for the three and nine months ended September 30, 2011 compared to the same period in 2010 was due to increased revenues

from our Next Generation Communication Networks products, the acquisition of Continuous Computing, and Other Commercial products.

Gross margin as a percentage of revenues was 28.6% for the three and nine months ended September 30, 2011 as compared to 30.3% and 30.1% for the three and nine months ended September 30, 2010. Gross margin as a percentage of revenues was unfavorably impacted by increased amortization of purchased technology, an expected decline in gross margins on our Legacy products, and increased excess and obsolete inventory charges, which was partially offset by increased margins from our Next Generation Communication Networks products .

Net income for the three and nine months ended September 30, 2011 was $2.8 million and $2.4 million compared to net income of $2.2 million and $1.7 million for the three and nine months ended September 30, 2010. For the three and nine months ended September 30, 2011, net income was impacted by increased operating expenses and offset by a higher income tax benefit. Increased operating expenses primarily reflect expenses associated with our acquisition of Continuous Computing and increased restructuring activities. The increase in the income tax benefit reflects the partial reversal of the valuation allowance recorded on our deferred tax assets. The reversal is the direct result of the addition of deferred tax liabilities associated with the acquisition of Continuous Computing during the third quarter of 2011.

Cash and cash equivalents amounted to $55.9 million and $129.1 million at September 30, 2011 and December 31, 2010. The decrease in cash and cash equivalents was primarily due to $81.5 million used for the acquisition of Continuous Computing, capital expenditures of $4.3 million, and repurchases of our common stock for $3.9 million. These cash outflows were offset by cash generated from operating activities of $13.9 million.

Critical Accounting Policies and Estimates

We reaffirm our critical accounting policies and use of estimates as reported in our Annual Report on Form 10-K for the year ended December 31, 2010. There have been no significant changes during the nine months ended September 30, 2011 to the items that we disclosed as our critical accounting policies and estimates in Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2010 except as discussed below.

Contingent Consideration

Results of Operations

The following table sets forth certain operating data as a percentage of revenues for the three and nine months ended September 30, 2011 and 2010:



	For the Three Months Ended				For the Nine Months Ended
	September 30,				September 30,
	2011		2010		2011		2010
Revenues	100.0	%	100.0	%	100.0	%	100.0	%
Cost of sales:
Cost of sales	68.0		67.5		69.2		67.6
Amortization of purchased technology	3.4		2.2		2.2		2.3
Total cost of sales	71.4		69.7		71.4		69.9
Gross margin	28.6		30.3		28.6		30.1
Research and development	13.2		13.1		12.6		13.4
Selling, general, and administrative	15.9		14.9		14.9		15.6
Intangible assets amortization	1.3		0.3		0.6		0.3
Restructuring and acquisition-related charges, net	5.9		(0.3	)	3.3		—
Gain on the liquidation of a foreign subsidiary	(2.1	)	—		(0.8	)	—
Income (loss) from operations	(5.6	)	2.3		(2.0	)	0.8
Interest expense	(0.4	)	(0.6	)	(0.5	)	(0.7	)
Interest income	—		0.1		—		0.3
Other income (expense), net	0.3		(0.1	)	0.1		—
Income (loss) before income tax benefit	(5.7	)	1.7		(2.4	)	0.4
Income tax benefit	(8.5	)	(1.2	)	(3.4	)	(0.4	)
Net income	2.8	%	2.9	%	1.0	%	0.8	%

Comparison of the Three and Nine Months Ended September 30, 2011 and 2010

Revenues

Revenues increased $22.7 million to $97.9 million in the three months ended September 30, 2011 from $75.2 million in the three months ended September 30, 2010. Revenues increased $33.9 million to $251.4 million in the nine months ended September 30, 2011 from $217.5 million in the nine months ended September 30, 2010.

For the three months ended September 30, 2011 and 2010 one customer, Nokia Siemens Networks, accounted for 29.1% and 42.0% of revenues. For the nine months ended September 30, 2011 Nokia Siemens Networks accounted for 40.2% of revenues and no other customers accounted for greater than 10% of revenues. For the nine months ended September 30, 2010 two customers, Nokia Siemens Networks and NEI accounted for 39.2% and 10.0% of revenues. Due to our growing design wins with new customers and acquisitions we expect a continued decline in customer concentration in future periods.

The following table sets forth our revenues by market (in thousands):



	For the Three Months Ended						For the Nine Months Ended
	September 30,						September 30,
	2011		2010		Change		2011		2010		Change
Next Generation Communication Networks Products	$	53,626	$	30,857	73.8	%	$	116,155	$	90,093	28.9	%
Legacy Communication Networks Products	23,717		24,575		(3.5	)	76,711		71,073		7.9
Total Communication Networks Products	77,343		55,432		39.5		192,866		161,166		19.7
Medical Products	8,447		8,403		0.5		21,291		24,738		(13.9	)
Other Commercial Products	12,086		11,332		6.7		37,202		31,581		17.8
Total Commercial Products	20,533		19,735		4.0		58,493		56,319		3.9
Total revenues	$	97,876	$	75,167	30.2	%	$	251,359	$	217,485	15.6	%

Communication Networks Product Group

Revenues in the Communication Networks market increased $21.9 million to $77.3 million for the three months ended September 30, 2011, from $55.4 million for the three months ended September 30, 2010. The increase in revenue for the three months ended September 30, 2011 reflects a $22.8 million increase in Next Generation Communication Networks products and an $858,000 decrease in Legacy Communication Network products. Increased revenues from the Next Generation Communication Networks products reflect a $12.8 million increase in revenues from ATCA products as the result of increased 3G and 4G/LTE infrastructure deployments and a $12.2 million increase in revenue due to the acquisition of Continuous Computing, offset by a $2.5 million decline in revenues from our media server products. Revenues from the Legacy Communication Networks products decreased as the expected decline in revenue from customers migrating to ATCA products more than offset a $3.1 million increase in revenue due to the acquisition of Continuous Computing.

