**FORM 10-Q/A**

 

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

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**ý****      QUARTERLY REPORT PURSUANT TO SECTION 13OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934**

 

**For the quarterly period ended October 31,2005**

 

**OR**

 

**o****      TRANSITION REPORT PURSUANT TO SECTION 13OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934**

 

**For the transition period from          to**

 

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**Commission File Number  0-21709**

 

**INTELLISYNC CORPORATION**

(Exact name of Registrant as specified in its charter)

 
| **Delaware**                    | ** ** | **77-0349154**         |
|---------------------------------|------------|------------------------|
| (State or other jurisdiction of |       | (I.R.S. Employer       |
| incorporation or organization)  | ** ** | Identification Number) |

 

**2550 North First Street, San Jose, California95131**

(Address of principal executive office and zip code)

 

**(408) 321-7650**

 (Registrant’s telephone number,including area code)

 

Indicate by check markwhether the Registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934, during the preceding 12months (or for such shorter period that the Registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days.

Yes  ý  No  o

 

Indicate by check mark whether the Registrant is anaccelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes  ý  No  o

 

Indicate by check mark whether the Registrant is ashell company (as defined in Rule 12b-2 of the Exchange Act).  

Yes  o  No  ý

 

Indicate the number ofshares outstanding of each of the issuer’s classes of common stock, as of December 8,2005: **67,557,940**

 

 

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**EXPLANATORY NOTE**

 

                      This Quarterly Report onForm 10-Q/A (“Form 10-Q/A”) is being filed as Amendment No. 1 to theRegistrant’s Quarterly Report on Form 10-Q for the fiscal quarter ended October31, 2005 , which was filed with the Securities and Exchange Commission (“SEC”)on December 12, 2005 (the “Original Filing”).  The Registrant is filingthis Form 10-Q/A to: (i) provide a corrected Certification of PrincipalExecutive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 thatwas filed as Exhibit 31.1 to the Original Filing; (ii) provide a correctedCertificate of Principal Financial Officer Pursuant to Section 302 of theSarbanes-Oxley Act of 2002 that was filed as Exhibit 31.2 to the OriginalFiling; (iii) provide a corrected Certification of Principal Executive Officerpursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of theSarbanes-Oxley Act of 2002 that was filed as Exhibit 32.1 to the OriginalFiling; (iv) provide a corrected Certification of Principal Financial Officerpursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of theSarbanes-Oxley Act of 2002 that was filed as Exhibit 32.2 to the OriginalFiling and (v) to modify the form to reflect that it is a Form 10-Q/A ratherthan a Form 10-Q.

 

                      Except for the foregoing amended information,this Form 10-Q/A continues to describe conditions as of the date of theOriginal Filing, and we have not updated the disclosures contained herein toreflect events that have occurred subsequent to that date.  

 

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**INTELLISYNC CORPORATION**

 

**QUARTERLY REPORT ON FORM 10-Q/A**

 

**INDEX**

 
| ** **                              | ** **                                                                                    | **Page**   |
|-----------------------------------------|-----------------------------------------------------------------------------------------------|------------|
| ** **                              | ** **                                                                                    | **Number** |
| ** **                              | ** **                                                                                    | ** ** |
| **PART I - FINANCIAL INFORMATION** | 1                                                                                             |
|                                    |                                                                                          |       |
| Item 1.                                 | Unaudited Condensed Consolidated Financial Statements                                         | 1          |
|                                    |                                                                                          |       |
|                                    | Condensed  Consolidated Balance Sheets as of                                                  |       |
|                                    | October 31,  2005 and July 31, 2005                                                 | 1          |
|                                    | Condensed  Consolidated Statements of Operations for the                                      |       |
|                                    | three  months ended October 31, 2005 and 2004                                            | 2          |
|                                    | Condensed  Consolidated Statements of Cash Flows for the                                      |       |
|                                    | three  months ended October 31, 2005 and 2004                                            | 3          |
|                                    |                                                                                          |       |
|                                    | Notes to Unaudited Condensed  Consolidated Financial Statements                               | 4          |
|                                    |                                                                                          |       |
| Item 2.                                 | Management’s  Discussion and Analysis of

Financial  Condition and Results of Operations | 25         |
|                                    |                                                                                          |       |
| Item 3.                                 | Quantitative and Qualitative  Disclosures About Market Risk                                   | 56         |
|                                    |                                                                                          |       |
| Item 4.                                 | Controls and Procedures                                                                       | 57         |
|                                    |                                                                                          |       |
| **PART II - OTHER INFORMATION**    | 58                                                                                            |
|                                    |                                                                                          |       |
| Item 1.                                 | Legal Proceedings                                                                             | 58         |
|                                    |                                                                                          |       |
| Item 2.                                 | Changes in Securities and Use of  Proceeds                                                    | 58         |
|                                    |                                                                                          |       |
| Item 3.                                 | Defaults Upon Senior Securities                                                               | 58         |
|                                    |                                                                                          |       |
| Item 4.                                 | Submission of Matters to a Vote of  Security Holders                                          | 58         |
|                                    |                                                                                          |       |
| Item 5.                                 | Other Information                                                                             | 59         |
|                                    |                                                                                          |       |
| Item 6.                                 | Exhibits                                                                                      | 59         |
|                                    |                                                                                          |       |
| **SIGNATURE**                           |                                                                                          | 60         |
|                                    |                                                                                          |       |
| **EXHIBIT INDEX**                  |                                                                                          |       |

 

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**INTELLISYNC CORPORATION**

 

**PART I - FINANCIALINFORMATION**

 

**Item 1.****           Unaudited CondensedConsolidated Financial Statements**

 

**CONDENSED CONSOLIDATED BALANCESHEETS**

(In thousands, except per share data)

(Unaudited)

 
| ** **                                                                                                                                                   | ** ** | **October 31,** | ** ** | **July 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------|------------|-------------------|------------|
| ** **                                                                                                                                                   | ** ** | **2005**             | ** ** | **2005**          | ** ** |
|                                                                                                                                                         |       |                 |       |              |       |
| **Assets**                                                                                                                                                   |       |                 |       |              |       |
| Current assets:                                                                                                                                              |       |                 |       |              |       |
| Cash and cash equivalents                                                                                                                                    |       | $                    | 19,246     |              | $          | 19,533 |   |
| Short-term investments                                                                                                                                       |       | 16,448               |       | 19,319            |       |
| Accounts receivable, net of allowance for doubtful  accounts of $402 and $564                                                                                |       | 14,122               |       | 13,682            |       |
| Inventories                                                                                                                                                  |       | 41                   |       | 46                |       |
| Other current assets                                                                                                                                         |       | 2,632                |       | 3,190             |       |
|                                                                                                                                                         |       |                 |       |              |       |
| Total current assets                                                                                                                                         |       | 52,489               |       | 55,770            |       |
|                                                                                                                                                         |       |                 |       |              |       |
| Property and  equipment, net                                                                                                                                 |       | 3,517                |       | 3,028             |       |
| Goodwill                                                                                                                                                     |       | 68,494               |       | 68,474            |       |
| Other intangible  assets, net                                                                                                                                |       | 23,647               |       | 25,946            |       |
| Restricted cash                                                                                                                                              |       | 4,891                |       | 4,306             |       |
| Other assets                                                                                                                                                 |       | 3,099                |       | 3,269             |       |
| Total assets                                                                                                                                                 |       | $                    | 156,137    |              | $          | 160,793 |   |
|                                                                                                                                                         |       |                 |       |              |       |
| **Liabilities  and Stockholders’ Equity**                                                                                                               |       |                 |       |              |       |
| Current  liabilities:                                                                                                                                        |       |                 |       |              |       |
| Accounts payable                                                                                                                                             |       | $                    | 2,295      |              | $          | 2,584 |   |
| Accrued liabilities                                                                                                                                          |       | 7,411                |       | 7,569             |       |
| Current portion of obligations under capital lease                                                                                                           |       | 154                  |       | 153               |       |
| Deferred revenue                                                                                                                                             |       | 7,608                |       | 7,396             |       |
|                                                                                                                                                         |       |                 |       |              |       |
| Total current liabilities                                                                                                                                    |       | 17,468               |       | 17,702            |       |
|                                                                                                                                                         |       |                 |       |              |       |
| Obligations under capital lease                                                                                                                              |       | 173                  |       | 206               |       |
| Long term deferred revenue                                                                                                                                   |       | 614                  |       | 228               |       |
| Convertible senior notes                                                                                                                                     |       | 56,963               |       | 57,531            |       |
| Other liabilities                                                                                                                                            |       | 3,457                |       | 2,915             |       |
|                                                                                                                                                         |       |                 |       |              |       |
| Total liabilities                                                                                                                                            |       | 78,675               |       | 78,582            |       |
|                                                                                                                                                         |       |                 |       |              |       |
| Commitments and  contingencies (Note 7)                                                                                                                      |       |                 |       |              |       |
|                                                                                                                                                         |       |                 |       |              |       |
| Stockholders’  equity:                                                                                                                                  |       |                 |       |              |       |
| Preferred stock, $0.001 par value; 2,000 shares  authorized; none issued and outstanding at October 31, 2005 and July 31,  2005                    |       | —               |       | —            |       |
| Common stock, $0.001 par value; 160,000 shares  authorized; 67,281 and 66,639 shares issued and outstanding at October 31,  2005 and July 31, 2005 |       | 67                   |       | 67                |       |
| Additional paid-in capital                                                                                                                                   |       | 230,280              |       | 227,014           |       |
| Accumulated deficit                                                                                                                                          |       | (152,544             | )          | (144,530          | )          |
| Accumulated other comprehensive loss                                                                                                                         |       | (341                 | )          | (340              | )          |
| Total stockholders’ equity                                                                                                                              |       | 77,462               |       | 82,211            |       |
| Total liabilities and stockholders’ equity                                                                                                              |       | $                    | 156,137    |              | $          | 160,793 |   |

