This discussion and analysis should be read in conjunction with the condensed consolidated financial statements included in this Form 10-Q and Part II of our Form 10-K for the fiscal year ended March 30, 2012 (as amended). Statements contained in this Form 10-Q that are not historical facts are forward-looking statements within the meaning of the federal securities laws that relate to future events or our future financial performance. A forward-looking statement may contain words such as "plans," "hopes," "believes," "estimates," "will," "continue to," "expect to," "anticipate that," "to be," or "can affect." Forward-looking statements are based upon management expectations, forecasts and assumptions that involve risks and uncertainties that may cause actual results to differ materially from those expressed or implied in the forward-looking statements. Many factors may cause actual results to vary including, but not limited to, the factors discussed in this Form 10-Q and our most recently filed Form 10-K (as amended). The Company expressly disclaims any obligation or undertaking to revise or publicly release any updates or revisions to any forward-looking statement contained in this Form 10-Q except as required by law. Investors should carefully review any risk factors described in this Form 10-Q and our most recently filed Form 10-K (as amended), along with other documents the Company files from time to time with the Securities and Exchange Commission.

References to "fiscal 2013" or "fiscal 2012" generally refer to the specific periods presented in this discussion.

Merger Agreement with Sonus Inc.

On June 18, 2012, Network Equipment Technologies, Inc. ("NET") entered into an Agreement and Plan of Merger (the "Merger Agreement") with Sonus Networks, Inc. ("Sonus"), and Navy Acquisition Subsidiary, Inc., a direct wholly-owned subsidiary of Sonus ("Merger Sub"), pursuant to which, subject to the satisfaction or waiver of certain conditions, Merger Sub will merge with and into NET and NET will become a direct wholly-owned subsidiary of Sonus (the "Merger"). See Note 1 to the Condensed Consolidated Financial Statements.

Our Business

Network Equipment Technologies, Inc. (NET), founded in 1983, develops and sells high performance networking equipment optimized for real-time communications. For more than a quarter of a century, NET has delivered solutions for multi-service networks requiring high degrees of versatility, security and performance. Today, the company is focused on providing secure real-time communications for unified communications (UC), session-initiation protocol (SIP) trunking, enterprise mobility, and IP-based multi-service networking. In 2007, in order to enhance our lineup of voice over IP (VoIP) offerings, we acquired Quintum Technologies and its Tenor product line.

Our enterprise customer base includes large enterprises adopting UC and small to mid-sized businesses (SMBs) implementing real-time communications. Our government customers include a variety of federal and international agencies and organizations, including civilian and defense agencies and resellers to such entities. In addition to our direct sales capabilities, we have developed relationships with integrators, resellers, and vendors of related technologies in order to help drive our enterprise business. Our global support and service organization, along with third-party service organizations, provides installation and other professional services, a variety of maintenance programs, technical assistance, and customer training.

Today, our solutions are focused on enabling our enterprise and government customers to cost-effectively migrate to next-generation IP networks utilizing real-time communications, including unified communications platforms, cloud-based voice, secure voice applications, and high-speed multiservice wide area networking (WAN) transport networks. Our newest product offering, the UX Series, was purpose-built for the unified communications and enterprise session border controller (E-SBC) markets to enable adoption of new communication technologies and services. Our voice solutions include the VX Series and the Tenor product lines of switching media gateways. Our legacy multi-service solutions include the Promina platform and the NX Series high speed multi-service network exchange platform.

The UX Series is an enhanced gateway with an embedded server that acts as a survivable branch appliance (SBA), which is a key component for remote-site survivability. The UX Series interoperates with our VX Series and Tenor products and was specifically designed to support upstream deployments with advanced features that give customers high levels of flexibility, scalability, quality of experience, and investment protection through interoperability. The VX Series and Tenor product lines provide enterprise customers with voice interoperability solutions that enable existing private branch exchange (PBX) and IP-PBX systems to work together with new UC platforms and IP-based service provider networks offering SIP trunking services. The VX Series also provides IP-based solutions to government agencies requiring high bandwidth efficiency and call performance for secure voice communications. The Tenor product line also provides traditional VoIP switching gateway solutions for SMBs and smaller branch offices within large enterprises.

Our legacy multi-service solutions include the Promina, NX1000 and NX5010 platforms. The Promina product line has been serving government agencies and large enterprises for many years, providing industry-leading network reliability and security. The NX Series products are high-performance networking platforms that provide high-grade data transfer and enable secure grid computing. Our NX1000 platform provides an extensive, compact, wide-area network (WAN) switching solution that enables applications to integrate and aggregate into IP-based networks. The NX5010 platform enables high-speed, secure interconnection and extension of geographically distributed grid computing clusters and SANs.

Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires that we make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Such estimates and assumptions, which we evaluate on an on-going basis, include, but are not limited to: assumptions related to contracts that have multiple elements, the allowances for sales returns and potentially uncollectible accounts receivable, the valuation of inventory, warranty costs, the valuation allowance on deferred tax assets, certain reserves and accruals, estimated lives of depreciable assets, and assumptions related to stock-based compensation. We base our estimates on historical experience and other assumptions that we believe are reasonable under the circumstances. Actual results could differ from those estimates.

There have been no significant changes to our policies and estimates, as discussed in our Annual Report on Form 10-K for the fiscal year ended March 30, 2012.

Recent Accounting Pronouncements

See Note 1 of our Notes to Condensed Consolidated Financial Statements for recent accounting pronouncements, including the expected dates of adoption and estimated effects on our consolidated financial statements.

Results of Operations

The following table sets forth selected data derived from our condensed
consolidated statements of operations expressed as a percentage of revenue for
the periods presented:

                                     Three Months Ended
                                   June             June
                                 29, 2012         24, 2011
Percent of revenue
Product                               65.8 %           68.1 %
Service and other                     34.2             31.9
Total revenue                        100.0            100.0

Product gross margin                  31.8             30.5
Service and other gross margin        60.2             41.6
Total gross margin                    41.5             34.0

Sales and marketing                   30.7             39.5
Research and development              31.5             42.6
General and administrative            26.0             22.0
Restructure and other costs            1.1                -
Total operating expenses              89.3            104.1
Loss from operations                 (47.8 )          (70.1 )

Interest expense, net                 (4.5 )           (4.0 )
Other income (expense), net              -              0.3
Loss before taxes                    (52.3 )          (73.8 )
Income tax provision                   0.3              0.6
Net loss                             (52.6 ) %        (74.4 ) %

Overview and Highlights

· Total revenue increased slightly in the first quarter of fiscal 2013 due to higher service revenues. Product revenue declined, as increased sales to commercial customers were offset by reduced sales to government customers. Our legacy products have seen sales declines and our newer products are targeted for different solutions and will require marketing and further development towards these new solutions in order to achieve broader adoption in the government sector.

· We are transitioning our product line to address unified communications and other new telecommunications opportunities. Sales of our UX Series product, which was introduced in the third quarter of fiscal 2011, are increasing, but sales have declined for our Promina and other multi-service products, as well as for our VoIP-based VX Series product.

· Our sector mix and our mix of product sales fluctuate quarter to quarter. Our newer products have not achieved broad market acceptance, so large individual sales can have a significant effect on our mix of product sales. Also, spending by government customers fluctuates based on budget allocations, the timely passage of the annual federal budget, and the timing of specific programs and purchasing for those programs. The following table shows elements of our sector mix and our mix of product sales:

(in thousands, except percentages) Three Months Ended June June 29, 2012 24, 2011 Sector mix:
Revenue from government customers $ 4,664 $ 5,965 % of total revenue 40.9 % 52.7 % Revenue from commercial customers $ 6,752 $ 5,348 % of total revenue 59.1 % 47.3 % Mix of product sales:
Promina product revenue $ 1,405 $ 1,936 % of product revenue 18.7 % 25.1 % VoIP-based product revenue $ 5,878 $ 4,825 % of product revenue 78.3 % 62.7 % Other product revenue $ 174 $ 863 % of product revenue 2.3 % 11.2 %

· Product margin and service margin both increased. The increase in product margin was a result of reduced employee compensation costs, due to lower headcount and related costs allocated to cost of products, partially offset by reserve charges for legacy products. The increase in service margin was also a result of reduced employee compensation costs, due to lower headcount and related costs allocated to cost of service.

· Expense levels were lower than in prior periods. Operating expense in the first quarter of fiscal 2013 decreased 13.5% from the prior year, despite substantial expenses for outside services relating the pending acquisition by Sonus. This decrease was achieved largely as a result of reduced employee compensation costs following organizational restructurings in the fourth quarter of fiscal 2012.

Revenue

                                        Three Months Ended
                                        June          June
(in thousands, except percentages)    29, 2012      24, 2011      Change
Product                               $  7,509     $  7,699       (2.5 )%
Service and other                        3,907        3,614        8.1
Total revenue                         $ 11,416     $ 11,313        0.9 %

Total revenue increased in fiscal 2013, due to an increase in service revenue, partially offset by a decline in product revenue.