For the nine months ended September 30, 2011, revenues in the Communication Networks market increased $31.7 million to $192.9 million from $161.2 million for the nine months ended September 30, 2010. The increase in revenue reflects a $26.1 million increase in Next Generation Communication Networks products and a $5.6 million increase in Legacy Communication Networks products. Increased revenues from the Next Generation Communication Networks products was due to a $17.9 million increase in revenues from ATCA products as the result of increased 3G and 4G/LTE infrastructure deployments and the continued migration within our largest customer from Legacy Communication Networks products as well as, a $12.2 million increase in revenue due to the acquisition of Continuous Computing. These increases were offset by a $4.3 million decline in revenues from our media server products. Increased revenues from the Legacy Communication Networks products reflect a near-term increase in market share with an existing customer during the first half of 2011 and a $3.1 million increase in revenue due to the acquisition of Continuous Computing.

Commercial Products Group

Revenues in the Commercial Products market increased $798,000 to $20.5 million for the three months ended September 30, 2011 from $19.7 million for the three months ended September 30, 2010. Revenues in the Commercial Products market increased $2.2 million to $58.5 million for the nine months ended September 30, 2011 from $56.3 million in the same period in 2010. The increase in revenue for the three months ended September 30, 2011 reflects a $754,000 increase in Other Commercial products. Increased revenues for the nine months ended September 30, 2011 were the result of a $5.6 million increase in revenues from our Other Commercials products and partially offset by a $3.4 million decline in revenues from our Medical products. Revenues from our Other Commercial products reflect increased sales of our COM Express products to a customer in the telecommunications industry. Revenues from our Medical products decreased primarily due to a decline in revenues from our RackMount Server product line. We expect revenues from our RackMount Server product line to continue to decline through 2012; however, we are reinvesting in this product line and expect revenue growth to resume again in 2013.

Given the dynamics of these markets, we may experience general fluctuations in the percentage of revenue attributable to each market. As a result, the quarter to quarter and year to year comparisons of our markets often are not indicative of overall economic trends affecting the long-term performance of our markets.

Revenue by Geography

The following tables outline overall revenue dollars and the percentage of revenues, by geographic region, for the three and nine months ended September 30, 2011 and 2010:



	For the Three Months Ended						For the Nine Months Ended
	September 30,						September 30,
	2011		2010		Change		2011		2010		Change
North America	$	30,188	$	24,739	22.0	%	$	73,137	$	74,731	(2.1	)%
Europe, the Middle East and Africa ("EMEA")	21,337		20,937		1.9		63,133		59,961		5.3
Asia Pacific	46,351		29,491		57.2		115,089		82,793		39.0
Total	$	97,876	$	75,167	30.2	%	$	251,359	$	217,485	15.6	%



	For the Three Months Ended				For the Nine Months Ended
	September 30,				September 30,
	2011		2010		2011		2010
North America	30.8	%	32.9	%	29.1	%	34.3	%
EMEA	21.8		27.9		25.1		27.6
Asia Pacific	47.4		39.2		45.8		38.1
Total	100.0	%	100.0	%	100.0	%	100.0	%

North America. Revenues from the North America region for the three months ended September 30, 2011 compared to the same period in 2010 increased $5.4 million to $30.2 million from $24.7 million. The increase is primarily due to the acquisition of Continuous Computing which contributed $5.4 million to revenues. Revenues from the North America region decreased $1.6 million to $73.1 million for the nine months ended September 30, 2011 from $74.7 million for the nine months ended September 30, 2010. The decrease in overall revenues from North America was primarily attributable to decreases in revenue from our ATCA blades that are used in telecommunication network monitoring equipment due to the timing of carrier deployment during the first half of 2011 which accelerated in third quarter of 2011 and is expected to continue to increase in the fourth quarter of 2011. This decrease was offset by a $5.4 million increase in revenue due to the acquisition of Continuous Computing and an increase in revenue from our Other Commercial products, which primarily reflects an increase in revenue from our COM Express products.

EMEA. Revenues from the EMEA region increased $400,000 to $21.3 million for the three months ended September 30, 2011 from $20.9 million for the three months ended September 30, 2010. The increase is primarily due to the acquisition of Continuous Computing which contributed $1.4 million to revenues. Revenues from the EMEA region increased $3.2 million to $63.1 million for the nine months ended September 30, 2011 from $60.0 million for the nine months ended September 30, 2010. For the nine months ended September 30, 2011, the increase reflects a $2.1 million increase in revenues from Next Generation Communication Networks products and a $1.4 million increase due to the acquisition of Continuous Computing. These increases were offset by decreased revenues from our Medical products.

Asia Pacific. Revenues from the Asia Pacific region increased $16.9 million to $46.4 million for the three months ended September 30, 2011 from $29.5 million in the same period of 2010. Revenues from the Asia Pacific region increased $32.3 million to $115.1 million for the nine months ended September 30, 2011 from $82.8 million in the same period of 2010. The increase was the result of increased revenues from our Next Generation Communication Networks products as the result of increased 3G and 4G/LTE infrastructure deployments and a near-term increase in market share from an existing customer during the first half of 2011 from our Legacy Communication Networks products. In addition, revenues for the three and nine months ended September 30, 2011 benefited from the acquisition of Continuous Computing which contributed $8.5 million to revenues.

We currently expect continued fluctuations in the percentage of revenue from each geographic region. Additionally, we expect non-U.S. revenues to remain a significant portion of our revenues.

Gross Margin

Gross margin as a percentage of revenues decreased 1.7 percentage points to 28.6% for the three months ended September 30, 2011 from 30.3% for the three months ended September 30, 2010. Gross margin as a percentage of revenues decreased 1.5 percentage points to 28.6% for the nine months ended September 30, 2011 from 30.1% in the same period in 2010. Gross margin was unfavorably impacted for the three and nine months ended September 30, 2011 compared to the same periods in 2010 due to higher amortization of purchased technology, the continued deterioration of gross margin for Legacy Communication Networks products, and increased charges for excess and obsolete inventory primarily associated with rationalizing product overlap associated with our acquisition of Continuous Computing.

Amortization of purchased technology increased $1.7 million and $592,000 for the three and nine months ended September 30, 2011 compared to the same periods in 2010 due to the acquisition of Continuous Computing and offset by decreased amortization due to MCPD purchased-technology licenses that have become fully amortized. The decline in gross margin for Legacy Communication Network products is due to the end of life for our higher margin Legacy Communication Networks products combined with competitive pricing pressure on our newer Legacy Communication Networks products. For the three and nine months ended September 30, 2011, excess and obsolete charges increased $193,000 and $217,000 compared to the same periods in 2010 attributable to product overlap associated with our acquisition of Continuous Computing and product build in excess of customer demand associated with a range of products near end of life.