 

The accompanyingnotes are an integral part of these unaudited condensed consolidated financialstatements.

 

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**INTELLISYNC CORPORATION**

 

**CONDENSED****CONSOLIDATED STATEMENTS OF OPERATIONS**

(In thousands, except per share data)

(Unaudited)

 
| ** **                                                            | ** ** | **Three Months Ended  October 31,** | ** ** |
|-----------------------------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                            | ** ** | **2005**                                 | ** ** | **2004** | ** ** |
|                                                                  |       |                                     |       |   |   |
| Revenue                                                               |       |                                     |       |   |   |
| License                                                               |       | $                                        | 10,265     |   | $ | 7,825 |   |
| Services                                                              |       | 6,080                                    |       | 4,477 |   |
| Total revenue                                                         |       | 16,345                                   |       | 12,302 |   |
|                                                                  |       |                                     |       |   |   |
| Cost and  operating expenses:                                         |       |                                     |       |   |   |
| Cost of revenue                                                       |       | 3,073                                    |       | 2,341 |   |
| Amortization of developed and  core technology                        |       | 1,257                                    |       | 1,156 |   |
| Research and development                                              |       | 4,981                                    |       | 3,329 |   |
| Sales and marketing                                                   |       | 8,583                                    |       | 5,589 |   |
| General and administrative                                            |       | 4,201                                    |       | 2,049 |   |
| Amortization of other  intangibles                                    |       | 1,048                                    |       | 1,046 |   |
| Restructuring and merger charges                                      |       | 606                                      |       | — |   |
| Total cost and operating expenses                                     |       | 23,749                                   |       | 15,510 |   |
| Operating loss                                                        |       | (7,404                                   | )          | (3,208 | ) |
| Other expense,  net:                                                  |       |                                     |       |   |   |
| Interest income                                                       |       | 310                                      |       | 236 |   |
| Interest expense                                                      |       | (563                                     | )          | (240 | ) |
| Other, net                                                            |       | (250                                     | )          | (179 | ) |
| Total other expense, net                                              |       | (503                                     | )          | (183 | ) |
|                                                                  |       | (7,907                                   | )          | (3,391 | ) |
| Provision for  income taxes                                           |       | (107                                     | )          | (115 | ) |
| Net loss                                                              |       | $                                        | (8,014     | ) | $ | (3,506 | ) |
|                                                                  |       |                                     |       |   |   |
| Basic and  diluted net loss per common share                          |       | $                                        | (0.12      | ) | $ | (0.05 | ) |
|                                                                  |       |                                     |       |   |   |
| Shares used in  computing basic and diluted net loss per common share |       | 66,981                                   |       | 64,418 |   |

 

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

 

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**INTELLISYNC CORPORATION**

 

**CONDENSED CONSOLIDATED STATEMENTSOF CASH FLOWS**

(In thousands)

(Unaudited)

 
| ** **                                                                   | ** ** | **Three Months Ended  October 31,** | ** ** |
|------------------------------------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                                   | ** ** | **2005**                                 | ** ** | **2004** | ** ** |
| **Cash  flows from operating activities:**                                   |       |                                     |       |   |   |
| Net loss                                                                     |       | $                                        | (8,014     | ) | $ | (3,506 | ) |
| Adjustments to reconcile net loss to net cash used  in operating activities: |       |                                     |       |   |   |
| Allowance for doubtful accounts                                              |       | (162                                     | )          | 61 |   |
| Depreciation                                                                 |       | 391                                      |       | 278 |   |
| Amortization of other intangibles                                            |       | 2,305                                    |       | 2,202 |   |
| Amortization of debt issuance costs                                          |       | 164                                      |       | 159 |   |
| Non-cash stock compensation expense (reversal)                               |       | 2,231                                    |       | (65 | ) |
| Changes in operating assets and liabilities:                                 |       |                                     |       |   |   |
| Accounts receivable                                                          |       | (278                                     | )          | (540 | ) |
| Inventories                                                                  |       | 5                                        |       | 16 |   |
| Other current assets                                                         |       | 644                                      |       | 831 |   |
| Accounts payable                                                             |       | (289                                     | )          | 891 |   |
| Accrued liabilities                                                          |       | (184                                     | )          | (1,179 | ) |
| Deferred revenue                                                             |       | 598                                      |       | (246 | ) |
| Net cash used in operating activities                                        |       | (2,589                                   | )          | (1,098 | ) |
| ** **                                                                   | ** ** | ** **                               | ** ** | ** ** | ** ** |
| **Cash  flows from investing activities:**                                   | ** ** | ** **                               | ** ** | ** ** | ** ** |
| Purchase of property and equipment                                           |       | (880                                     | )          | (755 | ) |
| Purchase of short term investments                                           |       | (192                                     | )          | (1,028 | ) |
| Proceeds from the sales of short-term investments                            |       | 2,280                                    |       | 500 |   |
| Proceeds from the maturities of short-term  investments                      |       | 800                                      |       | 1,000 |   |
| (Increase) decrease in restricted cash                                       |       | (685                                     | )          | 416 |   |
| Net cash provided by investing activities                                    |       | 1,323                                    |       | 133 |   |
|                                                                         |       |                                     |       |   |   |
| **Cash  flows from financing activities:**                                   |       |                                     |       |   |   |
| Debt issuance costs                                                          |       | —                                   |       | (89 | ) |
| Principal payments on capital leases                                         |       | (32                                      | )          | (24 | ) |
| Proceeds upon exercise of stock options                                      |       | 681                                      |       | 161 |   |
| Proceeds from ESPP shares issued                                             |       | 354                                      |       | 300 |   |
| Net cash provided by financing activities                                    |       | 1,003                                    |       | 348 |   |
|                                                                         |       |                                     |       |   |   |
| Effect of exchange rate changes on cash and cash equivalents                 |       | (24                                      | )          | 105 |   |
|                                                                         |       |                                     |       |   |   |
| Net decrease in  cash and cash equivalents                                   |       | (287                                     | )          | (512 | ) |
| Cash and cash  equivalents at beginning of period                            |       | 19,533                                   |       | 12,991 |   |
| Cash and cash  equivalents at end of period                                  |       | $                                        | 19,246     |   | $ | 12,479 |   |

 

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

 

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**INTELLISYNC CORPORATION**

 

**NOTES TO UNAUDITED CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS**

 

**Note1  The Company and a Summary of itsSignificant Accounting Policies**

 

*TheCompany*

 

IntellisyncCorporation (Intellisync or the “Company”) develops, markets and supportsdesktop, enterprise and mobile carrier-class software that enables consumers,business executives and information technology professionals to extend thecapabilities of enterprise groupware and vertical applications, data-enabledmobile devices and other personal communication platforms.  The primary software applications the Companyhas developed and marketed include push-email, data synchronization and systemsmanagement software.  The Company’ssoftware also enables organizations to search, find, match and synchronizeidentity data within their computer systems and network databases. 