On a sector basis, product revenue from commercial customers increased by $942,000, while product revenue from government customers declined by $1.1 million.

We expect our mix of product sales and our sector mix to fluctuate quarter to quarter, and we expect commercial sales to continue to increase as a percentage of our total sales. Sales to our government customers can fluctuate based upon passage of the annual budget and the timing of specific government programs.

Service and other revenue increased slightly in fiscal 2013, due to increased service activities. Significant fluctuations in our service and other revenue can occur as a result of factors affecting the timing of the recognition of revenue, including customer deployment schedules, contractual acceptance provisions and renewal of annual support agreements.

Gross Margin

Total gross margin increased in fiscal 2013 due principally to higher service and other margin.

Product margin was slightly higher in fiscal 2013. This increase was primarily due to the effect of lower employee compensation costs resulting from the restructurings.

Service and other gross margin improved due largely to reduced employee compensation and facilities costs resulting from the restructurings and cost savings resulting from closures of service facilities.

Operating Expenses

                                        Three Months Ended
                                        June          June
(in thousands, except percentages)    29, 2012      24, 2011      Change
Sales and marketing                  $    3,501     $   4,464       (21.6 )%
Research and development                  3,601         4,821       (25.3 )
General and administrative                2,972         2,498        19.0
Restructure costs                           121             -       100.0
Total operating expenses             $   10,195     $  11,783       (13.5 )%

Operating expense in fiscal 2013 decreased due principally to the effect of the restructurings. In the fourth quarter of fiscal 2012, the Company reduced headcount by approximately 90 employees. Employee compensation costs were significantly lower in fiscal 2013 and other operating expenses were also generally lower in fiscal 2013 reflecting the reduced headcount.

Sales and marketing expense was lower in fiscal 2013 by $1.0 million. This decrease was due principally to the effect of headcount reductions, and related expense reductions, that have occurred since the fourth fiscal quarter of fiscal 2012.

Research and development expense was lower in fiscal 2013 by $1.2 million. This decrease was due principally to the effect of headcount reductions that have occurred since the fourth fiscal quarter of fiscal 2012.

General and administrative expense was higher in fiscal 2013 by $472,000. Acquisition-related activities were principally responsible for increases in legal costs of $479,000 and increases in outside services costs of $309,000. These increases were partially offset by lower employee compensation costs, reflecting headcount reductions, and by lower audit fees.

Restructure and other costs of $121,000 for fiscal 2013 reflected charges for employee separation costs related to corporate restructuring activities and a change in our estimate of the cost to vacate certain facilities.

Non-Operating Items

(in thousands, except percentages)       Three Months Ended
                                         June           June
                                       29, 2012        24, 2011       Change
Interest income                       $     42       $     106       (60.4 )%
Interest expense                      $   (551 )     $    (553 )      (0.4 )
Other income (expense), net           $     (5 )     $      34       823.5 %

Interest income was lower in fiscal 2013 due to lower average cash and investment balances, and to a lesser extent, lower average interest earned on investments. Average cash and investment balances were lower primarily due to the effect of operating losses throughout fiscal 2012 and in the first three months of fiscal 2013.

Interest expense in the first quarter of fiscal 2013 and the first quarter of fiscal 2012 was virtually equivalent, as the balance of long-term debt was identical throughout each of the two periods.

Other income (expense), net, consisted of:

(in thousands)                           Three Months Ended
                                      June
                                     29, 2012       June 24, 2011
Gain (loss) on foreign exchange    $    (125 )          $      2
Realized gain on investments               6                  36
Other                                    114                  (4 )
                                   $      (5 )          $     34

Income Tax Provision

Income tax provisions were $38,000 and $72,000, respectively, in the first quarter of fiscal 2013 and 2012. Provisions for income tax are primarily related to our international operations.

Liquidity and Capital Resources

Historically, our primary sources of liquidity and capital resources have been our cash and investment balances, cash provided by operating activities and debt financing activities.

Cash balances: As of June 29, 2012, cash and cash equivalents, short-term investments and restricted cash were $30.2 million, as compared to $35.1 million as of March 30, 2012. At June 29, 2012, these amounts were invested 62% in U.S. Treasury notes and government agency investments and cash equivalents.

Cash flow from operating activities:

Net cash used by operating activities was $4.7 million in fiscal 2013 compared to $7.1 million in fiscal 2012. The decrease in net cash used in operating activities in fiscal 2013 resulted principally from the reduction in net loss in fiscal 2013 of $2.4 million, compared to fiscal 2012.

