The following discussion and analysis should be read in conjunction with our Consolidated Financial Statements and Notes thereto for the year ended December 31, 2008, included in our Annual Report on Form 10-K, filed with the Securities and Exchange Commission on March 12, 2009. The discussion in this Quarterly Report on Form 10-Q contains forward-looking statements that involve risks and uncertainties, such as statements of our future financial operating results, plans, objectives, expectations and intentions. Our actual results could differ materially from those discussed here. See "Risk Factors" in Item 1A of Part II for factors that could cause future results to differ materially.

Overview

We are a leading global provider of voice infrastructure solutions for established and emerging wireline and wireless service providers. Service providers use our products to transport, convert and manage data and voice traffic both over legacy TDM networks and IP networks, while enabling VoIP and other multimedia services. Our product portfolio consists of bandwidth optimization and NGN switching solutions. Our bandwidth optimization products consist of our I-Gate 4000 family of media gateways, our Secure Communication software, and our DTX-600 DCME product for voice compression over legacy TDM networks. Our NGN switching solution consists of our ControlSwitch, an IP softswitch and service delivery platform comprised of numerous IMS-compatible software modules, our Network-adaptive Border Controller, our I-Gate 4000 EDGE SIP Gateway, and our I-Gate 4000 family of media gateways. Our portfolio of products can significantly reduce the cost to build and operate voice services compared to traditional alternatives and other NGN solutions. In addition, our products offer a standards-compliant platform that enables service providers to increase their revenues through the rapid creation and delivery of new services. We also offer services consisting of hardware and software maintenance and support, installation, training and other professional services.

We outsource the manufacturing of our hardware products. Our I-Gate 4000 media gateways are manufactured for us by Flextronics. We buy our DCME products from ECI Telecom Ltd. which subcontracts the manufacturing to Flextronics. This enables us to focus mainly on the design, development, sales and marketing of our products and lowers our capital requirements. However, our ability to bring new products to market, fulfill customer orders and achieve long-term growth depends on our ability to maintain sufficient technical personnel and obtain necessary external subcontractor capacity.

We sell our products primarily through a direct sales force and also through indirect sales channels.

Other Matters

On April 3, 2008, we received a letter from the SEC informing us that the SEC was conducting a confidential informal inquiry into the Company. In response to the inquiry, our Board of Directors appointed a special investigation committee composed of independent directors to cooperate with the SEC in connection with such inquiry and to perform our own investigation of the matters surrounding the inquiry. The special investigation committee, in turn, retained independent legal counsel to perform an internal investigation. On July 17, 2008, Independent Counsel reported their findings to representatives of the SEC and subsequently provided all the requested documents to the SEC. On January 27, 2009, we received a subpoena from the SEC that it had commenced a formal investigation into matters related to our business practices in Vietnam. In connection with such subpoena, we are producing documents relevant to the SEC's investigation. The level of sales to Vietnam customers has historically been a minor portion of the our overall business and represented 2% and 1% of our total revenues during the year ended March 31, 2009 and December 31, 2008, respectively.

At the current time, we cannot determine the probability of or quantify the amount of any fines or penalties associated with the SEC matters discussed above.

We are the exclusive worldwide distributor of a line of voice compression telecommunications products or DCME, for ECI under the DCME Master Manufacturing and Distribution Agreement (DCME Agreement), which was executed in December 2002, and certain agreements relating to third party intellectual property and quality assurance and quality control services. Under the DCME Agreement, ECI manufactures or subcontracts the manufacture of all DCME equipment sold by us and also provides certain supply, service and warranty repairs. The DCME Agreement is automatically renewed for successive one-year periods unless earlier terminated and was renewed for the period ending December 31, 2008. ECI has recently provided us with a purported notice of default under the DCME Agreement as ECI Telecom believes that we are past due on payments, and owe additional royalties of sales of DCME related products among other items. We may be unable to or choose not to cure any alleged default and the sales of DCME products could cease and/or additional liabilities may be incurred. Currently, we and ECI Telecom are working amicably to resolve the notice of default.

Critical Accounting Policies and Estimates

There have been no significant changes to our critical accounting policies and estimates during the three months ended March 31, 2009, as compared to the previous disclosures in management's discussion and analysis of financial condition and results of operations included in our Annual Report on Form 10-K, filed with the Securities and Exchange Commission on March 12 , 2009.

Results of Operations

Comparison of Three Months Ended March 31, 2009 and 2008

Revenues (amount in thousands).



