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, Femtocell applications, 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, military and industrial automation 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

• Military: ruggedized laptops, small unmanned vehicles, and other military applications.

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, intelligent and networked functionality to a wide variety of applications, including wireless, wireline and data communications, network security, image processing, transaction and monitoring and control.

• 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

Convedia® Media Servers ("CMS"). In the third quarter, we were awarded a key new design win with an existing Tier 1 customer in China. This award was for an integrated media processing platform that will be used by mobile service providers to deliver advanced 3G video services.

During September of 2009, we announced the addition of new 3G features for our media server product family enabling two-way interactive mobile video. RadiSys media servers offer a broad range of IP video processing features for video telephony applications including mobile video conferencing, video ringback tones, video mail and interactive voice and video response ("IVVR"). With the addition of new media processing capabilities, the RadiSys media servers can now support a service provider's 3G video processing needs with one common voice over internet protocol ("VoIP") infrastructure.

During the second quarter of 2009, we were awarded new media server business with a Tier 1 North American customer for an interactive voice response ("IVR") front end IP teleconferencing service application. This application will use our full featured software media server product.

During the second quarter of 2009, we were also awarded our first media server business with a targeted new Tier 1 customer in Asia. This award was for a WiMax application in the customer's home market. We believe that this initial win will enable further media server business with this customer in its end markets.

During the first quarter of 2009, the RadiSys CMS 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.

Promentum® ATCA Products. During the third quarter of 2009, we announced our ATCA 4.0 initiative, our 4th generation of ATCA products that are designed to support the next generation of high bandwidth applications. This fully integrated platform features the latest technology in the industry, incorporating a 10/40G backplane and switching capability. As telecom equipment manufacturers ("TEMs") focus on building next generation network infrastructures, including 4G and Broadband, the RadiSys ATCA 4.0 platform will provide them with the next-generation switching, power and cooling they require.

Also, during the third quarter of 2009, we partnered with Aricent and 6WIND to deliver application-ready platforms for the LTE evolved packet core ("EPC"). Through this collaboration, we can deliver its market-proven ATCA Promentum platform, a comprehensive LTE signaling stack and efficient data path software in one fully integrated solution that lowers development risk for TEMs and reduces time-to-market by as much as 18 months.

In addition, during the third quarter of 2009, we were awarded new ATCA business in messaging, deep packet inspection ("DPI") security gateway, VoIP probe, session border controller ("SBC") and unmanned aerial vehicles ("UAV"). Specifically, the messaging win was of notable size with a new large Tier 1 TEM for RadiSys in North America. The UAV win is related to a project for a new customer for a universal ground control station for unmanned aerial reconnaissance drones.

Also, during the third quarter of 2009, the our ATCA 4500 10 Gigabit compute processing module was production released in the second quarter and deployed in customer trial networks in the third quarter. This product is ideal for control plane and server functions for LTE wireless infrastructure, DPI, internet protocol television ("IPTV"), IP multimedia subsystems and defense applications.

During the second quarter of 2009, we were awarded new ATCA business in deep packet inspection, network security appliance, 3G wireless appliance, Packet Data Serving Node ("PDSN") and Wireless Access Gateway ("WAG") applications. These wins, which were particularly strong in Asia and North America, included full platform solutions with both Tier 1 and Tier 2 Telecommunications Equipment Manufacturers ("TEMs").

Additionally, during the second quarter of 2009, we began ramping shipments of our packet processing ATCA 7220 blade to support a number of growing Tier 1 and Tier 2 customers. The ATCA 7220, which has been designed into seven different programs already, provides the highest density of Gigabit Ethernet interfaces in the industry and offers a complete solution for packet processing applications such as radio network controller ("RNC"), SBC, edge routers, security and media gateways.

In the second quarter of 2009, our ATCA platforms began field deployment into a top North American wireless carrier for a new 3G Femtocell application.

Additionally, during the second quarter of 2009, our newly announced ATCA 4500 processing blade that uses the new Intel Xeon processor 5500 series started shipping in production volumes. We were also awarded new ATCA 4500 business for security appliance and PDSN applications from customers in Japan and China.

During the first quarter of 2009, we announced ongoing development with Cavium Networks to deliver OCTEON II based ATCA solutions to TEMs. We believe that 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 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. This new product resulted in several design wins in the first quarter in both Asia and North America.