 

On November 15,2005, the Company entered into a merger agreement with Nokia Inc., a Delawarecorporation.  Refer to Note 13 –Subsequent Events for more details.

 

*Liquidityand Capital Resources*

 

The Company has incurred losses andnegative cash flows since inception.  TheCompany incurred a net loss of approximately $8,014,000 and negative cash flowsfrom operations of approximately $2,589,000 for the three months ended October 31,2005.  The Company’s cash balances maydecline further, although the Company believes that the effects of itsstrategic actions implemented to improve revenue as well as control costs alongwith existing cash resources will be adequate to fund its operations for atleast the next 12 months.  Failure to generatesufficient revenues or control spending could adversely affect the Company’sability to achieve its business objectives. 

 

*Basis ofPresentation and Consolidation*

 

Theaccompanying condensed consolidated financial statements of Intellisync as of October 31,2005 and for the three months ended October 31, 2005 are unaudited andreflect all normal recurring adjustments which are, in the opinion ofmanagement, necessary for the fair statement of such financial statements.  These condensed consolidated financialstatements should be read in conjunction with the Company’s consolidatedfinancial statements and notes thereto included in the Company’s Annual Reporton Form 10-K for the fiscal year ended July 31, 2005.  The condensed consolidated balance sheet asof July 31, 2005 has been derived from the audited financial statements atthat date but does not include all of the information and footnotes required bygenerally accepted accounting principles for complete financialstatements.  The results of operationsfor the interim period ended October 31, 2005 are not necessarilyindicative of results to be expected for the full year. 

 

Theaccompanying condensed consolidated financial statements include the accountsof the Company and its wholly owned subsidiaries.  All significant inter-company balances andtransactions have been eliminated in consolidation.  

 

*Use ofEstimates and Assumptions*

 

Thepreparation of the consolidated financial statements in conformity withaccounting principles generally accepted in the United States of America requiresthe Company to make estimates and assumptions that affect the reported amountsof assets and liabilities and disclosure of contingent assets and liabilitiesat the date of the condensed consolidated financial statements and the reportedamounts of revenue and expenses during the reporting period.  On an on-going basis, the Company evaluatesits estimates, including those related to provision for doubtful accounts,channel inventory and product returns, valuation of goodwill and intangibles,investments and other long-lived assets, restructuring accruals, valuation ofincome taxes, license and services revenue recognition, contingencies andstock-based compensation.  The Companybases its estimates on various factors and information

 

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which may include, butare not limited to, history and prior experience, experience of otherenterprises in the same industry, new related events, current economicconditions and information from third party professionals that are believed tobe reasonable under the circumstances, the results of which form the basis for makingjudgments about the carrying values of assets and liabilities that are notreadily apparent from other sources. Actual results may differ from these estimates under differentassumptions or conditions. 

 

*RevenueRecognition*

 

Revenueis derived from software licenses and related services, which includeimplementation and integration of software solutions, post contract support,training, hosting and consulting.  

 

Transactionsinvolving the sale of software products are accounted for under the AmericanInstitute of Certified Public Accountants (AICPA) Statement of Position (SOP) No. 97-2,“*Software Revenue Recognition*,” asamended by SOP No. 98-9, “*Modification of 97-2,Software Revenue Recognition with Respect to Certain Transactions*.”  For contracts with multiple elements, and forwhich vendor-specific objective evidence of fair value for the undeliveredelements exists, revenue is recognized for the delivered elements based uponthe residual contract value as prescribed by SOP No. 98-9.  The Company has accumulated relevantinformation from contracts to use in determining the availability ofvendor-specific objective evidence and believes that such information complieswith the criteria established in SOP No. 97-2 as follows:

 

•                  Customers are required to payseparately for maintenance.  Optionalstated future renewal rates are included as a term of the contracts. TheCompany uses the renewal rate as vendor-specific objective evidence of fairvalue for maintenance.  

 

•                  The Company charges standard hourlyrates for consulting services, when such services are sold separately, basedupon the nature of the services and experience of the professionals performingthe services.

 

•                  For training, the Company chargesstandard rates for each course based upon the duration of the course, and suchcourses are separately priced in contracts. The Company has a history ofselling such courses separately.

 

Revenuefrom license fees is recognized when persuasive evidence of an arrangementexists, delivery of the product has occurred, no significant Companyobligations with regard to implementation or integration exist, the fee isfixed or determinable and collectibility is probable. Arrangements for whichthe fees are not deemed probable for collection are recognized upon cashcollection.  Payments from customersreceived in advance of revenue recognition are recorded as deferred revenue.

 

Servicerevenue primarily comprises revenue from consulting fees, maintenancecontracts, training and hosting fees. Service revenue from consulting, hosting and training is recognized asthe service is performed.  Maintenancecontracts include the right to unspecified upgrades and ongoing support.  Maintenance revenue is deferred andrecognized ratably as services are provided over the maintenance period.

 

Licenseand service revenue on contracts involving significant implementation,customization or services, that are essential to the functionality of thesoftware is recognized over the period of each engagement, primarily using thepercentage-of-completion method. Costs incurred are generally used as themeasure of progress towards completion as prescribed by SOP No. 81-1, “*Accounting for Performance of Construction-Type and CertainProduct-Type Contracts*.” Revenue for these arrangements isclassified as license revenue and service revenue based upon estimates of fairvalue for each element, and the revenue is recognized based on the percentage-of-completionratio for the arrangement. A provision for estimated losses on engagements ismade in the period in which the loss becomes probable and can be reasonablyestimated. The Company considers a project completed when all contractualobligations have been met (generally the go live date).

 

TheCompany currently licenses its products directly to individuals, smallbusinesses and corporations, to original equipment manufacturers, or OEMs, andto distributors and value-added resellers in North America, Europe, theAsia-Pacific region, South America and Africa. Revenue from productsdistributed indirectly through major

 

5

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distributors andresellers is recognized on a sell through basis. Agreements with the Company’smajor distributors and resellers contain specific product return privileges forstock rotation and obsolete products that are generally limited to contractualamounts. Reserves for estimated future returns are provided for upon revenuerecognition. Product returns are recorded as a reduction of revenue.Accordingly, the Company has established a product returns reserve composed of100% of product inventories held at the Company’s distribution partners, aswell as an estimated amount for returns from customers of the distributors andother resellers as a result of stock rotation and obsolete products. Suchreserves are based on:

 

•                  historical product returns andinventory levels on a product by product basis; 

•                  current inventory levels and sell throughdata on a product by product basis as reported by the Company’s majordistributors worldwide; 

•                  demand forecast by product in each ofthe principal geographic markets, which is impacted by the Company’s productrelease schedule, seasonal trends and analyses developed by the Company’sinternal sales and marketing group; and 

•                  general economic conditions.

 

TheCompany licenses rights to use its technology portfolio, whereby licensees,particularly OEMs, typically pay a non-refundable license fee in one or moreinstallments and on-going royalties based on their sales of productsincorporating the Company’s technology. Revenue from OEMs under minimum guaranteed royalty arrangements, whichare not subject to future obligations, is recognized when such royalties areearned and become payable.  Royaltyrevenue is recognized as earned when reasonable estimates of such amounts canbe made. Royalty revenue that is subject to future obligations is recognizedwhen such obligations are fulfilled. Royalty revenue that exceeds minimum guarantees is recognized in theperiod earned.  