For the three and nine months ended September 30, 2011, gross margin was favorably impacted due to an increase in the share of Next Generation Communication Networks products as a percentage of our total revenues as compared to prior periods. In addition to the increase in share of overall revenues, gross margin on Next Generation Communication Networks products increased as a result of reduced customer concentration coupled with the acquisition of Continuous Computing.

Operating Expenses

The following table summarizes our operating expenses (in thousands):



	For the Three Months Ended								For the Nine Months Ended
	September 30,								September 30,
	2011			2010			Change		2011			2010			Change
Research and development	$	12,955		$	9,863		31.3	%	$	31,562		$	29,174		8.2	%
Selling, general and administrative	15,610			11,225			39.1		37,520			34,030			10.3
Intangible assets amortization	1,234			192			542.7		1,618			538			200.7
Restructuring and acquisition-related charges, net	5,758			(228		)	NM		8,279			(203		)	NM
Gain on the liquidation of a foreign subsidiary	(2,081		)	—			NM		(2,081		)	—			NM
Total	$	33,476		$	21,052		59.0	%	$	76,898		$	63,539		21.0	%

Research and Development

R&D expenses consist primarily of salary, bonuses and benefits for product development staff, and cost of design and development supplies and equipment, net of reimbursements for nonrecurring engineering services. R&D expenses increased $3.1 million to $13.0 million for the three months ended September 30, 2011 from $9.9 million for the same period in 2010. R&D expenses increased $2.4 million to $31.6 million for the nine months ended September 30, 2011 from $29.2 million for the nine months ended September 30, 2010. These increases are primarily due to the acquisition of Continuous Computing which contributed $3.2 million to R&D expense for the three and nine months ended September 30, 2011. This increase was offset by lower payroll and payroll-related costs of $326,000 and $1.1 million for the three and nine months ended September 30, 2011 resulting from a reduction in overall headcount and the transition of R&D activities to lower cost geographies. These cost savings were partially offset by an increase in expenses for temporary labor of $186,000 and $439,000 for the three and nine months ended September 30, 2011.

Selling, General, and Administrative

Selling, general and administrative (“SG&A”) expenses consist primarily of salary, commissions, bonuses and benefits for sales, marketing, executive and administrative personnel, as well as professional services and costs of other general corporate activities. SG&A expenses increased $4.4 million to $15.6 million for the three months ended September 30, 2011 from $11.2 million for the same period in 2010. The increase in SG&A expenses for the three months ended September 30,

2011 was due to the acquisition of Continuous Computing which contributed an additional $3.8 million to SG&A expenses. In addition, SG&A expense was impacted by increased commissions of $508,000 and stock-based compensation expense of $276,000. The increase in commissions expense was primarily the result of strong design win performance during the third quarter of 2011 as well as increased third-party commissions. Stock-based compensation expense increased for the three months ended September 30, 2011 compared to the same period in 2010 and primarily reflects expense for new grants and options assumed as part of our acquisition of Continuous Computing.

SG&A expenses increased $3.5 million to $37.5 million for the nine months ended September 30, 2011 from $34.0 million for the same period in 2010. The increase in SG&A expenses for the nine months ended September 30, 2011 was due to the acquisition of Continuous Computing which contributed an additional $3.8 million to SG&A expenses. In addition SG&A expense increased as a result of an increase in commissions of $790,000 and temporary labor of $248,000. Increased commissions are the result of increased design win activity as well as an increase in third party commissions. These increases were offset by a decrease in stock-based compensation of $834,000. Stock-based compensation expense decreased due to the reversal of LTIP expense for a named executive officer who forfeited shares upon his departure as a result of not completing the requisite service period which was partially offset by increased expense for new grants and assumed options associated with the acquisition of Continuous Computing.

Intangible Assets Amortization

Intangible assets amortization increased $1.0 million to $1.2 million for the three months ended September 30, 2011 from $192,000 for the same period in 2010. Intangible assets amortization increased $1.1 million to $1.6 million for the nine months ended September 30, 2011 from $538,000 for the same period in 2010. Intangible assets amortization increased primarily due to the acquisition of Continuous Computing in July 2011 which contributed $1.2 million to amortization expense. The increase associated with Continuous Computing intangible assets was offset by a decrease of $109,000 resulting from final amortization of intangible assets associated with our acquisition of Convedia. We perform reviews for impairment of the purchased intangible assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.

Restructuring and Acquisition-Related Charges, Net

Restructuring and acquisition-related charges, net include expenses associated with restructuring activities as well as integration, transaction and legal fees, and retention bonuses incurred in connection with our acquisition of Continuous Computing. We evaluate the adequacy of the accrued restructuring and other charges on a quarterly basis. As a result, we record reversals to the accrued restructuring in the period in which we determine that expected restructuring and other obligations are less than the amounts accrued.

The increase in restructuring and acquisition-related charges, net for the three and nine months ended September 30, 2011 is due to expenses associated with our acquisition of Continuous Computing including legal and investment banking fees of $2.6 million and $4.2 million and restructuring activities associated with the acquisition. During the second quarter of 2011, we initiated a restructuring plan associated with the acquisition of Continuous Computing, and for the three and nine months ended September 30, 2011, we have recorded charges of $3.4 million and $4.3 million under this plan. This plan includes multiple phases and the full scope of the plan is expected to be finalized by the end of the fourth quarter. At the end of the third quarter, the plan included the identification of 114 positions at various locations that will be eliminated. The restructuring plan is ongoing and we expect to incur additional charges under the plan through the first quarter of 2012.

Stock-based Compensation Expense

Included within costs of sales, R&D and SG&A are expenses associated with stock-based compensation. Stock-based compensation expense consists of amortization of stock-based compensation associated with unvested stock options, restricted stock units issued to employees under the 2007 stock plan, the 1998 Continuous Computing plan, the Continuous Computing inducement stock plan and the long-term incentive plan ("LTIP"), and the employee stock purchase plan (“ESPP”).

