Introduction and Overview

RadiSys Corporation is a leading provider of advanced embedded solutions for the communications networking and commercial systems markets. Through innovative product planning, close customer collaboration, and the combination of innovative technologies and industry leading architecture, we help original equipment manufacturers ("OEMs"), systems integrators and solution providers bring better products to market faster and more economically. Our products include embedded boards, application enabling platforms and turn-key systems, which are used in today's complex computing, processing and network intensive applications. Unless context otherwise requires, 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.

Our Markets

We provide application enabling solutions to the following two distinct markets:

• Communications Networking - The communications networking market is comprised of two product categories, which are next generation and traditional communication networking products. Included in our next-generation communications product group are Advanced Telecommunications Computing Architecture ("ATCA") and Media Server products. Included in our traditional product group are traditional wireless products and all other communications networking revenues not included in the next-generation group. Applications in this market include 2, 2.5, 3, and 4G wireless infrastructure products, IP media server platforms, military applications, multimedia messaging, network access, packet-based switches, security and switching applications, unified messaging solutions, voice messaging and video distribution applications.

• Commercial Systems - The commercial systems market consists primarily of embedded solutions for the medical imaging, test and measurement, industrial automation and military submarkets. Specific applications include:

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

• Test and Measurement: network and logic analyzers, network and production test equipment; and

• Industrial Automation: distribution automation, electronics assembly and semiconductor manufacturing equipment.

Market Drivers

We believe there are a number of fundamental drivers for growth in the embedded solutions market, including:

• Increasing desire by OEMs to utilize standards-based, merchant-supplied modular building blocks and platforms to develop their new systems. We believe OEMs are combining their internal development efforts with merchant-supplied building blocks and platforms, from partners like RadiSys, to deliver a larger number of more valuable new products to market faster at a lower total cost.

• Increasing usage levels of general purpose technologies, such as Ethernet, IP, Linux, media processing and central processing units ("CPUs"), graphics processing units and network processing units ("NPUs"), to provide programmable,

• Increasing demand for standards-based solutions, such as ATCA, IP Multimedia Subsystem ("IMS"), Computer-on-Module Express ("COM Express"), and Session Initiation Protocol, which motivates system makers to take advantage of proven and validated standards-based products.

• Continued emergence, growth and evolution of applications utilizing long term evolution ("LTE") and worldwide inter-operability for microwave access ("WiMAX") networks, both of which are supported by ATCA.

Our Solutions

We provide our customers with standards-based and custom advanced embedded solutions that enable them to focus their resources and development efforts on their key areas of differentiation and allow them to provide higher value systems with a time-to-market advantage and a lower total cost.

Key benefits of our solutions include:

Leading, high-performance technology. We have been the first to market with many technological advancements such as the industry's first 10-Gigabit common managed platform, and we are a leader in areas such as IP conferencing and COM Express new product development. Our design capabilities extend to CPUs, NPUs, digital signal processing and integrated software managed platforms, such as media and application servers, as well as many other areas.

Deep pool of technical resources. Our research and development staff has extensive experience in designing embedded hardware and software solutions. Our customers benefit from the broad array of standards-based solutions that our research and development staff continues to develop and support, as well as our staff's experience in designing perfect fit solutions for our customers.

Reduced time to market. We offer standards-based, ready-made solutions, such as ATCA-based solutions for the communications networking 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 embedded solution products. Our product lines include a large portfolio of embedded solutions, integrated platforms and application-ready systems. Our product portfolio allows us to address a range of customer requirements and applications. We believe that over time many of our customers will increasingly rely on a smaller set of vendors who can address a broader set of their embedded solution needs.

Our Strategy

Build market leadership in standards-based advanced embedded solutions in our target markets. We believe this strategy enables our customers to focus their resources and development efforts on their key areas of competency allowing them to provide higher value systems with a time-to-market advantage and a lower total cost. We are currently one of the leading vendors in ATCA, IP Media Servers as well as COM Express embedded solutions. We intend to continue to invest significant research and development and sales and marketing resources to build our presence in these market segments.

Develop our offering of higher value platform solutions.Historically, the majority of our revenues have been from the sale of stand-alone boards or blades. While we will continue to focus on these products, we have spent considerable resources developing application-ready platform solutions that incorporate complete hardware systems as well as embedded software developed by us or third parties. These platforms provide an additional revenue opportunity for us, and we believe revenues from these products have the potential to generate higher average selling prices and higher gross margins than those provided from the sale of boards or blades alone.