 

*Stock-BasedCompensation Expense*

 

On August 1, 2005, the Companyadopted Statement of Financial Accounting Standards (SFAS) No. 123(revised 2004) or 123(R), “*Share-Based Payment*,”which requires the measurement and recognition of compensation expense for allshare-based payment awards made to employees and directors including employeestock options and employee stock purchases related to the Employee StockPurchase Plan (“employee stock purchases”) based on estimated fair values. SFASNo. 123(R) supersedes the Company’s previous accounting under AccountingPrinciples Board (APB) Opinion No. 25, “*Accountingfor Stock Issued to Employees*” for periods beginning in fiscal 2006.In March 2005, the Securities and Exchange Commission issued StaffAccounting Bulletin (SAB) No. 107 relating to SFAS No. 123(R). TheCompany has applied the provisions of SAB No. 107 in its adoption of SFAS No. 123(R).

 

The Company adopted SFAS No. 123(R)using the modified prospective transition method, which requires theapplication of the accounting standard as of August 1, 2005, the first dayof the Company’s fiscal year 2006. The Company’s condensed consolidatedfinancial statements as of and for the three months ended October 31, 2005reflect the impact of SFAS No. 123(R). In accordance with the modifiedprospective transition method, the Company’s condensed consolidated financialstatements for prior periods have not been restated to reflect, and do notinclude, the impact of SFAS No. 123(R). Stock-based compensation expenserecognized under SFAS No. 123(R) for the three months ended October 31,2005 was $2,231,000 which consisted of stock-based compensation expense relatedto employee stock options and employee stock purchases. Stock-basedcompensation reversal of $65,000 for the three months ended October 31,2004 was related to employee stock options subject to variable accounting whichthe Company had been recognizing under previous accounting standards. Refer to Note8 for additional information. 

 

SFAS No. 123(R) requirescompanies to estimate the fair value of share-based payment awards on the dateof grant using an option-pricing model. The value of the portion of the awardthat is ultimately expected to vest is recognized as expense over the requisiteservice periods in the Company’s consolidated statement of operations. Prior tothe adoption of SFAS No. 123(R), the Company accounted for stock-basedawards to employees and directors using the intrinsic value method inaccordance with APB Opinion No. 25 as allowed under SFAS No. 123, “*Accounting for Stock-Based Compensation*.”  Under the intrinsic value method, nostock-based compensation expense had been recognized in the Company’sconsolidated statement of operations, other than as related to stock

 

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options accounted for using variable accounting,because the exercise price of the Company’s stock options granted to employeesand directors equaled the fair market value of the underlying stock at the dateof grant. 

 

Stock-based compensation expenserecognized during the period is based on the value of the portion ofshare-based payment awards that is ultimately expected to vest during theperiod. Stock-based compensation expense recognized in the Company’sconsolidated statement of operations for the first quarter of fiscal 2006included compensation expense for share-based payment awards granted prior to,but not yet vested as of July 31, 2005 based on the grant date fair valueestimated in accordance with the pro forma provisions of SFAS No. 123 andcompensation expense for the share-based payment awards granted subsequent to July 31,2005 based on the grant date fair value estimated in accordance with the provisionsof SFAS No. 123(R).  Compensationexpense for all share-based payment awards are recognized using the acceleratedmultiple-option approach.  As stock-basedcompensation expense recognized in the consolidated statement of operations forthe first quarter of fiscal 2006 is based on awards ultimately expected tovest, it has been reduced for estimated forfeitures. SFAS No. 123(R)requires forfeitures to be estimated at the time of grant and revised, ifnecessary, in subsequent periods if actual forfeitures differ from thoseestimates. In the Company’s pro forma information required under SFAS No. 123for the periods prior to fiscal 2006, the Company accounted for forfeitures asthey occurred. 

 

Upon adoption of SFAS No. 123(R), the Company continued to use the Black-Scholes option-pricing model as itsmethod of valuation for share-based awards. For additional information, refer to Note 8. The Company’s determinationof fair value of share-based payment awards on the date of grant using anoption-pricing model is affected by the Company’s stock price as well asassumptions regarding a number of highly complex and subjective variables.These variables include, but are not limited to the Company’s expected stockprice volatility over the term of the awards, and actual and projected employeestock option exercise behaviors. Option-pricing models were developed for usein estimating the value of traded options that have no vesting or hedgingrestrictions and are fully transferable. Because the Company’s employee stockoptions have certain characteristics that are significantly different fromtraded options, and because changes in the subjective assumptions canmaterially affect the estimated value, in management’s opinion, the existingvaluation models may not provide an accurate measure of the fair value of theCompany’s employee stock options. Although the fair value of employee stockoptions is determined in accordance with SFAS No. 123(R) and SAB No. 107using an option-pricing model, that value may not be indicative of the fairvalue observed in a willing buyer/willing seller market transaction. 

 

**Note2  Recently Issued AccountingPronouncements**

 

*Share-BasedPayment*****

 

In September 2005,the Financial Accounting Standards Board (FASB) issued FASB Staff Position(FSP) No. FAS 123(R)-1, “*Classification and Measurement ofFreestanding Financial Instruments Originally Issued in Exchange for EmployeeServices under FASB Statement No. 123(R)*,” to defer therequirement of SFAS No. 123(R) that a freestanding financial instrumentoriginally subject to SFAS No. 123(R) becomes subject to the recognitionand measurement requirements of other applicable GAAP when the rights conveyedby the instrument to the holder are no longer dependent on the holder being anemployee of the entity. The rights under stock-based payment awards the Companyissued to its employees are all dependent on the recipient being an employee ofIntellisync. Therefore, this FSP currently does not have an impact on theCompany’s consolidated financial statements and its measurement of stock-basedcompensation in accordance with SFAS No. 123(R). 

 

In October 2005,the FASB issued FSP No. FAS 123(R)-2, “*Practical Accommodation tothe Application of Grant Date as Defined in FASB Statement No. 123(R)*,”to provide guidance on determining the grant date for an award as defined inSFAS No. 123(R). This FSP stipulates that assuming all other criteria inthe grant date definition are met, a mutual understanding of the key terms andconditions of an award to an individual employee is presumed to exist upon theaward’s approval in accordance with the relevant corporate governancerequirements, provided that the key terms and conditions of an award (a) cannotbe negotiated by the recipient with the employer because the award is aunilateral grant, and (b) are expected to be communicated to an individualrecipient within a relatively short time period from the date of approval. TheCompany has applied the principles set forth in this FSP upon its adoption ofSFAS No. 123(R). 

 

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*Accountingfor Conditional Asset Retirement Obligations, an interpretation of FASBStatement No. 143*

 

In March 2005,the FASB issued Interpretation (FIN) No. 47, “*Accountingfor Conditional Asset Retirement Obligations, an interpretation of FASBStatement No. 143, ‘Accounting for Asset Retirement Obligations.’*”  FIN No. 47 clarifies when anentity would be required to recognize a liability for the fair value of anasset retirement obligation that is conditional on a future event if theliability’s fair value can be reasonably estimated. Uncertainty surrounding thetiming and method of settlement that may be conditional on events occurring inthe future would be factored into the measurement of the liability rather thanthe recognition of the liability.  FIN No. 47is effective no later than the end of fiscal years ending after December 15,2005.  The Company does not expect theadoption of this statement will have a material impact on its financialstatements.

 

*AccountingChanges and Error Corrections*

 

In June 2005,the FASB issued SFAS No. 154, “*AccountingChanges and Error Corrections*,” which replaces APB Opinion No. 20,“*Accounting Changes*,” and SFAS No. 3,“*Reporting Accounting Changes in InterimFinancial Statements*.” SFAS No. 154 changes the requirementsfor the accounting and reporting of a change in accounting principle. APBOpinion No. 20 previously required that most voluntary changes in anaccounting principle be recognized by including the cumulative effect of thenew accounting principle in net income of the period of the change. SFAS No. 154now requires retrospective application of changes in an accounting principle toprior period financial statements, unless it is impracticable to determineeither the period-specific effects or the cumulative effect of the change. TheStatement is effective for fiscal years beginning after December 15, 2005.The Company does not expect the adoption of this statement on August 1,2006 will have a material impact on its financial statements. 