                                            Three Months Ended March 31,
                                           2009                      2008                Period-to-Period Change
                                              Percentage                Percentage
                                               of Total                  of Total
                                    Amount     Revenue        Amount     Revenue         Amount         Percentage
Revenues:
IP Products                        $ 13,050           62 %   $ 20,744           74 %   $    (7,694 )           (37 )%
DCME Products                         1,198            6        1,576            6            (378 )           (24 )
Services                              6,703           32        5,563           20           1,140              20

Total revenues                     $ 20,951          100 %   $ 27,883          100 %   $    (6,932 )           (25 )%

Revenue by Geography:
Europe, Middle East and Africa     $  8,645           41 %   $ 15,025           54 %   $    (6,380 )           (42 )%
North America                         3,170           15        4,544           16          (1,374 )           (30 )
Asia Pacific and India                5,548           27        5,438           20             110               2
Caribbean and Latin America           3,588           17        2,876           10             712              25

Total revenues                     $ 20,951          100 %   $ 27,883          100 %   $    (6,932 )           (25 )%

IP product revenues decreased 37% on lower bookings in the first quarter of 2009, as compared with the same period of 2008. The decrease in IP product bookings was a result of the slowdown of the global economy. In addition, less revenue was recognized from prior quarter's bookings on VOIP solutions. The IP revenues were also impacted as fewer projects were completed and accepted in the first quarter of 2009 than in the same period of 2008. The timing and amount of bookings is affected by a number of factors, including the increased slowdown in capital spending in some regions that have placed orders in the past and increased competition in some regions, particularly in the Europe, Middle East and Africa region. As the market continues to demand more sophisticated communications products, we expect that IP revenues as a percentage of total revenue will continue to increase while concurrently DCME product revenues will continue to decline.

DCME product revenues decreased 24% year over year and was the result of the expected continuing decline in the size of the overall DCME market as customers migrate from traditional voice networks utilizing DCME products over to those increasingly using IP products. At this late stage of the product life cycle of this legacy product, the rate of decline of DCME product revenues will vary from quarter to quarter. We still expect our DCME product sales to continue to decline over time, while there will be some periods where the DCME sales could be higher or lower than our expectations.

Services revenues increased 20% year over year. Our IP services revenues increased to $5.9 million in the first quarter of 2009 from $4.1 million in the first quarter of 2008 due to recognition of revenues from large deals on completed and accepted projects, for professional services and increased support and maintenance from a larger IP customer installation base. This increase in IP services revenue was offset by a decrease in DCME services revenues of $0.6 million, as a result of a reduction from $1.4 million to $0.8 million in the three months ended March 31, 2008 and 2009, respectively. Over time, as with the DCME product revenues, we expect DCME services revenues to decrease as new DCME implementations continue to decrease and customers migrate to next generation networks.

Revenue by Geography

The decrease in revenues of $6.9 million resulted from a decrease in sales in the Europe, Middle East and Africa, and the North America regions due to the economic downturn. There was a marginal dollar increase in the Asia Pacific and India region. The Caribbean and Latin America region were responsible for a significant increase due to the expansion of our products into new countries in the region, particularly Brazil. During the three months ended March 31, 2009, revenues were 15% from North America and 85% international as compared to 16% from North America and 84% international during the three months ended March 31, 2008. The geographic mix of revenues will vary significantly on a quarterly basis, primarily depending on the timing of the completion of projects.

Cost of Revenues and Gross Profit (amount in thousands).



                                            Three Months Ended March 31,
                                           2009                      2008                Period-to-Period Change
                                              Percentage                Percentage
                                               of Total                  of Total
                                    Amount     Revenue        Amount     Revenue         Amount         Percentage
Cost of Revenues:
IP Products                        $  5,434           42 %   $  8,408           41 %   $    (2,974 )           (35 )%
DCME Products                           487           41          585           37             (98 )           (17 )
Services                              2,888           43        3,938           71          (1,050 )           (27 )

Total cost of revenues             $  8,809           42 %   $ 12,931           46 %   $    (4,122 )           (32 )%

Gross Profit:
IP Products                        $  7,616           58 %   $ 12,336           59 %        (4,720 )           (38 )%
DCME Products                           711           59          991           63            (280 )           (28 )

Services                              3,815           57        1,625           29           2,190             135

Total gross profit                 $ 12,142           58 %   $ 14,952           54 %   $    (2,810 )           (19 )%

Cost of Revenues. The decrease in sales of IP and DCME products resulted in a corresponding decrease in cost of revenues. Although overall cost of revenues decreased as a result of the decrease in revenues, we continued to incur the fixed overhead costs during the current quarter. The overall decrease in cost of revenues includes the benefit from a correction of an error of $0.2 million that was discovered in the current period but related to a prior year. We do not believe that correcting the error in Q1 2009 is material to the current quarter or the expected result for the year 2009.