We incurred and recognized stock-based compensation expense as follows (in thousands):



	For the Three Months Ended						For the Nine Months Ended
	September 30,						September 30,
	2011		2010		Change		2011		2010		Change
Cost of sales	$	217	$	194	11.9	%	$	572	$	640	(10.6	)%
Research and development	464		302		53.6		1,070		1,010		5.9
Selling, general and administrative	1,220		944		29.2		2,396		3,230		(25.8	)
Total	$	1,901	$	1,440	32.0	%	$	4,038	$	4,880	(17.3	)%

Stock-based compensation expense for the three months ended September 30, 2011 increased over the comparable period due to new grants and assumed options associated with the acquisition of Continuous Computing. For the nine months ended September 30, 2011 stock-based compensation expense decreased over the comparable period due to the reversal of LTIP expense for a named executive officer and offset by additional expense associated with the acquisition of Continuous Computing.

Non-Operating Expenses

The following table summarizes our non-operating expenses (in thousands):



	For the Three Months Ended								For the Nine Months Ended
	September 30,								September 30,
	2011			2010			Change		2011			2010			Change
Interest expense	$	(458	)	$	(462	)	(0.9	)%	$	(1,410	)	$	(1,578	)	(10.6	)%
Interest income	6			59			(89.8	)	97			566			(82.9	)
Other income (expense), net	327			(55		)	NM		187			(34		)	NM
Total	$	(125	)	$	(458	)	(72.7	)%	$	(1,126	)	$	(1,046	)	7.6	%

Interest Expense

Interest expense includes interest incurred on our convertible notes and our lines of credit. The decrease in interest expense during the three and nine months ended September 30, 2011, compared to the same periods in 2010, was due to a decrease in the outstanding balance on our revolving line of credit. During 2011, we had no outstanding balances on our line of credit.

Interest Income and Other Income (Expense), Net

Interest income decreased for the three and nine months ended September 30, 2011 due to a decline in the weighted average balance of interest bearing investments held as a result of cash paid for the acquisition of Continuous Computing coupled with a decline in the average yield on investments.

Other income (expense), net increased for the three and nine months ended September 30, 2011 as a result of the strengthening of the US Dollar ('USD') against currencies of our non-USD functional currency subsidiaries. Specifically, as a result of our acquisition of Continuous Computing, we now have exposure to the Indian Rupee ("INR"), which, as a result of weakening against the USD gave rise to a substantial portion of the gain recognized in other income (expense) for the three months ended September 30, 2011. We are currently evaluating strategies to limit our exposure to fluctuations in exchange rates between the INR and USD and expect to begin hedging this currency exposure in the fourth quarter of 2011.

Income Tax Provision

We recorded tax benefits of $8.4 million and $884,000 for the three months ended September 30, 2011 and 2010. We recorded tax benefits of $8.5 million and $920,000 for the nine months ended September 30, 2011 and 2010. Our effective tax rate for the three months ended September 30, 2011 and 2010 was 149.2% and (68.7)%. The effective tax rate fluctuations are due to the jurisdictions in which pretax income (loss) is being earned and income tax rate differences between the jurisdictions. Additionally, the effective tax rate for the three months ended September 30, 2011 was increased by a partial release of the Company's valuation allowance provided against its U.S. net deferred tax assets as a result of the purchase accounting

associated with the acquisition of Continuous Computing. An income tax benefit of $7.6 million was recognized upon the partial valuation allowance release.

Liquidity and Capital Resources

The following table summarizes selected financial information as of the dates indicated and for the three months ended September 30, 2011 and 2010 and for the year ended December 31, 2010:



	September 30, 2011		December 31, 2010		September 30, 2010
	(Dollar amounts in thousands)
Cash and cash equivalents	$	55,902	$	129,078	$	133,257
Working capital	$	79,175	$	147,049	$	147,009
Accounts receivable, net	$	58,805	$	42,855	$	43,647
Inventories, net	$	30,281	$	15,178	$	12,881
Accounts payable	$	52,762	$	29,190	$	34,781
2013 convertible senior notes	$	50,000	$	50,000	$	50,000
Days sales outstanding ^(A)	55		55		53



(A)	Based on ending net trade receivables divided by daily revenue (quarterly revenue, annualized and divided by 365 days).

Cash Flows

Cash and cash equivalents decreased by $73.2 million to $55.9 million at September 30, 2011 from $129.1 million at December 31, 2010. As of September 30, 2011, the amount of cash held by foreign subsidiaries was $23.8 million. If these funds are needed for our operations in the U.S., we would be required to accrue U.S. taxes to repatriate these funds. However, our intent is to permanently reinvest these funds outside the U.S. and our current plans do not require us to repatriate them to fund our U.S. operations. Any repatriation may not result in actual cash payments as the taxable event would likely be offset by the utilization of the then-available net operating losses and tax credits.

Activities impacting cash and cash equivalents are as follows:



	For the Nine Months Ended
	September 30,
	2011			2010
	(In thousands)
Operating Activities
Net income	$	2,426		$	1,713
Non-cash adjustments	8,101			14,632
Changes in working capital	3,388			2,909
Cash provided by operating activities	13,915			19,254
Cash provided by (used in) investing activities	(84,087		)	52,768
Cash used in financing activities	(3,004		)	(39,486		)
Effects of exchange rate changes	—			49
Net increase (decrease) in cash and cash equivalents	$	(73,176	)	$	32,585

Cash provided by operating activities in the nine months ended September 30, 2011 was $13.9 million and consisted of net income of $2.4 million, adjustments for non-cash items of $8.1 million and cash provided by working capital and other activities of $3.4 million. For the nine months ended September 30, 2011 primary drivers to changes in our working capital, net of changes attributable to the acquisition of Continuous Computing, consisted of the following:


•	Net trade accounts receivable increased primarily as the result of increased revenues, the timing of our shipments and customer payments. Days sales outstanding decreased from 59 days at December 31, 2010 to 54 days at September 30, 2011.


•	Inventories increased significantly due to the build-up of buffer stock and end of life products as we finalize our transition to one contract manufacturer.


•	Accounts payable increased as a direct result of our build in inventories as well as timing of vendor payments.

Days to pay increased from 54 days at December 31, 2010 to 69 days at September 30, 2011.


•	Deferred income increased as the result of customer billings not recognized as revenues due to undelivered elements or acceptance provisions contained in certain arrangements.