 

*Other-Than-TemporaryImpairment*

 

In June 2005,the FASB decided not to provide additional guidance on the meaning ofother-than-temporary impairment, and directed the staff to issue proposed FSPEITF 03-1-a, “*Implementation Guidance forthe Application of Paragraph 16 of EITF Issue No. 03-1*,” asfinal. The final FSP will supersede EITF Issue No. 03-1, “*The Meaning of Other-Than-Temporary Impairment andIts Application to Certain Investments*,” and EITF Topic No. D-44,“*Recognition of Other-Than-TemporaryImpairment upon the Planned Sale of a Security Whose Cost Exceeds Fair Value*.”The final FSP (retitled FSP FAS No. 115-1, “*The Meaning of Other-Than-Temporary Impairment and Its Application toCertain Investments*”) will replace the guidance set forth inparagraphs 10-18 of EITF No. 03-1 with references to existingother-than-temporary impairment guidance, such as SFAS No. 115, “*Accounting for Certain Investments in Debt and EquitySecurities*,” SEC SAB No. 59, “*Accountingfor Noncurrent Marketable Equity Securities*,” and APB Opinion No. 18,“*The EquityMethod of Accounting for Investments in Common Stock.*”** FSP FAS No. 115-1 will codify theguidance set forth in EITF Topic D-44 and clarify that an investor shouldrecognize an impairment loss no later than when the impairment is deemed otherthan temporary, even if a decision to sell has not been made. FSP FAS No. 115-1will be effective for other-than-temporary impairment analysis conducted inperiods beginning after September 15, 2005.  The Company does not believe the adoption ofFSP FAS No. 115-1 will have a significant impact on its consolidatedresults of operations or financial position. 

 

*AmortizationPeriod for Leasehold Improvements*

 

In June 2005,the EITF reached a consensus on Issue No. 05-06, “*Determiningthe Amortization Period for Leasehold Improvements.*”  The guidance requires that leaseholdimprovements acquired in a business combination or purchased subsequent to theinception of a lease be amortized over the lesser of the useful life of theassets or a term that includes renewals that are reasonably assured at the dateof the business combination or purchase. The guidance is effective for periodsbeginning after June 29, 2005. The adoption of this guidance did not andis not expected to have an impact on the Company’s financial position, resultsof operations or cash flows.

 

8

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*RentalCosts Incurred during a Construction Period*

 

On October 6, 2005, the FASB issued FSP No. 13-1,“*Accounting for Rental Costs Incurred during a ConstructionPeriod*.”  FSP No. 13-1 requires that rental costsassociated with ground or building operating leases that are incurred during aconstruction period be recognized as rental expense.  FSP No. 13-1 iseffective for the first reporting period after December 15, 2005.  TheCompany has historically expensed rental costs incurred during a constructionperiod; therefore, the adoption of this guidance will not have an impact on itsnet earnings, cash flows or financial position. 

 

**Note3  Balance Sheets Components**

 

Inventoriesconsist of the following (in thousands):

 
| ** **                         | ** ** | **October 31,  2005** | ** ** | **July 31,  2005** | ** ** |
|------------------------------------|------------|----------------------------|------------|-------------------------|------------|
| Raw materials                      |       | $                          | 35         |                    | $          | 11 |   |
| Finished goods and work-in-process |       | 6                          |       | 35                      |       |
| Inventories                        |       | $                          | 41         |                    | $          | 46 |   |

 

**Note4  Acquisitions**

 

Duringfiscal 2005, the Company acquired PDAapps, Inc. and Tourmaline Networks, Inc.  The PDAapps, and Tourmaline transactions wereaccounted for as business combinations pursuant to SFAS No. 141, “*Business Combinations*.” 

 

*PDAapps, Inc.*

 

OnJune 23, 2005, the Company completed its acquisition of all of the issuedand outstanding stock of PDAapps, Inc., makers of Intellisync IM (formerlyVeriChat), the mobile instant messaging solution for all Palm OS devices,Pocket PC devices, Symbian devices and RIM Blackberry devices.  Under the terms of an Agreement and Plan ofMerger, dated as of June 23, 2005, the outstanding shares of PDAappscommon stock were converted into the right to receive (i) an aggregate ofapproximately $4,000,000 in aggregate initial cash consideration and (ii) anaggregate of up to $2,600,000 in cash earnout consideration (based on futurerevenue generated by the Company from the former PDAapps client base), subjectto the deposit of $1,000,000 in escrow to be available to compensateIntellisync pursuant to the indemnification obligations of the holders ofPDAapps common stock.  The earnoutconsideration, if achieved, is due and payable shortly following the firstanniversary of the acquisition.  As of October 31,2005, the Company has not accrued the contingent earnout payment amount.  Any earnout consideration paid will berecorded as additional goodwill.

 

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Thecondensed consolidated financial statements include the results of operationsof PDAapps since the date of acquisition. Under the purchase method ofaccounting, the total purchase price was allocated to PDAapps’ net tangible andintangible assets based upon their estimated fair value as of the acquisitiondate. The initial purchase price of $4,150,000 (including estimated acquisitioncosts of $150,000) was assigned to the fair value of the assets acquired,including the following (in thousands):

 
| Tangible assets acquired            |   | $     | 74     |   |
|-------------------------------------|--------|-------|--------|--------|
| Deferred tax  assets                |   | 976   |   |
| Liabilities assumed                 |   | (337  | )      |
| Deferred tax  liability assumed     |   | (976  | )      |
| In-process research and development |   | 220   |   |
| Developed and core technology       |   | 2,320 |   |
| Customer base                       |   | 140   |   |
| Covenant-not-to-compete             |   | 24    |   |
| Goodwill                            |   | 1,709 |   |
|                                |   | $     | 4,150  |   |

 

Inaccordance with SFAS No. 109, “*Accounting for IncomeTaxes*,” deferred tax liabilities of approximately $976,000 have beenrecorded for the tax effect of the amortizable intangible assets. Deferred taxassets of $976,000 have also been recorded by the Company to account for thetax effect of the Company’s net operating loss and credit carryforwards. 

 

Tangible assets acquired, whichincludes $46,000 of cash, and liabilities assumed were valued at theirrespective carrying amounts as the Company believes that these amountsapproximated their current fair values at the acquisition date. The valuationof identifiable intangible assets acquired was based on management’s estimates,currently available information and reasonable and supportableassumptions.  This allocation wasgenerally based on the fair value of these assets determined using the incomeapproach.

 

Anestimate of $1,709,000 has been allocated to goodwill. Goodwill represents theexcess of the purchase price over the fair value of the net tangible and intangibleassets acquired. In accordance with SFAS No. 142, “*Goodwill andOther Intangible Assets*,” goodwill is not amortized but is testedfor impairment at least annually. 

 

Of thetotal purchase price, $2,484,000 was allocated to amortizable intangibles includedin the above list. The developed and core technology and customer base arebeing amortized in proportion with the expected cash flows to be received fromthe underlying assets over their estimated useful life of five and seven years,respectively.  Thecovenant-not-to-compete is being amortized using the straight-line method overthe estimated useful life of the asset of 30 months.  

 

As of the acquisition date,technological feasibility of the in-process technology had not been establishedand the technology had no alternative future use. Accordingly, the Companyexpensed the in-process research and development at the date of theacquisition. 

 

The amount of the purchase priceallocated to in-process research and development was based on establishedvaluation techniques used in the high-technology software industry. The fairvalue assigned to the acquired in-process research and development wasdetermined using the income approach, which discounts expected future cashflows to present value. The key assumptions used in the valuation include,among others, expected completion date of the in-process projects identified asof the acquisition date, estimated costs to complete the projects, revenuecontributions and expense projections assuming the resulting product hasentered the market, and discount rate based on the risks associated with thedevelopment life cycle of the in-process technology acquired. The discount rateused in the present value calculations are normally obtained from aweighted-average cost of capital analysis, adjusted upward to account for theinherent uncertainties surrounding the successful development of the in-processresearch and development, the expected profitability levels of such technology,and the uncertainty of technological advances that could potentially impact theestimates. The Company assumes the pricing model for the resulting product ofthe

 

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acquired in process research and development to bestandard within its industry. The Company, however, did not take intoconsideration any consequential amount of expense reductions from integratingthe acquired in-process technology with other existing in-process or completedtechnology. Therefore, the valuation assumptions do not include significantanticipated cost savings. 