Although services revenues increased 20%, the cost of services revenues decreased 27% compared to the same period in 2008. The decreases were a result of lower salaries and related costs of $0.3 million due to lower headcount from the restructuring activities in the third quarter of 2008, decreased outside professional services of $0.3 million and reduced travel related costs of $0.2 million. The cost of services revenues will vary from period to period depending on the timing of projects being implemented, which may not be in the same period in which the corresponding revenue is recognized. We expect cost of service revenues to slightly increase as services revenue increases throughout the year.

Gross Margin. Gross margin, which is gross profit as a percentage of revenue, increased to 58% from 54% for the three months ended March 31, 2009 and 2008, respectively. This increase is primarily attributable to the higher margins attained in services revenues in the current quarter, which increased from 29% in the three months ending March 31, 2008 to 57% in the three months ending March 31, 2009.

Overall IP product gross margin may fluctuate on a sequential quarter over quarter basis due to changes in the IP product mix and the timing of the recognition of revenue and the associated costs. Typically, IP product revenues from expansion sales will have higher gross margins than revenues from initial VoIP solution deployments.

DCME product gross margins have remained relatively flat quarter over quarter because our hardware costs are a fixed percentage of our customer order amounts, and we anticipate this trend to continue.

The increase in services gross margin in the first quarter of 2009 compared to the same period of 2008 was attributable to higher services revenue as well as the timing of services expenses, which may not be in the same period as when the services revenues are recognized and our reduced cost structure in 2009 over 2008. We expect our services margins to improve during the first half of 2009 over the corresponding periods in 2008 due to our reduced cost structure resulting from our restructuring initiated in the third quarter of 2008.

Operating Expenses (amount in thousands).



                                            Three Months Ended March 31,
                                           2009                      2008                Period-to-Period Change
                                              Percentage                Percentage                      Percentage
                                               of Total                  of Total                        of Total
                                    Amount     Revenue        Amount     Revenue         Amount          Revenue
Research and development, net      $  5,208           25 %   $  7,873           28 %   $    (2,665 )           (34 )%
Sales and marketing                   6,530           31        7,806           28          (1,276 )           (16 )
General and administrative            2,808           13        2,936           11            (128 )            (4 )

Total operating expenses           $ 14,546           69 %   $ 18,615           67 %   $    (4,069 )           (22 )%

Research and development expenses, net. Research and development expenses consist primarily of salaries and related compensation for our engineering personnel responsible for design, development, testing and certification of our products. Our research and development efforts have been partially financed through grants from the Office of the Chief Scientist of the Israel Ministry of Industry and Trade (OCS). We record grants received from the OCS as a reduction of research and development expenses. Grants received from the OCS were $0.3 million in the three months ended March 31, 2009, and $0.6 million in the three months ended March 31, 2008. The decrease in OCS grant monies is mainly due to decreased spending in research activities and unfavorable foreign exchange movement between the U.S. dollar and the New Israeli Shekel. Of the $2.7 million decrease in research and development expenses, salaries, benefits and related employee costs, outside professional services, and travel contributed to $2.6 million of the decrease in expenses which is due to an approximate 40% headcount reduction from the restructuring that occurred in the third quarter of 2008.

We expect research and development expenses to remain approximately at the current expenditure levels on an absolute basis during the remaining quarters of 2009, and to decrease as a percentage of total revenues as revenues increase throughout the year.

Sales and marketing expenses. Sales and marketing expenses consist primarily of salaries and related compensation for our personnel, as well as marketing expenses, including attendance at trade shows, participation in trade associations and promotional activities. The $1.3 million decrease in sales and marketing expenses was a result of lower agent commissions of $0.5 million mainly due to lower bookings in Russia, which is a region where outside agents are utilized more often compared to other sales regions. Other decreases in sales and marketing expenses were from $0.3 million of travel, $0.2 million of marketing programs and $0.1 million in outside professional service expenses which was due to the emphasis in decreasing costs company wide due the to the restructuring that occurred the third quarter of 2008.

We expect sales and marketing expenses to increase throughout the year as sales personnel meet their higher annual commission tiers. However, other sales and marketing expenses will be impacted by sales arrangements which may include agent commissions and related expenses that will depend on the individual contract.