Cash provided by operating activities in the nine months ended September 30, 2010 was $19.3 million and consisted of net income of $1.7 million, adjustments for non-cash items of $14.6 million and cash provided by working capital and other activities of $2.9 million. For the nine months ended September 30, 2010 primary drivers to changes in our working capital consisted of the following:


•	Net trade accounts receivable decreased slightly primarily as a result of the timing of shipments and customer payments. Days sales outstanding decreased from 54 days at December 31, 2009 to 53 days at September 30, 2010.


•	Inventories decreased due to an increase in inventory turns as the result of the outsourcing of our manufacturing function as well as timing of customer shipments.


•	Accounts payable increased as a result of our cash management and timing of vendor payments. Days to pay increased from 50 days at December 31, 2009 to 61 days at September 30, 2010.


•	Deferred income increased as the result of an increase in the base of customer maintenance contracts as well as an increase in contract-specific deferrals for contracts containing undelivered elements.

Cash used in investing activities in the nine months ended September 30, 2011 of $84.1 million was primarily attributable to $79.3 million used for the acquisition of Continuous Computing and to capital expenditures of $4.3 million related principally to infrastructure to support our contract manufacturing model as well as our transfer to one contract manufacturer.

Cash provided by investing activities in the nine months ended September 30, 2010 of $52.8 million was attributable to $62.2 million of gross proceeds from the settlement of auction rate securities. Additional uses of cash included $3.4 million for the acquisition of Pactolus, $3.2 million for the purchase of other assets, and $3.3 million in capital expenditures principally related to office equipment and software.

Cash used in financing activities in the nine months ended September 30, 2011 of $3.0 million was primarily driven by repurchases of our common stock of $3.9 million under the Company's repurchase program and partially offset by cash received for net payments related to stock-based award activities of $1.2 million. As more fully discussed in Note 13 - Common Stock Repurchase Program of the Notes to the Unaudited Consolidated Financial Statements, we are authorized to repurchase an additional $16.1 million of common stock.

Cash used in financing activities in the nine months ended September 30, 2010 of $39.5 million was primarily related to $41.3 million in net repayments on our revolving UBS line of credit and partially offset by cash received for net payments related to stock-based award activities of $1.8 million.

As of September 30, 2011 and December 31, 2010, working capital was $79.2 million and $147.0 million, respectively. Working capital decreased $67.9 million as our current assets decreased $33.3 million and our current liabilities increased $34.6 million. The decrease in our current assets balance was primarily due to $81.5 million cash used for the July 2011 acquisition of Continuous Computing which was partially offset by Continuous Computing's current assets. Current liabilities increased primarily to the acquisition of Continuous Computing and an increase in our accounts payable balance resulting from increased inventory levels and timing of vendor payments.

Lines of Credit

Silicon Valley Bank

On November 1, 2011 the Company entered into a $40.0 million secured revolving line of credit agreement (the “Agreement”) with Silicon Valley Bank (“SVB”) to replace the Company's existing line of credit with SVB. The new Agreement matures on September 30, 2014 and is subject to a borrowing base and secured by the Company's accounts receivable. The secured revolving credit facility is available for cash borrowings, with $20.0 million of the Agreement available on a non-formula basis and the remaining $20.0 million subject to a borrowing formula based upon eligible accounts receivable. Eligible accounts receivable (as defined in the Agreement) include 100% of US and 65% of foreign (including Continuous Computing), limited to concentration by certain customers, accounts receivable not greater than 60 days past due and no greater than 120 days from original invoice date. Borrowings under the Agreement bear interest at the prime rate, which was 3.25% as of September 30, 2011, or LIBOR, which was 0.24% as of September 30, 2011, plus 1.25%, with either interest rate determined by the Company's election. The Company is required to make interest payments monthly. The Company is

further required to pay a commitment fee equal to $35,000 on the closing date of the agreement and annually thereafter and to pay quarterly in arrears an unused facility fee in an amount equal to 0.375% per year of the unused amount of the facility.

•

minimum quarterly liquidity ratio of 1.25 during the term of the agreement. The liquidity ratio is defined as cash, cash equivalents and short term investments (with cash and cash equivalents held by the Company's foreign subsidiaries not to exceed $10.0 million and excluding any investments held by the Company's foreign subsidiaries) plus eligible accounts receivable (as defined in the Agreement), divided by the sum of obligations to SVB;

•


•	capital expenditures may not exceed $11.0 million in fiscal 2011 and $8.0 million in subsequent fiscal years.

As of September 30, 2011 and December 31, 2010, the Company had no outstanding balances or letters of credit issued on its behalf under the agreement that existed on those dates.

2013 Convertible Senior Notes

During February 2008, we offered and sold in a public offering pursuant to the shelf registration statement $55.0 million aggregate principal amount of 2.75% convertible senior notes due 2013 (the “2013 convertible senior notes”). Interest is payable semi-annually, in arrears, on each August 15 and February 15, beginning on August 15, 2008, to the holders of record at the close of business on the preceding August 1 and February 1, respectively. The 2013 convertible senior notes mature on February 15, 2013. Holders of the 2013 convertible senior notes may convert their notes into a number of shares of our common stock determined as set forth in the indenture governing the notes at their option on any day up to and including the business day prior to the maturity date. The 2013 convertible senior notes are initially convertible into 76.7448 shares of our common stock per $1,000 principal amount of the notes (which is equivalent to a conversion price of approximately $13.03 per share), subject to adjustment upon the occurrence of certain events. Upon the occurrence of a fundamental change, holders of the 2013 convertible senior notes may require us to repurchase some or all of their notes for cash at a price equal to 100% of the principal amount of the notes being repurchased, plus accrued and unpaid interest, if any. In addition, if certain fundamental changes occur, we may be required in certain circumstances to increase the conversion rate for any 2013 convertible senior notes converted in connection with such fundamental changes by a specified number of shares of our common stock. The 2013 convertible senior notes are our general unsecured obligations and rank equal in right of payment to all of our existing and future senior indebtedness, and senior in right of payment to our future subordinated debt. Our obligations under the 2013 convertible senior notes are not guaranteed by, and are effectively subordinated in right of payment to all existing and future obligations of our subsidiaries and are effectively subordinated in right of payment to our future secured indebtedness to the extent of the assets securing such debt.