 

The key assumptions underlying thevaluation of acquired in-process research and development from PDAapps are asfollows (in thousands, except percentage): 

 

Project names: Enhanced version of VeriChat product - to feature J2ME (Java 2 Platform,Micro Edition) and IMode support, presence manager (uses phone state to dictatethe status of a user so others can decide if they should send an instantmessaging (IM) or place a call), secure enterprise chat and carrier brandedchat

Percentcompleted as of acquisition date: 30-50%

Estimatedcosts to complete technology at acquisition date: $900

Risk-adjusteddiscount rate: 25% 

Firstperiod expected revenue: 2nd quarter of calendar year 2006

 

Thedevelopment of the above technology remains highly dependent on the remainingefforts to achieve technical viability, rapidly changing customer markets,uncertain standards for a new product, and significant competitive threats fromseveral companies.  The nature of the effortsto develop this technology into a commercially viable product consistsprimarily of planning, designing, experimenting, and testing activitiesnecessary to determine that the technology can meet market expectations,including functionality and technical requirements. Failure to bring theproduct to market in a timely manner could result in a loss of market share ora lost opportunity to capitalize on emerging markets, and could have a materialadverse impact on the Company’s business and operating results. 

 

Subsequentto the acquisition of PDAapps, there have been no significant developmentsrelated to the current status of the acquired in-process research anddevelopment project that would result in material changes to the assumptions.

 

*TourmalineNetworks, Inc.*

 

On March 1,2005, the Company completed its acquisition of all of the issued andoutstanding stock of Tourmaline Networks, Inc., a privately held developerand marketer of mobile email based on QUALCOMM’s BREW® solution headquarteredin San Diego, California.  Under theterms of an Agreement and Plan of Merger, dated as of February 9, 2005,the outstanding shares of Tourmaline common stock were converted into the rightto receive (i) an aggregate of approximately $4,118,000 in aggregateinitial cash consideration and (ii) an aggregate of up to $2,881,918 incash earnout consideration (based on future revenue generated by the Companyfrom the former Tourmaline client base), subject to the deposit of a certainportion of the initial cash consideration and earnout consideration in escrowto be available to compensate Intellisync pursuant to the indemnificationobligations of the holders of Tourmaline common stock.  The earnout consideration, if achieved, is dueand payable shortly following the first anniversary of the acquisition.  As of October 31, 2005, the Company hasnot accrued the contingent earnout payment amount.  Any earnout consideration paid will berecorded as additional goodwill. 

 

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Thecondensed consolidated financial statements include the results of operationsof Tourmaline since the date of acquisition. Under the purchase method ofaccounting, the total purchase price was allocated to Tourmaline’s net tangibleand intangible assets based upon their estimated fair value as of theacquisition date. The initial purchase price of $4,218,000 (including estimatedacquisition costs of $100,000) was assigned to the fair value of the assetsacquired, including the following (in thousands):

 
| Tangible assets acquired        |   | $     | 478    |   |
|---------------------------------|--------|-------|--------|--------|
| Deferred tax  assets            |   | 803   |   |
| Liabilities assumed             |   | (275  | )      |
| Deferred tax  liability assumed |   | (803  | )      |
| Developed and core technology   |   | 800   |   |
| Customer base                   |   | 1,443 |   |
| Goodwill                        |   | 1,772 |   |
|                            |   | $     | 4,218  |   |

 

Inaccordance with SFAS No. 109, “*Accounting for IncomeTaxes*,” deferred tax liabilities of approximately $803,000 have beenrecorded for the tax effect of the amortizable intangible assets. Deferred taxassets of $803,000 have also been recorded by the Company to account for thetax effect of the Company’s net operating loss and credit carryforwards. 

 

Tangible assets acquired, whichincludes $23,000 of cash, and liabilities assumed were valued at theirrespective carrying amounts as the Company believes that these amountsapproximated their current fair values at the acquisition date. The valuationof identifiable intangible assets acquired was based on management’s estimates,currently available information and reasonable and supportableassumptions.  This allocation wasgenerally based on the fair value of these assets determined using the incomeapproach.

 

Anestimate of $1,772,000 has been allocated to goodwill. Goodwill represents theexcess of the purchase price over the fair value of the net tangible andintangible assets acquired. In accordance with SFAS No. 142, “*Goodwill and Other Intangible Assets*,” goodwill will not beamortized but will be tested for impairment at least annually. 

 

Of thetotal purchase price, $2,243,000 was allocated to amortizable intangiblesincluded in the above list. The amortizable intangible assets are beingamortized using an accelerated method according to the expected cash flows tobe received from the underlying assets over their respective estimated usefullife of three to six years. 

 

# ***Unaudited Pro Forma Consolidated Combined Results***

# ** **

Thefollowing unaudited pro-forma consolidated financial information reflects theresults of operations for the three months ended October 31, 2004, as if Tourmalineacquisition had occurred on August 1, 2004 and after giving effect topurchase accounting adjustments. The effect of PDAapps’ acquisition has beenexcluded from the pro forma financial information as amounts are consideredimmaterial to the Company.  Since theacquisitions took place in fiscal 2005, the results of operations of PDAappsand Tourmaline are included in the Company’s condensed consolidated results ofoperations for the three months ended October 31, 2005. 

 

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Thesepro forma results have been prepared for comparative purposes only and do notpurport to be indicative of what operating results would have been had theacquisitions in aggregate actually taken place on August 1, 2004. Inaddition, these results are not intended to be a projection of future resultsand do not reflect any synergies that might be achieved from the combinedoperation (in thousands, except per share data): 

 
| ** **                                             | ** ** | **Three Months Ended  October 31, 2004** | ** ** |
|--------------------------------------------------------|------------|-----------------------------------------------|------------|
|                                                   |       |                                          |       |
| Pro forma  revenue                                     |       | $                                             | 12,660     |   |
|                                                   |       |                                          |       |
| Pro forma net  loss                                    |       | $                                             | (3,576     | ) |
|                                                   |       |                                          |       |
| Pro forma basic  and diluted net loss per common share |       | $                                             | (0.06      | ) |

 

Theeffect of the in-process research and development charges has been excluded inthe above unaudited pro forma consolidated financial information as theyrepresent non-recurring charges directly related to the acquisitions.

 

#### **Note 5  Related Party Transactions**

#### ** **

On August 29,2005, the Company entered into a severance agreement and mutual release withits Chief Strategy Officer, Steve Goldberg, in connection with Mr. Goldberg’sresignation from employment by the Company effective August 31, 2005.Pursuant to the terms of the agreement, Mr. Goldberg receives, among otheritems, a lump sum payment of $110,000, twelve months of accelerated vesting ofhis options to purchase shares of the Company’s common stock, the right toexercise his vested options until six months following his termination date andsix months of COBRA premiums paid by the Company. The agreement includes ageneral mutual release by the Company and Mr. Goldberg and a non-solicitationagreement by Mr. Goldberg for twelve months following the effective dateof the agreement.  The lump sum paymentof $110,000 is included in “Restructuring and Merger Charges” in theaccompanying condensed consolidated statement of operations for the threemonths ended October 31, 2005.

 

On October 15,2005, the Company entered into a severance agreement and mutual release withits Chief Technology Officer, Said Mohammadioun, in connection with Mr. Mohammadioun’sresignation from employment by the Company effective October 15, 2005.Pursuant to the terms of the agreement, Mr. Mohammadioun received, amongother items, a lump sum payment of $46,875, two and a half months ofaccelerated vesting of his options to purchase shares of the Company’s commonstock, the right to exercise his vested options until six months following histermination date and two and a half months of COBRA premiums paid by theCompany. The agreement includes a general mutual release by the Company and Mr. Mohammadiounand a non-solicitation agreement by Mr. Mohammadioun for twelve monthsfollowing the effective date of the agreement. The lump sum payment of $46,875 is included in “Research and Development”in the accompanying condensed consolidated statement of operations for thethree months ended October 31, 2005.