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 embedded solutions. Our global reach allows us to market our solutions to most leading system vendors in our target markets. In addition, our acquisitions of Convedia Corporation ("Convedia") and certain assets of the Modular Communications Platform Division ("MCPD") business from Intel Corporation ("Intel") provide us access to additional customers to whom we intend to market our full product line.

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 three years, we acquired Convedia®, a closely-held vendor of IP media servers, and certain assets of the Intel MCPD business, which included ATCA and compact peripheral component interconnect ("PCI") product lines.

Products Overview

Promentum® ATCA Products. During the first quarter of 2009, we announced ongoing development with Cavium Networks to deliver OCTEON II based ATCA solutions to Telecom Equipment Manufacturers (TEMs). The OCTEON II packet processing smart front end ATCA solution has cutting-edge performance, flexibility and throughput to reduce TEMs time-to-market, price and improve performance of their systems. We also announced the release of the first ATCA processing blade using the new Intel Xeon processor 5500 series that combines high performance with large memory capacity and expansion flexibility. The new product is targeted at 4G applications including LTE, WiMAX, and IMS (IP Multimedia Subsystem). This new product resulted in several design wins in the first quarter in both Asia and North America.

Convedia® Media Servers ("CMS"). During the first quarter of 2009, the RadiSys Convedia Media Server was named the media server market leader for the fifth consecutive year by Infonetics in its report, "Service Provider VoIP Equipment and Subscribers: Quarterly Worldwide Market Share and Forecasts." RadiSys captured 47% of the total media server market in 2008.

During the first quarter of 2009, we also introduced Voice Quality Enhancement features for the CMS that will improve voice quality in VoIP conferencing applications. This new feature set recently received the 2009 NGN Leadership Award from NGN (Next Generation Networks) Magazine, a Technology Marketing Corporation publication.

Procelerant™ Commercial Products. During the first quarter of 2009, we announced a new image processing embedded server with high processing performance targeted at medical imaging, industrial automation and test and measurement applications. We also announced a new ruggedized extended temp COM Express module targeted at industrial automation, transportation, military, aerospace, and government applications using ultra low-power Intel Atom processors. In addition, the Company announced an ultra-small, low power PICO-ITX single board computer for portable and handheld devices for medical, gaming, ticketing and test and measurement applications.

Financial Results - Total revenue was $77.6 million and $86.0 million for the three months ended March 31, 2009 and 2008, respectively. Backlog was approximately $41.4 million and $34.4 million at March 31, 2009 and December 31, 2008, respectively. Backlog includes all purchase orders scheduled for delivery within 12 months. The decrease in revenues for the three months ended March 31, 2009 compared to the same period in 2008 was driven by decreased revenues from our traditional wireless business and our commercial markets. These declines were offset by increased revenues from our next-generation communications products.

Net loss was $40.1 million and $7.2 million for the three months ended March 31, 2009 and 2008, respectively. Net loss per share was $1.73 and $0.32 for the three months ended March 31, 2009 and 2008, respectively. Net loss increased from 2008 to 2009, due to increased income tax expense, which totaled $38.9 million for the three months ended March 31, 2009, as compared to an income tax benefit of $491,000 for the three months ended March 31, 2008. The increase in income tax expense was driven by the establishment of a valuation allowance for our U.S. deferred tax assets.

Cash and cash equivalents amounted to $79.1 million and $74.0 million at March 31, 2009 and December 31, 2008, respectively. The increase in cash and cash equivalents and investments during the three months ended March 31, 2009, is primarily due to cash generated from our operating activities in the amount of $4.3 million. Additionally, financing activities generated cash flows of $1.6 million largely due to proceeds from the issuance of our common stock. Cash flows used in investing activities totaling $552,000, slightly offset these increases. Investing activities were primarily related to capital expenditures, which were down compared to prior periods due to our focus on reducing spending.

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, 2008. There have been no significant changes during the three months ended March 31, 2009 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 fiscal year ended December 31, 2008 except as follows.

2023 Convertible Senior Notes

During the three months ended March 31, 2009, we adopted FSP APB 14-1. FSP APB 14-1 is effective for our previously outstanding 1.375% convertible senior notes which were due November 15, 2023. Although, the 2023 convertible senior notes were retired as of December 31, 2008, we were still required to retrospectively apply FSP APB 14-1 in all periods presented that include the notes. FSP APB 14-1 required that issuers of convertible instruments that may be settled for cash upon conversion separately account for the liability and equity components related to convertible debt instruments in a manner which would reflect the issuer's nonconvertible debt borrowing rate when interest expense is recognized in subsequent periods. Adoption of FSP APB 14-1 required significant judgment by management in determining the estimated borrowing rate at date of issuance, exclusive of the conversion feature. For further discussion of the adoption of FSP APB 14-1 refer to Note 8.