In connection with the issuance of the 2013 convertible senior notes, we entered into a capped call transaction with a hedge counterparty. The capped call transaction is expected to reduce the potential dilution upon conversion of the 2013 convertible senior notes in the event that the market value per share of our common stock, as measured under the terms of the capped call transaction, at the time of exercise is greater than the strike price of the capped call transaction of approximately $13.03. The strike price of the capped call transaction corresponds to the initial conversion price of the 2013 convertible senior notes and is subject to certain adjustments similar to those contained in the notes. The capped call transaction provides for net-share settlement in the event that the volume-weighted average price per share of our common stock on the settlement date exceeds the strike price of approximately $13.03 per share. In such event, the hedge counterparty would deliver to us a number of shares equal to a formula determined by the quotient resulting from (a) the shares being settled times the difference between the volume-weighted average price on the settlement date and the strike price of approximately $13.03 per share, divided by (b) the volume-weighted average price on the settlement date. If the volume-weighted average price on the settlement date equals or exceeds the cap price of $23.085 per share, the difference in (a) would be $23.085 minus $13.03, or $10.055. Because the maximum number of shares deliverable under the capped call transaction is less than the number of shares issuable upon conversion of the 2013 convertible senior notes, we refer to this effect as “dilution mitigation.” If the market value per share of our common stock exceeds the cap price of the capped call transaction of $23.085, as measured under the terms of the capped

call transaction, no additional shares would be delivered under the capped call transaction, and correspondingly, the dilution mitigation under the capped call transaction will be limited, which means that there would be dilution to the extent that the then market value per share of our common stock exceeds the cap price of the capped call transaction. Although the capped call transaction covers approximately 4.2 million shares, in order to facilitate an orderly settlement process, the shares are divided into tranches of approximately 211,000 shares each, settling on the twenty consecutive trading days prior to the date of maturity of our convertible notes. Thus, on each settlement date, approximately 211,000 shares would be settled, assuming a volume-weighted average price on such settlement date of $23.085. Assuming volume-weighted average price of $23.085, the hedge counterparty would deliver to us approximately 91,904 shares on each settlement date, calculated as follows: 211,000 x ($23.085 – $13.03)/$23.085 = 91,904.

We were advised by the hedge counterparty that, in order to hedge or manage its risk of having to deliver shares under the capped call transaction, depending on whether our stock price rises or falls, the counterparty may purchase our common stock in the open market or enter into derivative transactions equivalent to purchasing our stock (in which case its derivative counterparty would be expected to purchase common stock or accomplish the equivalent in derivative transactions) and/or may sell our common stock, enter into derivative transactions equivalent to selling our stock or unwind (that is, cancel upon payment of agreed consideration) previous derivative transactions (which would be the equivalent of selling our common stock). These types of transactions are commonly referred to as “modifying hedge positions.” Such modifications to our counterparty’s hedge positions may have an effect on our stock price.

As of September 30, 2011 and December 31, 2010, we had outstanding 2013 convertible senior notes with a face value of $50.0 million.

Contractual Obligations

The following summarizes our contractual obligations at September 30, 2011 and the effect of such on its liquidity and cash flows in future periods (in thousands):



	Total		2011*		2012 - 2013		2014 - 2015		2016 & Thereafter
Operating leases	$	25,064	$	1,387	$	9,785	$	8,319	$	5,573
Capital leases	108		10		82		16		—
Purchase obligations ^(A)	15,031		15,031		—		—		—
2013 convertible senior notes	50,000		—		50,000		—		—
Interest on convertible senior notes	2,063		—		2,063		—		—
Total	$	92,266	$	16,428	$	61,930	$	8,335	$	5,573



*	Remaining three months of 2011.

(A)	Purchase obligations include agreements or purchase orders to purchase goods or services that are enforceable and legally binding and specify all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions and the approximate timing of the transaction. Purchase obligations exclude agreements that are cancelable without penalty. These purchase obligations are entered into in the ordinary course of business and are expected to be funded by cash flows from continuing operations.

In addition to the above, we have approximately $2.4 million associated with unrecognized tax benefits. These liabilities are primarily included as a component of “other accrued liabilities” in our Consolidated Balance Sheet as we do not anticipate that settlement of the liabilities will require payment of cash within the next twelve months. We are not able to reasonably estimate when we would make any cash payments required to settle these liabilities, but do not believe that the ultimate settlement of our obligations will materially affect our liquidity.

Off-Balance Sheet Arrangements

We do not engage in any activity involving special purpose entities or off-balance sheet financing.

Liquidity Outlook

At September 30, 2011, our cash and cash equivalents amounted to $55.9 million. We believe that our current cash and cash equivalents, the cash generated from operations and our line of credit facility will satisfy our short and long-term expected working capital needs, capital expenditures, acquisitions, stock repurchases, and other liquidity requirements associated with our existing business operations.

FORWARD-LOOKING STATEMENTS

This report contains forward-looking statements including:


•	expectations and goals for revenues, gross margin, R&D expenses, SG&A expenses and profits;


•	the impact of our restructuring events on future operating results;


•	our projected liquidity;


•	future operations and market conditions;


•	industry trends or conditions and the business environment;


•	future levels of inventory and backlog and new products introductions;


•	expected synergies and other expense savings and operational and administrative efficiencies, opportunities, timing, expense and effects of the acquisition of Continuous Computing;


•	financial performance, revenue growth, management changes or other attributes of Radisys following the acquisition; and


•	other statements that are not historical facts.

All statements that relate to future events or to our future performance are forward-looking statements. In some cases, forward-looking statements can be identified by terms such as “may,” “will,” “should,” “expect,” “plans,” “seeks,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “continue,” “seek to continue,” “intends,” or other comparable terminology. These forward-looking statements are made pursuant to safe-harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our

actual results or our industries’ actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements.

These factors include, among others, the Company's high degree of customer concentration, the Company's transition to one contract manufacturer and use of the single contract manufacturer in the future for the significant portion of the production of our products, the anticipated amount and timing of revenues from design wins due to the Company's customers' product development schedule, cancellations or delays, matters affecting the embedded system industry, including changes in industry standards, changes in customer requirements and new product introductions, currency exchange rate fluctuations, changes in tariff and trade policies and other risks associated with foreign operations, actions by regulatory authorities or other third parties, actions by Continuous Computing's former shareholders, costs and difficulties related to integration of acquired businesses, delays, costs and difficulties related to the transaction, market conditions, performance and customer acceptance of the Trillium line of products, the combined companies' financial results and performance, satisfaction of closing conditions, and other factors described in "Risk Factors" and elsewhere in our Annual Report on Form 10-K for the year ended December 31, 2010, as updated in the subsequent quarterly reports on Form 10-Q. Although forward-looking statements help provide additional information about us, investors should keep in mind that forward-looking statements are only predictions, at a point in time, and are inherently less reliable than historical information.