 

As aresult of the modification of the stock awards described above in the eventthat an employee terminates prior to the time that the options would havevested under the original terms, the Company will incur additional compensationexpense based on the intrinsic value at the time of the acceleration ofvesting, reduced by the amounts previously expensed as a result of theacceleration. The terminations of the officers discussed above and theacceleration of their stock options, therefore, resulted in additionalequity-based compensation of approximately $55,000.

 

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# **Note 6 Long-Term Debt**

# ** **

Thefollowing table sets forth the Company’s long-term obligations, excluding capitallease obligations (in thousands):

 
| ** **                                                                                          | ** ** | **October 31,  2005** | ** ** | **July 31,  2005** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|----------------------------|------------|-------------------------|------------|
| 3% convertible senior notes, interest due  semi-annually, principal due in March 2009          |       | $                          | 56,963     |                    | $          | 57,531 |   |
| Interest rate swaps fair value hedge adjustment on  $60 million of 3% convertible senior notes |       | 3,037                      |       | 2,469                   |       |
|                                                                                                |       | 60,000                     |       | 60,000                  |       |
| Less: current portion                                                                               |       | —                     |       | —                  |       |
| Long-term portion                                                                                   |       | $                          | 60,000     |                    | $          | 60,000 |   |

 

# ***3% Convertible Senior Notes***

# ** **

Duringfiscal 2004, the Company completed the offering of $60,000,000 of 3% convertiblesenior notes to qualified institutional buyers in reliance on Rule 144Aunder the Securities Act. The notes are senior unsecured obligations ofIntellisync and rank junior to any future secured debt, on a parity with all ofthe Company’s other existing and future senior unsecured debt and prior to anyexisting or future subordinated debt. As of October 31, 2005, the Companyhad no other senior or subordinated debt, except for ordinary course tradepayables. The Company may not redeem any of the notes prior to their maturity.Holders, however, may require the Company to repurchase the notes upon sometypes of change in control transactions. The notes will mature on March 1,2009 unless earlier converted or redeemed. Neither the Company nor any of itssubsidiaries are subject to any financial covenants under the indenture. Inaddition, neither the Company nor any of its subsidiaries are restricted underthe indenture from paying dividends, incurring debt, or issuing or repurchasingits securities.

 

Thenotes are convertible into shares of common stock of the Company at the holdersoption any time prior to the close of business on the final maturity date ofthe notes, subject to prior redemption of the notes. The initial conversionrate is 250.0000 shares per each $1,000 principal amount of notes whichrepresents an initial conversion price of $4.00 per share. The conversion rateis subject to adjustment for certain events, including the payment ofdividends, and other events specified in the indenture.

 

Thenotes bear interest at a rate of 3% per annum. Interest on the notes is paid onMarch 1 and on September 1 of each year.

 

*Interest Rate Swap*

 

During fiscal 2004, the Companyentered into two interest rate swap agreements with a financial institution ona total notional amount of $60,000,000, whereby the Company receives fixed-rateinterest of 3% in exchange for variable interest payments.  The interest rate swaps expire upon thematurity of the Company’s $60,000,000, 3% convertible senior notes in March 2009,and effectively convert fixed-rate notes into variable-rate borrowings. Theinterest rate is reset semi-annually and is equal to the 6-month LIBOR rateless a rate spread. The total variable interest rate was approximately 3.8% at October 31,2005.  Under the provisions of SFAS No. 133,“*Accounting for Derivative Instruments and HedgingActivities*,” as amended, the interest rate swaps have beendesignated and qualify as an effective fair value hedge of interest rate riskrelated to the $60,000,000 convertible senior notes. As the terms of the swapsmatch those of the underlying hedged debt, the changes in the fair value ofthese swaps are offset by corresponding changes in the carrying value of thehedged debt, and therefore do not impact the Company’s net earnings. As of October 31,2005, the fair value of the interest rate swaps was approximately $3,037,000and recorded in “Other Liabilities” with an equal adjustment recorded to thecarrying value of the $60,000,000 convertible senior notes.

 

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Refer to Note 7 for the descriptionof the collateral required on the interest rate swaps.

 

**Note 7  Commitments and Contingencies**

 

*Leases*

 

Duringfiscal 2005, the Company entered into a capital lease agreement for computerperipherals, which expires in September 2007.  In addition, during fiscal 2004, the Companyentered into a capital lease agreement for a phone system, which expires in February 2008.  The agreements resulted in capitalized costsof $296,000 and $231,000 during fiscal 2005 and 2004, respectively.  Assets and future obligations related to thecapital leases are included in the accompanying condensed consolidated balancesheet as of October 31, 2005 in property and equipment and in therespective liability accounts, respectively. Current and long-term portions ofthe capital leases amounted to $154,000 and $173,000, respectively, at October 31,2005. Depreciation of assets held under the capital leases is included indepreciation and amortization expense.

 

The Company leases its facilitiesunder operating leases that expire at various dates through December 2008.The total amount of rental payments due over the lease term is being charged torent on the straight-line method over the term of the lease. The differencebetween rent expense recorded and the amount paid is credited or charged to “deferredrent” which is included in current liabilities in the accompanying balancesheets. Deferred rent was approximately $203,000 and $259,000 at October 31,2005 and July 31, 2005, respectively. Total rent expense was approximately $924,000 and $589,000 for the threemonths ended October 31, 2005 and 2004, respectively.  

 

Futureminimum lease payments for all non-cancelable capital and operating leaseagreements at October 31, 2005, were as follows (in thousands): 

 
| ** **                    | ** ** | ** ** | ** ** | **Nine months**                | ** ** | **Fiscal  year ending July 31,** | ** ** |
|-------------------------------|------------|------------|------------|--------------------------------|------------|---------------------------------------|------------|
| ** **                    | ** ** | **Total**  | ** ** | **ending  July 31, 2006** | ** ** | **2007**                              | ** ** | **2008** | ** ** | **2009** | ** ** | **2010 and Thereafter** | ** ** |
| Capital lease obligation(1)   |       | $          | 364        |                           | $          | 136                                   |       | $ | 182 |   | $ | 46 |   | $ | — |   | $ | — |   |
| Operating leases:             |       |       |       |                           |       |                                  |       |   |   |   |   |   |   |
| Operating leases              |       | 4,559      |       | 2,242                          |       | 1,099                                 |       | 849 |   | 369 |   | — |   |
| Proceeds from subleases       |       | (21        | )          | (21                            | )          | —                                |       | — |   | — |   | — |   |
| Net operating leases          |       | 4,538      |       | 2,221                          |       | 1,099                                 |       | 849 |   | 369 |   | — |   |
| Future minimum lease payments |       | $          | 4,902      |                           | $          | 2,357                                 |       | $ | 1,281 |   | $ | 895 |   | $ | 369 |   | $ | — |   |

 

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(1) Includes interest payments due (interest rates ranging from 2.4%to 12.7%).

 

*Acquisitionsand Potential Earnout Payments*

 

In June 2005,the Company completed its acquisition of all of the issued and outstandingstock of PDAapps.  Under the terms of anAgreement and Plan of Merger, dated as of June 23, 2005, the outstandingshares of PDAapps common stock were converted into the right to receive (i) anaggregate of approximately $4,000,000 in aggregate initial cash considerationand (ii) an aggregate of up to $2,600,000 in cash earnout consideration(based on future revenue generated by the Company from the former PDAappsclient base), subject to the deposit of $1,000,000 in escrow to be available tocompensate Intellisync pursuant to the indemnification obligations of theholders of PDAapps common stock.  Theearnout consideration, if achieved, is due and payable shortly following thefirst anniversary of the acquisition.

 

In March 2005,the Company completed its acquisition of all of the issued and outstandingstock of Tourmaline.  Under the terms ofan Agreement and Plan of Merger, dated as of February 9, 2005, theoutstanding shares of Tourmaline common stock were converted into the right toreceive (i) an aggregate of approximately $4,118,000 in aggregate initialcash consideration and (ii) an aggregate of up to $2,881,918 in cashearnout consideration (based on future revenue generated by the Company fromthe former Tourmaline client base), subject to the deposit of a certain portionof the initial cash consideration and earnout consideration in escrow to beavailable to compensate Intellisync

 

15

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pursuant to theindemnification obligations of the holders of Tourmaline common stock.  The earnout consideration, if achieved, isdue and payable shortly following the first anniversary of the acquisition.