General and administrative expenses. General and administrative expenses consist primarily of salaries and related compensation costs for our executive management, finance personnel, legal and professional services, travel and related expenses, insurance and other overhead costs. We do not anticipate the expenses from the ongoing SEC investigation in 2009 to the same extent that we experienced in 2008.

We expect expenses and costs associated with our general and administrative functions to remain flat on an absolute basis, and to decrease as a percentage of total revenues as revenues increase throughout the year.

Other income (expense), net. Other income (expense), net consists primarily of interest income earned on cash and cash equivalents, foreign currency exchange gains (losses) and collection fees offset by interest expense and bank charges. Other income (expense), net, was a net expense of $0.5 million in the three months ended March 31, 2009, as compared with a net other income of $0.6 million in the three months ended March 31, 2008. The decrease was primarily due to an increase in foreign currency exchange losses on certain balance sheet items that are denominated in foreign currency, as well as by a decrease in interest income resulting from lower interest rates, and lower cash and cash equivalents balances due to significant use of cash for normal operating activities.

Provision for income taxes. Income taxes provided a provision of $0.1 million in each of the three months ended March 31, 2009 and 2008, respectively. Our income tax provision in the three months ended March 31, 2009 and 2008 was attributable to our profitable foreign operations.

Net loss. Net loss was $3.0 million and $3.1 million for the three months ended March 31, 2009 and 2008, respectively. Although the net loss remained relatively flat, gross profit decreased by $2.8 million compared to the three months ended March 31, 2008, while operating expenses decreased by $4.1 million partly related to restructuring charges.

Liquidity and Capital Resources

At March 31, 2009, we had unrestricted cash, cash equivalents and short-term investments of $35.8 million, a decrease from $38.0 million from December 31, 2008.

We anticipate our cash and related balances to increase in aggregate for the next 12 months as revenues increase and operating expenses decrease moderately from savings due to the restructuring completed in 2008. As a result, we believe that our existing cash, cash equivalents and short-term investments will meet our normal operating and capital expenditure needs for at least the next twelve months.

Operating Activities

Net cash used in our operating activities was $2.0 million and $2.9 million during the three months ended March 31, 2009 and 2008, respectively.

Net cash used in our operating activities in the three months ended March 31, 2009 was primarily attributable to our net loss of $3.0 million. The amount of cash used related to a decrease in deferred revenues of $4.3 million and decreases in accrued payroll and expenses of $1.3 million, offset by a decreases in inventories of $2.4 million, accounts receivable of $3.4 million, prepaid expenses and other current assets of $1.3 million and related party, net, by $2.4 million. Further, we incurred non-cash costs of $0.7 million for depreciation and $1.2 million of stock-based compensation. Our working capital decreased to $45.5 million as of March 31, 2009, from $47.1 million as of December 31, 2008.

Net cash used in our operating activities in the three months ended March 31, 2008 was primarily attributable to our net loss of $3.1 million. During the quarter we did not sell any accounts receivable, which increased by $5.0 million. We also had an increase in inventories of $0.5 million and decreases in accounts payable and deferred revenues in the aggregate amount of $2.6 million. The amount of cash used was offset by a decrease in prepaid expenses and other current assets, and increases in accrued expenses and in the net amount due to related parties in the aggregate amount of $6.2 million. The net cash used in our operating activities all related to sales growth and expanded operations. In addition, we incurred $0.9 million and $1.1 million of depreciation and stock-based compensation expenses, respectively, which are non-cash expenses. Our working capital decreased to $59.5 million as of March 31, 2008, from $60.7 million as of December 31, 2007.

Investing Activities

Net cash used in our investing activities was $12.6 million during the three months ended March 31, 2009. Net cash provided by our investing activities was $0.5 million during the three months ended March 31, 2008.

Investing activities in the three months ended March 31, 2009 consisted primarily of net purchases of short-term investments of $12.2 million as well as purchases of property and equipment of $0.4 million.

Investing activities in the three months ended March 31, 2008 consisted primarily of net proceeds received from the sales of short-term investments of $0.9 million offset by purchases of property and equipment of $0.5 million.

Financing Activities

Net cash provided by our financing activities was $32,000 for the three months ended March 31, 2009. Net cash used in our financing activities was $0.5 million during the three months ended March 31, 2008.

Net cash provided by our financing activities in the three months ended March 31, 2009 was comprised of proceeds received from the exercise of stock options in the amount of $32,000.

Net cash used in our financing activities in the three months ended March 31, 2008 was due to repayments of a loan in the amount of $0.9 million off set by proceeds received from the exercise of stock options in the amount of $0.4 million.

Off-Balance Sheet Arrangements

At March 31, 2009, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.