Cash flow from investing activities:

Net cash provided by investing activities was $3.7 million in fiscal 2013 compared to $9.9 million in fiscal 2012. The principal reason for this change was the net effect upon cash of purchases, sales and maturities of short-term investments. These activities provided net cash of $3.8 million and $10.1 million in fiscal 2013 and 2012, respectively.

We used the cash provided by investing activities in fiscal 2013 principally to fund operating activities.

Cash flow from financing activities:

Net cash used in financing activities was $55,000 in fiscal 2013 compared to $145,000 in fiscal 2012.

Financing activities in fiscal 2013 consisted of payments for leased equipment as well as repurchases of common stock from employees to satisfy withholding tax requirements. The principal financing activity in fiscal 2012 was repurchases of common stock from employees to satisfy withholding-tax requirements.

Our contractual obligations and contingencies decreased by $1.7 million from March 30, 2012. This decrease was principally due to ongoing interest and operating lease payments. The following table provides a summary of our contractual obligations and other commercial commitments as of June 29, 2012:

Contractual obligations 2014 2016 (in thousands) to to After Total 2013 2015 2017 2017 Current portion of long-term debt $ 1,204 $ - $ 1,204 $ - $ - Long-term debt 33,000 - 33,000 - - Interest on long-term debt 4,421 1,056 3,365 - - Operating leases 6,350 1,501 2,588 2,261 - Capital leases 121 45 55 21 - Total contractual obligations $ 45,096 $ 2,602 $ 40,212 $ 2,282 $ -

We have a contract with a third-party technology supplier that calls for payments by us totaling $2.5 million upon receipt of deliverables meeting certain conditions. We believe it is unlikely these payments will become due or be paid.

We have a long-term income tax liability for uncertain tax positions amounting to $371,000 at June 29, 2012. We cannot currently predict the date of settlement or payment, as the timing of resolution of our liability is highly uncertain.

In the normal course of business, we enter into contractual commitments to purchase services, materials, components, and finished goods from suppliers, mainly our primary contract manufacturer, Plexus. Under our agreement with Plexus, we maintain a level of control over parts procurement, design, documentation, and selection of approved suppliers. We are generally liable for any termination or cancellation of product orders, as well as excess and obsolete material, which can result, for example, from an engineering change, product obsolescence, or inaccurate component forecasting. Under the agreement, Plexus is to procure raw materials and begin manufacturing of products in accordance with our forecasts. If certain purchased raw materials or certain work-in-process items are held for greater than 90 days, we must make deposits on the aging inventory, although Plexus must make efforts to minimize our liability for the aging inventory, including returning materials to suppliers, canceling orders with suppliers, or using materials to manufacture product for its other customers. If raw material or in-process inventories are still unused and have been held for more than nine months, we must take ownership and pay for the aged inventory. Alternatively, if there is forecasted demand for such inventory, we must pay a management fee for Plexus to retain such inventory. If the forecasted demand does not materialize we must take ownership and pay for such inventory. This activity may increase our owned inventories. The term of our agreement with Plexus currently runs to December 31, 2012, with automatic renewal for additional one-year terms unless either party gives notice of intent not to renew, and subject to either party's right to terminate upon six months notice.

At June 29, 2012, Plexus held inventory related to our products. Our deposit relating to this inventory was $2.7 million and reserves relating to this deposit were $1.3 million. Both the deposit and the related reserves are included in prepaid expenses and other assets on the condensed consolidated balance sheets. Additional deposits may be required under the terms of the agreement.

Liquidity: We believe that our existing cash, cash equivalents and short-term investments will be sufficient to fund operations for at least the next twelve months. However, if the effects of our restructuring commenced in January 2012 and continued in March 2012 are not materially consistent with our expectations, we may encounter cash flow and liquidity issues during that period. We will continue to assess our cash consumption, and our liquidity position. At any time, if we determine that it is necessary, we will evaluate our alternatives and take appropriate steps to address liquidity issues, either by further reducing cash consumption, raising additional capital, or a combination of measures. If additional capital is needed we cannot be assured that it will be available to us and, if we are unable to raise it or raise it on acceptable terms, we may have to delay, reduce the scope of, or eliminate some or all of our research and development programs or other operations, which may include delaying further development of our products; or reduce marketing, customer support or other resources devoted to our products or operations. Any of these developments could harm our business, results of operations, or financial condition.

Off-balance sheet arrangements: Other than the commitments described above, there are no other off-balance sheet arrangements that are reasonably likely to materially affect our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.