Results of Operations

The following table sets forth certain operating data as a percentage of
revenues for the three months ended March 31, 2009 and 2008.



                                                  For the Three Months Ended
                                                           March 31,
                                                    2009               2008
    Revenues                                          100.0 %            100.0 %
    Cost of sales:
    Cost of sales                                      66.9               72.5
    Amortization of purchased technology                2.1                4.8

    Total cost of sales                                69.0               77.3

    Gross margin                                       31.0               22.7
    Research and development                           14.4               14.7
    Selling, general, and administrative               15.2               14.9
    Intangible assets amortization                      0.8                1.5
    Restructuring charges, net                          2.0                 -

    Loss from operations                               (1.4 )             (8.4 )
    Interest expense                                   (0.8 )             (2.0 )
    Interest income                                     0.5                1.5
    Other income, net                                   0.2                0.0

    Loss before income tax provision (benefit)         (1.5 )             (8.9 )
    Income tax provision (benefit)                     50.2               (0.6 )

    Net Loss                                          (51.7 )%            (8.3 )%

Comparison of Three Months Ended March 31, 2009 and 2008

Revenues. Revenues decreased by $8.4 million or 9.8%, from $86.0 million for the three months ended March 31, 2008 to $77.6 million for the three months ended March 31, 2009. The decrease in revenues for the three months ended March 31, 2009, compared to the same period in 2008, was driven by decreased revenues from our traditional wireless business and our commercial markets. These declines were offset by increased revenues from our next-generation communications products. During the three months ended March 31, 2009, we changed the manner in which we report revenues, which involved a shift from a market based approach to a product based approach. Previously, we reported communications networking revenues broken out into sub-markets for wireless, IP networking and messaging, and other communications networking products. As described above in the description of our markets, we now report our communications networking revenues from either next-generation communications networking products or our traditional communications networking products.

                                                         For the Three Months Ended
                                                                  March 31,
                                                         2009         2008      Change
 Next-generation Communications Networking Products   $   25,159    $ 23,881   $  1,278
 Traditional Communications Networking Products           36,872      42,671     (5,799 )

 Total Communications Networking Products                 62,031      66,552     (4,521 )

 Medical Products                                     $    6,386    $  8,009   $ (1,623 )
 Other Commercial Products                                 9,187      11,487     (2,300 )

 Total Commercial Products                            $   15,573    $ 19,496   $ (3,923 )

 Total                                                $   77,604    $ 86,048   $ (8,444 )

Revenues in the communications networking product group decreased for the three months ended March 31, 2009, compared to the same period in 2008, primarily due to declines in revenues from traditional communications networking products, which was the result of general economic weakness combined with the ongoing end of life of some of our traditional products. This decrease was partially offset by overall increased revenues from the deployment of our next generation communications networking product group.

Revenues in our commercial products group decreased for the three months ended March 31, 2009, compared to the same period in 2008. This decrease was driven by a decline in demand caused by soft overall economic conditions in all of our submarkets including medical and test and measurement equipment.

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.

From a geographic perspective, for the three months ended March 31, 2009, compared to the same period in 2008, the percentage of revenues by destination in the Asia Pacific region increased by $1.2 million, and represented 36.7% of total revenues, up from 31.7% in the same period of 2008. Revenues in the EMEA region decreased by $8.1 million during the three months ended March 31, 2009 and represented 32.8% of total revenues, down from 39.0% in the same period of 2008. The changes in the percentages of revenues from EMEA and Asia Pacific regions were driven by a shift in our end customers for our traditional wireless products, from Europe to Asia. For the three months ended March 31, 2009, revenues from North America decreased by $1.5 million, compared to the same period in 2008. This decrease is primarily due to a reduction in demand driven by soft economic conditions.

Gross Margin. Gross margin as a percentage of revenues increased 8.3 percentage points, up from 22.7% for the three months ended March 31, 2008, to 31.0% for the three months ended March 31, 2009. This increase was largely driven by a greater mix of next-generation higher margin products as well as lower manufacturing and operational costs, which combined accounted for 6.4 of the percentage point increase. The remaining 1.9 percentage point increase in gross margin was driven by a reduction in amortization costs of purchased technology, for which certain assets are now fully amortized, along with a change in the estimated life of certain intangible assets in the fourth quarter of 2008.