Procelerant™ Commercial Products. During the third quarter of 2009, we were awarded sizable new COM Express business by a leading enterprise service provider in North America for a network switch application. We also won new COM Express business in the third quarter in a wide variety of applications including military, Session Border Controller and touch panel home automation systems. Further, we also won new rack mount server medical imaging business with an existing Tier 1 medical customer.

During the second quarter of 2009, we won embedded rackmount server business with an existing Tier 1 medical customer. In addition, during the second quarter of 2009, we won new COM Express business in a wide variety of applications such as military, IP Gateway, Network Analyzer, aircraft video, entertainment and law enforcement.

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 $70.4 million and $100.3 million for the three months ended September 30, 2009 and 2008, respectively. Total revenue was $226.1 million and $283.9 million for the nine months ended September 30, 2009 and 2008, respectively. Backlog was approximately $51.7 million and $34.4 million at September 30, 2009 and December 31, 2008, respectively. Backlog includes all purchase orders scheduled for delivery within 12 months. The decrease in revenues for the three and nine months ended September 30, 2009, compared to the same periods in 2008, was driven by decreased revenues in all of our product groups.

Net loss was $832,000 and $481,000 for the three months ended September 30, 2009 and 2008, respectively. Net loss per share was $0.04 and $0.02 for the three months ended September 30, 2009 and 2008, respectively. Net loss was $43.0 million and $10.7 million for the nine months ended September 30, 2009 and 2008, respectively. Net loss per share was $1.84 and $0.48 for the nine months ended September 30, 2009 and 2008, respectively. Net loss for the three months ended September 30, 2009, increased compared to the three months ended September 30, 2008, primarily due to decreased revenues in all of our product groups. These declines were largely the result of general economic weakness along with declines due to the maturity of our traditional communications networking products and decreased customer deployments for our next-generation communications networking products, as compared to the same periods in 2008. The decline in revenues was partially offset by improvements in our gross margin by 2.7 percentage points due to an improved mix of products and better operational costs. The decline in revenue was also partially offset by lower operating expense from ongoing expense control. Net loss increased for the nine months ended September 30, 2009, as compared to the nine months ended September 30, 2008, primarily due to increased income tax expense, which totaled $39.1 million for the nine months ended September 30, 2009, as compared to an income tax benefit of $739,000 for the nine months ended September 30, 2008. The increase in income tax expense was driven by the valuation allowance taken for our U.S. deferred tax assets during the three months ended March 31, 2009. Without the charge associated with the valuation allowance we would have seen an improvement in our net loss for the nine months ended September 30, 2009 compared to the same period in 2008. The improvement is due to better margins associated with a more favorable product mix as well as our ongoing focus on expense control.

Cash and cash equivalents amounted to $92.1 million and $74.0 million at September 30, 2009 and December 31, 2008, respectively. The increase in cash and cash equivalents during the nine months ended September 30, 2009, is primarily due to cash generated from our operating activities in the amount of $14.9 million. Additionally, financing activities generated cash flows of $5.2 million largely due to proceeds from the issuance of our common stock, through our stock compensation plans, along with borrowings on our line of credit totaling $1.7 million. These increases were offset by cash flows used in investing activities of $2.1 million, primarily related to capital expenditures.

On November 3, 2009 the Company exchanged a total of 848,822 of vested or unvested stock options having an exercise price greater than $9.44 per share for restricted stock units or new stock options with new vesting schedules and exercise prices, pursuant to the terms and conditions of the option exchange offer approved by the Company's shareholders on August 18, 2009. All surrendered options were cancelled and the Company granted a total of 169,639 restricted stock units and 34,983 new stock options, pursuant to the terms of the exchange offer. The new awards were granted under the Company's 2007 Stock Plan. See Note
16 - Subsequent Events to our consolidated financial statements for additional details about this offer.

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 and nine months ended September 30, 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 first quarter of 2009, we adopted the Cash Conversion Subsections of ASC Subtopic 470-20, "Debt with Conversion and Other Options - Cash Conversion" ("Cash Conversion Subsections"). The Cash Conversion Subsections are effective for our previously outstanding 1.375% convertible senior notes due 2023 (the "2023 convertible senior notes"). Although, the 2023 convertible senior notes were retired as of December 31, 2008, we were still required to retrospectively apply the Cash Conversion Subsections in all periods presented that include the notes. The Cash Conversion Subsections required that issuers of convertible instruments which 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 the Cash Conversion Subsections 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 the Cash Conversion Subsections refer to Note 8 - Convertible Debt, of the Notes to the Consolidated Financial Statements.