We do not guarantee future results, levels of activity, performance or achievements, and we do not assume responsibility for the accuracy and completeness of these statements. The forward-looking statements contained in this report are made and based on information as of the date of this report. We assume no obligation to update any of these statements based on information after the date of this report.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

We are exposed to market risk from changes in interest rates, foreign currency exchange rates, and equity trading prices, which could affect our financial position and results of operations.

Foreign Currency Risk. We pay the expenses of our international operations in local currencies, namely, the Canadian Dollar, Euro, Chinese Yuan, Japanese Yen, Malaysian Ringgit, British Pound Sterling, New Shekel, and Indian Rupee. Our international operations are subject to risks typical of an international business, including, but not limited to: differing economic conditions, changes in political climate, differing tax structures, foreign exchange rate volatility and other regulations and restrictions. Accordingly, future results could be materially and adversely affected by changes in these or other factors. We are also exposed to foreign exchange rate fluctuations as the balance sheets and income statements of our foreign subsidiaries are translated into U.S. Dollars during the consolidation process. Because exchange rates vary, these results, when translated, may vary from expectations and adversely affect overall expected profitability.

Based on our policy, we have established a foreign currency exposure management program which uses derivative foreign

exchange contracts to address nonfunctional currency exposures. In order to reduce the potentially adverse effects of foreign currency exchange rate fluctuations, we may enter into forward exchange contracts. These hedging transactions limit our exposure to changes in the U.S. Dollar/Canadian Dollar exchange rate, and as of September 30, 2011 the total notional or contractual value of the contracts we held was $8.3 million. These contracts will mature over the next 14 months.

Holding other variables constant, a 10% adverse fluctuation, in relation to our hedge positions, of the U.S. Dollar relative to the Canadian Dollar would require an adjustment of $829,000, and our total hedge liability as of September 30, 2011, would be $1.1 million. A 10% favorable fluctuation, in relation to our hedge positions, of the U.S. Dollar relative to the Canadian Dollar would result in an adjustment of $763,000 reversing our hedge liability and creating a hedge asset as of September 30, 2011 of $499,000. We do not expect a 10% fluctuation to have any impact on our operating results as the underlying hedged transactions will move in an equal and opposite direction. As of September 30, 2011 our hedged positions are associated with our exposure to movements in the Canadian Dollar. If there is an unfavorable movement in the Canadian Dollar relative to our hedged positions this would be offset by reduced expenses, after conversion to the U.S. Dollar, associated with obligations paid for in the Canadian Dollar.

Convertible Notes. The fair value of the 2013 convertible senior notes is sensitive to interest rate changes as well as changes in our stock price. Interest rate changes would result in an increase or decrease in the fair value of the 2013 convertible senior notes due to differences between market interest rates and rates in effect at the inception of the obligation. Fluctuations in our stock price would result in an increase or decrease in the fair value of the 2013 convertible senior notes due to the value of the notes derived from the conversion feature. Unless we elect to repurchase our 2013 convertible senior notes in the open market, changes in the fair value of the senior convertible notes have no impact on our cash flows or Consolidated Financial Statements. The estimated fair value of the 2013 convertible senior notes was $44.9 million and $49.1 million at September 30, 2011 and December 31, 2010, respectively.

Item 4. Controls and Procedures

Based on their evaluation as of the end of the period covered by this Quarterly Report on Form 10-Q, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s “disclosure controls and procedures” (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act) are effective.

During our most recent fiscal quarter ended September 30, 2011, no change occurred in the Company's internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.

The Company acquired Continuous Computing Corporation ("Continuous Computing") on July 8, 2011. Continuous Computing was not previously required to maintain disclosure controls and procedures, or maintain, document and assess internal control over financial reporting, as required under the rules and regulation of the Securities and Exchange Commission. The Company will review Continuous Computing's procedures and controls and may make additional changes in those controls in the future. The Company excluded Continuous Computing from its assessment of the effectiveness of disclosure controls and procedures as of September 30, 2011.

PART II. OTHER INFORMATION

Item 1A. Risk Factors

There are many factors that affect our business and the results of our operations, many of which are beyond our control. In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, Item 1A. Risk Factors and Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2010, which could materially affect our business, financial condition or future results. The risks described in this report and our Annual Report on Form 10-K for the year ended December 31, 2010 are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

We may not realize the anticipated benefits of the acquisition of Continuous Computing, and integration of the Continuous Computing business may disrupt our operations and may adversely affect our future results.

We believe that the acquisition of Continuous Computing will result in certain customer and strategic benefits, including expanded market reach and increased product offerings. However, to realize these anticipated benefits, Continuous Computing's business must be successfully integrated into our operations by focusing on engineering and marketing and sales cooperation. The success of the Continuous Computing acquisition will depend on our ability to realize these anticipated benefits from integrating Continuous Computing's business into our operations. We may fail to realize the anticipated benefits of the Continuous Computing acquisition on a timely basis, or at all. In addition, the diversion of the attention of management from its current operations to the integration effort could adversely affect our business.

We will incur substantial transaction costs in connection with the acquisition.

We have incurred and expect to continue to incur a number of non-recurring transaction costs associated with completing the acquisition, combining the operations of the two companies and achieving desired synergies. These fees and costs will be substantial. During the initial months after the closing of the acquisition as we integrate Continuous Computing's operations and personnel, we could experience operating inefficiencies that would adversely impact our gross margin and operating results. As a result of additional integration-related cash expenditures, purchase accounting charges and potential operating and integration inefficiencies, our operating results and financial condition may be adversely affected, particularly in the first year following the closing of the acquisition. Furthermore, the integration may result in additional and unforeseen expenses or delays. If we are not able to successfully integrate Continuous Computing's business and operations, the anticipated benefits of the acquisition may not be realized fully or at all or may take longer to realize than expected.