Research and Development. 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 decreased $1.5 million, or 11.5%, from $12.7 million for the three months ended March 31, 2008 to $11.2 million for the three months ended March 31, 2009. This decrease is primarily the result of decreased headcount and related payroll costs, resulting from restructuring activities undertaken during the second quarter of 2008. The decrease was further driven by lower project costs.

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 decreased by $1.0 million or 8.1%, from $12.9 million for the three months ended March 31, 2008 to $11.8 million for the three months ended March 31, 2009. The decrease was driven by the elimination of transition service payments related to the MCPD acquisition along with general expense reductions.

Stock-based Compensation Expense. Stock-based compensation expense consists of amortization of stock-based compensation associated with stock options, restricted shares and shares issued to employees as a result of the employee stock purchase plan ("ESPP"). Stock-based compensation expense increased by $254,000 or 10.0%, from $2.5 million for the three months ended March 31, 2008 to $2.8 million for the three months ended March 31, 2009. The increase is primarily due to the incremental cost of stock-based compensation, which totaled $234,000, associated with restructuring activities undertaken during the three months ended March 31, 2009, which included charges related to the modification of equity awards of certain employees involved in the restructuring plan.

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

                                                 For the Three Months Ended
                                                         March 31,
                                                   2009             2008
         Cost of sales                         $         340    $         244
         Research and development                        752              812
         Selling, general and administrative           1,465            1,481
         Restructuring                                   234               -

         Total stock-based compensation                2,791            2,537

Intangible Assets Amortization. Intangible assets consist of purchased technology, patents and other identifiable intangible assets. Intangible assets amortization expense included within operating expenses was $647,000 and $1.3 million for the three months ended March 31, 2009 and 2008, respectively. Intangible assets amortization decreased due to the extension of the useful lives of various intangible assets in the fourth quarter of 2008. 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 Other Charges. We evaluate the adequacy of the accrued restructuring and other charges on a quarterly basis. As a result, we record certain reclassifications and reversals to the accrued restructuring and other charges based on the results of the evaluation. The total accrued restructuring and other charges for each restructuring event are not affected by reclassifications. Reversals are recorded in the period in which we determine that expected restructuring and other obligations are less than the amounts accrued. Tables summarizing the activity in the accrued liability for current restructuring activities are contained in Note 6 - Accrued Restructuring and Other Charges of the Notes to the Unaudited Consolidated Financial Statements.

First Quarter 2009 Restructuring. During the fourth quarter of 2009, we initiated a restructuring plan that included the elimination of 29 positions. The restructuring was initiated to align our costs with our annual operating plan. During the three months ended March 31, 2009, we incurred $1.5 million in restructuring charges, which were comprised almost entirely of employee payroll related severance costs. Included in these costs were charges related to the modification of equity awards to certain employees included in this restructuring activity.

Interest Expense. Interest expense includes interest incurred on our convertible notes and our lines of credit. Interest expense decreased $1.2 million, or 66.4%, from $1.8 million during the three months ended March 31, 2008, to $590,000 during the three months ended March 31, 2009. The decrease in interest expense during the three months ended March 31, 2009, compared to the same period in 2008, was driven by the adoption of FSP APB 14-1 during the first quarter of 2009, which resulted in the retrospective recognition of interest expense in the amount of $1.2 million for the three months ended March 31, 2008.

Interest Income. Interest income decreased $909,000, or 69.7%, from $1.3 million for the three months ended March 31, 2008 to $395,000 million for the three months ended March 31, 2009. Interest income decreased largely as a result of a decline in our overall average investment yield during the first quarter of 2009, as compared to our average investment yield in the first quarter of 2008. The decline in our average investment yield is a direct result of lower reset interest rates associated with our ARS coupled with a shift in our investment portfolio.

Income Tax Provision. We recorded a tax provision of $38.9 million and a tax benefit of $491,000 for the three months ended March 31, 2009 and 2008, respectively. We expect the effective tax rate for the year ending December 31, 2009 to be higher in comparison to 12.6% for the year ended December 31, 2008. The anticipated increase in the effective tax rate, is primarily due to discrete items related to the full valuation allowance against our U.S. net deferred tax assets and the revaluation of our Canadian net deferred tax assets. The establishment of a valuation allowance resulted in a $42.0 million tax expense while the revaluation of net Canadian tax assets resulted in a tax benefit of $3.2 million in the three months ended March 31, 2009. See Note 11 - Income Taxes of the Notes to the Unaudited Consolidated Financial Statements for more details regarding these discrete items.

The 2009 estimated effective tax rate is based on current tax law and the current expected income, by tax jurisdiction, and assumes that we will continue to receive the tax benefits associated with certain income associated with . . .