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, 2009 and 2008.



                                                For the Three Months           For the Nine Months
                                                 Ended September 30,           Ended September 30,
                                                 2009            2008          2009            2008
Revenues                                          100.0 %%       100.0 %        100.0 %        100.0 %
Cost of sales:
Cost of sales                                      68.3           69.5           67.3           70.9
Amortization of purchased technology                2.3            3.8            2.1            4.2

Total cost of sales                                70.6           73.3           69.4           75.1

Gross margin                                       29.4           26.7           30.6           24.9
Research and development                           14.2           11.9           14.0           13.2
Selling, general, and administrative               15.6           12.7           15.1           13.6
Intangible assets amortization                      0.9            1.3            0.9            1.4
Restructuring and other charges                     0.2            0.0            2.0            0.2

Income (loss) from operations                      (1.5 )          0.8           (1.4 )         (3.5 )
Interest expense                                   (0.8 )         (1.0 )         (0.8 )         (1.4 )
Interest income                                     0.2            0.6            0.3            0.9
Other income (expense), net                         0.0            0.0            0.1           (0.0 )

Income (loss) before income tax (benefit)
expense                                            (2.1 )          0.4           (1.8 )         (4.0 )
Income tax (benefit) expense                       (0.9 )          0.9           17.2           (0.2 )

Net loss                                           (1.2 )%        (0.5 )%       (19.0 )%        (3.8 )%

Comparison of Three and Nine Months Ended September 30, 2009 and 2008

Revenues

Revenues decreased by $29.8 million or 29.7%, to $70.4 million in the three months ended September 30, 2009 from $100.3 million in the three months ended September 30, 2008. Revenues decreased by $57.8 million or 20.3%, to $226.1 million in the nine months ended September 30, 2009 from $283.9 million in the nine months ended September 30, 2008. The decrease in revenues for the three and nine months ended September 30, 2009, compared to the same periods in 2008, is due to decreased revenues from all of our product groups. These declines were largely the result of general economic weakness for our products, declines due to the maturity of our traditional communications networking products and decreased customer deployments for our next-generation communications networking products, as compared to the same periods in 2008.

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

                                        For the Three Months                   For the Nine Months
                                        Ended September 30,                    Ended September 30,
                                    2009       2008       Change          2009        2008       Change
Next-generation Communications
Networking Products               $ 21,653   $  30,655   $  (9,002 )    $  73,574   $  77,140   $  (3,566 )
Traditional Communications
Networking Products                 32,246      48,368     (16,122 )      107,631     148,038     (40,407 )

Total Communications Networking
Products                          $ 53,899   $  79,023   $ (25,124 )    $ 181,205   $ 225,178   $ (43,973 )

Medical Products                     6,683       8,418      (1,735 )       18,316      21,909      (3,593 )
Other Commercial Products            9,866      12,817      (2,951 )       26,624      36,829     (10,205 )

Total Commercial Products         $ 16,549   $  21,235   $  (4,686 )    $  44,940   $  58,738   $ (13,798 )

Total revenues                    $ 70,448   $ 100,258   $ (29,810 )    $ 226,145   $ 283,916   $ (57,771 )

Communications Networking Product Group

Revenues in the communications networking product group decreased during the three and nine months ended September 30, 2009 compared to the same periods in 2008 due to decreased revenues from both submarkets within our communications networking product group. Both product groups were affected by continued economic weakness. The decreases in revenues from our traditional communications networking products were further driven by the maturity of the products within this group. The decline in revenues from our next-generation communications networking products was driven by the recognition of approximately $7.2 million in previously deferred revenues.

Commercial Products Group

Revenues in our commercial products group decreased for the three and nine months ended September 30, 2009, compared to the same periods in 2008. These decreases were driven by a decline in demand caused by general global economic weakness in all of our submarkets including medical and test and measurement equipment. These declines were also affected by the maturity of our traditional products within our commercial products group.

Given the dynamics of these markets, we may experience general fluctuations in . . .