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



Issuer Purchases of Equity Securities
Period	Total Number of Shares Purchased [1]	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs [1]	Approximate Dollar Value of Shares that May Yet be Purchased Under the Plans or Programs [1]
July 1, 2011 through July 31, 2011	—	$	—	149,747	$	18,747
August 1, 2011 through August 31, 2011	176,633	$	7.44	326,380	$	17,433
September 1, 2011 through September 30, 2011	191,651	$	6.98	518,031	$	16,096
Total	368,284	$	7.54	518,031	$	16,096

[1] In December 2010, the Board of Directors authorized the repurchase of up to $20 million of our common stock through open market transactions or through privately negotiated transactions from time to time at the discretion of management.

Item 5. Other Information

Credit Agreement Amended and Restated

•


•	capital expenditures may not exceed $11.0 million in fiscal 2011 and $8.0 million in subsequent fiscal years.

The foregoing summary of the Amended and Restated Loan and Security Agreement is not complete and is qualified in its entirety by reference to the Amended and Restated Loan and Security Agreement, filed as Exhibit 10.1 to this report and incorporated herein by reference.

Item 6. Exhibits

(a) Exhibits



Exhibit No		Description
2.1		Merger Agreement between the Company and Continuous Computing Corporation dated May 2, 2011 incorporated by reference from Exhibit 2.1 in the Company's Current Report on Form 8-K filed on May 3, 2011.

2.2		Amendment No. 1 to Agreement and Plan of Merger by and among RadiSys Corporation, an Oregon corporation, RadiSys Holdings, Inc., a Delaware corporation, and Continuous Computing Corporation, a Delaware corporation, dated June 22, 2011, incorporated by reference to Exhibit 2.1 to RadiSys Corporation's Current Report on Form 8-K filed with the SEC on July 8, 2011, SEC File No.000-26844.

3.1		Second Restated Articles of Incorporation and amendments thereto. Incorporated by reference from Exhibit 4.1 to the Company's Registration Statement on Form S-8, filed on September 1, 2006, SEC File No. 333-137060, as amended by the Articles of Amendment incorporated by reference from Exhibit 3.1 in the Company's Current Report on Form 8-K filed on January 30, 2008.

3.2		Restated Bylaws. Incorporated by reference from Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q filed on May 8, 2007, as amended by the Amendment to Restated Bylaws incorporated by reference from Exhibit 3.1 in the Company's Current Report on Form 8-K filed on May 3, 2011.

10.1*		Amended and Restated Loan and Security Agreement, dated November 1, 2011, between the Company and Silicon Valley Bank.

31.1*		Certification of the Chief Executive Officer required by Rule 13a-14(a) or Rule15d-14(a) of the Exchange Act pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2*		Certification of the Chief Financial Officer required by Rule 13a-14(a) or Rule 15d-14(a) of the Exchange Act pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1*		Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2*		Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS**		XBRL Instance Document

101.SCH**		XBRL Taxonomy Extension Schema

101.CAL**		XBRL Taxonomy Extension Calculation Linkbase

101.LAB**		XBRL Taxonomy Extension Label Linkbase

101.PRE**		XBRL Taxonomy Presentation Linkbase

101.DEF**		XBRL Taxonomy Definition Linkbase



*	Filed herewith

**	Pursuant to applicable securities laws and regulations, the Registrant is deemed to have complied with the reporting obligation relating to the submission of interactive data files in such exhibits and is not subject to liability under any anti-fraud provisions of the federal securities laws as long as the Registrant has made a good faith attempt to comply with the submission requirements and promptly amends the interactive data files after becoming aware that the interactive data files fails to comply with the submission requirements. These interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under these sections.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.



		RADISYS CORPORATION
Dated:	November 4, 2011	By:	/s/ Michel Dagenais
			Michel Dagenais
			Chief Executive Officer

Dated:	November 4, 2011	By:	/s/ Brian Bronson
			Brian Bronson
			President, Chief Financial Officer and Principal Accounting Officer

EXHIBIT INDEX



Exhibit No		Description
2.1		Merger Agreement between the Company and Continuous Computing Corporation dated May 2, 2011 incorporated by reference from Exhibit 2.1 in the Company's Current Report on Form 8-K filed on May 3, 2011.

2.2		Amendment No. 1 to Agreement and Plan of Merger by and among RadiSys Corporation, an Oregon corporation, RadiSys Holdings, Inc., a Delaware corporation, and Continuous Computing Corporation, a Delaware corporation, dated June 22, 2011, incorporated by reference to Exhibit 2.1 to RadiSys Corporation's Current Report on Form 8-K filed with the SEC on July 8, 2011, SEC File No.000-26844.

3.1		Second Restated Articles of Incorporation and amendments thereto. Incorporated by reference from Exhibit 4.1 to the Company's Registration Statement on Form S-8, filed on September 1, 2006, SEC File No. 333-137060, as amended by the Articles of Amendment incorporated by reference from Exhibit 3.1 in the Company's Current Report on Form 8-K filed on January 30, 2008.

3.2		Restated Bylaws. Incorporated by reference from Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q filed on May 8, 2007, as amended by the Amendment to Restated Bylaws incorporated by reference from Exhibit 3.1 in the Company's Current Report on Form 8-K filed on May 3, 2011.

10.1*		Amended and Restated Loan and Security Agreement, dated November 1, 2011, between the Company and Silicon Valley Bank.

31.1*		Certification of the Chief Executive Officer required by Rule 13a-14(a) or Rule15d-14(a) of the Exchange Act pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2*		Certification of the Chief Financial Officer required by Rule 13a-14(a) or Rule 15d-14(a) of the Exchange Act pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1*		Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2*		Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS**		XBRL Instance Document

101.SCH**		XBRL Taxonomy Extension Schema

101.CAL**		XBRL Taxonomy Extension Calculation Linkbase

101.LAB**		XBRL Taxonomy Extension Label Linkbase

101.PRE**		XBRL Taxonomy Presentation Linkbase

101.DEF**		XBRL Taxonomy Definition Linkbase



*	Filed herewith

**	Pursuant to applicable securities laws and regulations, the Registrant is deemed to have complied with the reporting obligation relating to the submission of interactive data files in such exhibits and is not subject to liability under any anti-fraud provisions of the federal securities laws as long as the Registrant has made a good faith attempt to comply with the submission requirements and promptly amends the interactive data files after becoming aware that the interactive data files fails to comply with the submission requirements. These interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under these sections.