 

As of October 31,2005, the Company has not accrued any contingent earnout payment amountsdiscussed above.  Any earnout considerationpaid will be recorded as additional goodwill associated with the respectiveacquisition.

 

*Guarantees*

 

The Company has three letters ofcredit that collateralize certain operating lease obligations and totalapproximately $281,000 and $321,000 at October 31, 2005 and July 31,2005, respectively.  The Companycollateralizes these letters of credit with cash deposits made with two of itsfinancial institutions and has classified the short-term and the long-termportions of approximately $211,000 and $70,000 at October 31, 2005, and $196,000and $125,000 at July 31, 2005 as “Other Current Assets” and “RestrictedCash,” respectively, in the condensed consolidated balance sheets.  The long-term portion expires through June 2006.  The holders of the letters of credit are ableto draw on each respective letter of credit in the event that the Company isfound to be in default of its obligations under each of its operating leases.

 

Underthe terms of the interest rate swap agreement into which the Company enteredduring fiscal 2004, the Company must provide collateral to match anyunfavorable mark-to-market exposure (fair value) on the swaps. The amount ofcollateral required totals a minimum of $1,800,000 plus an amount equal to theunfavorable mark-to-market exposure on the swaps. Generally, the requiredcollateral will rise as interest rates rise. As of October 31, 2005, and July 31,2005, the Company has provided approximately $4,821,000 and $4,181,000,respectively, of collateral under this swap agreement which is included in “RestrictedCash” in its condensed consolidated balance sheet.

 

In theevent of early termination of the Company’s service agreement with eˆdeltacom,a division of ITC^DeltaCom, Inc. and a managed service provider, theCompany may be required to pay eˆdeltacom a penalty fee of up to approximately$45,000.

 

*Litigation*

 

On October 5,2005, Spontaneous Technology, Inc. served the Company with a complaintfiled in the Third Judicial District Court, of Salt Lake County, State ofUtah.  In the Complaint, SpontaneousTechnology asserts a cause of action for breach of contract related to thecalculation of an earnout payment in the Asset Purchase Agreement entered intobetween the parties on July 30, 2003. Spontaneous Technology seeks compensatory damages in the amount of$673,750 and recovery of its attorneys’ fees and costs.  The Company is investigating this matter, andat this time does not believe this matter will have a material adverse effecton its consolidated financial position, results of operation or liquidity.

 

TheCompany is party to various legal proceedings and claims, either asserted orunasserted, which arise in the ordinary course of business, includingproceedings and claims that relate to acquisitions it has completed or to companiesit has acquired, commercial, employment and other matters. While the outcome ofthese matters cannot be predicted with certainty, the Company does not believethat the outcome of any of these claims or any of the above mentioned legalmatters will have a material adverse effect on its consolidated financialposition, results of operations or cash flows. In accordance with generally accepted accounting principles, the Companymakes a provision for a liability when it is both probable that a liability hasbeen incurred and the amount of the loss can be reasonably estimated.  These provisions are reviewed at leastquarterly and adjusted to reflect the impacts of negotiations, settlements,rulings, advice of legal counsel, and other information and events pertainingto a particular case. Litigation is inherently unpredictable. However, theCompany believes that it has valid defenses with respect to the legal matterspending against Intellisync.  It ispossible, nevertheless, that the Company’s consolidated financial position,cash flows or results of operations could be affected by the resolution of oneor more of these contingencies.

 

16

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**Note 8  Stock-Based Compensation**

 

Effective August 1, 2005, the Companyadopted SFAS No. 123(R), “*Share-Based Payment*,”using the modified prospective application transition method, which establishesaccounting for stock-based awards exchanged for employee services. Accordingly,stock-based compensation cost is measured at grant date, based on the fairvalue of the award, over the requisite service period. The Company previouslyapplied APB Opinion No. 25, “*Accountingfor Stock Issued to Employees,*”and related Interpretations, as permitted by SFAS No. 123, “*Accounting for Stock-Based Compensation.*” 

 

*Pro FormaInformation Under SFAS No.123 for Periods Prior to Fiscal 2006*

 

Priorto the adoption of SFAS No. 123(R), the Company provided the disclosuresrequired under SFAS No. 123, as amended by SFAS No. 148, “*Accounting for Stock-Based Compensation – Transition and Disclosures*.”  The Company generally did not recognizestock-based compensation expense in its statement of operations for periodsprior to the adoption of SFAS No. 123(R) as most options granted had anexercise price equal to the market value of the underlying common stock on thedate of grant. 

 

Pro forma information regardingoption grants made to the Company’s employees and directors and employee stockpurchases related to the Employee Stock Purchase Plan is as follows (inthousands, except per-share amounts): 

 
| ** **                                                                                                 | ** ** | **Three Months Ended  October 31, 2004** | ** ** |
|------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|
| Net loss as reported                                                                                       |       | $                                             | (3,506     | ) |
| Add: Stock-based employee compensation expense  (reversal) included in reported net loss                   |       | (65                                           | )          |
| Deduct: Total stock-based employee compensation  expense determined under fair value method for all awards |       | (1,207                                        | )          |
| Pro forma net loss                                                                                         |       | $                                             | (4,778     | ) |
|                                                                                                       |       |                                          |       |
| Basic and diluted net loss per common share as  reported                                                   |       | $                                             | (0.05      | ) |
|                                                                                                       |       |                                          |       |
| Basic and diluted pro forma net loss per common  share                                                     |       | $                                             | (0.07      | ) |

 

The weighted-average estimated valueof options granted under the stock option plans and shares granted under thestock purchase plan during the three months ended October 31, 2004 was$1.67 and $1.36 using the Black-Scholes model with the followingweighted-average assumptions: 

 
| ** **                | ** ** | **Three Months Ended   October 31, 2004** | ** ** |
|---------------------------|------------|----------------------------------------------------------|------------|
| ** **                | ** ** | **Stock Option  Plans**                                  | ** ** | **Employee  Stock Purchase  Plan** | ** ** |
| Expected life  (in years) |       | 4.1                                                      |       | 1.0 |   |
| Risk-free  interest rate  |       | 4.05                                                     | %          | 1.97 | % |
| Stock price  volatility   |       | 110                                                      | %          | 125 | % |
| Expected dividend  yield  |       | —                                                   |       | — |   |

 

The Company estimates the expectedlife and expected volatility of the stock options based upon historicaldata.  Prior to fiscal 2006, forfeituresof employee stock options were accounted for on an as-incurred basis. 

 

17

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*Valuation andExpense Information under SFAS No. 123(R)*

 

The following table summarizesstock-based compensation expense related to employee stock options and employeestock purchases under SFAS No. 123(R) for the three months ended October 31,2005 which was allocated as follows (in thousands, except per share amount): 

 
| ** **                                      | ** ** | **Three Months Ended  October 31, 2005** | ** ** |
|-------------------------------------------------|------------|-----------------------------------------------|------------|
| Stock-based  compensation expense:              |       |                                          |       |
| Cost of revenue                                 |       | $                                             | 175        |   |
| Research and development                        |       | 599                                           |       |
| Sales and marketing                             |       | 854                                           |       |
| General and administrative                      |       | 603                                           |       |
| Total  stock-based compensation expense         |       | 2,231                                         |       |
| Tax effect on  stock-based compensation expense |       | 21                                            |       |
| Net effect on  net loss                         |       | $                                             | 2,210      |   |
| Effect on loss  per share:                      |       |                                          |       |
| Basic and diluted                               |       | $                                             | 0.03       |   |

 

As required by SFAS 123(R),management has made an estimate of expected forfeitures and is recognizingcompensation costs only for those equity awards expected to vest. 

 

*Stock Options:*During the three monthsended October 31, 2005, the Company granted 1,793,000  stock optionswith an estimated total grant-date fair value of approximately $5,641,000. Ofthis amount, the Company estimated that the stock-based compensation for theawards not expected to vest was $510,000. During the three months ended October 31,2005, the Company recorded stock-based compensation expense related to stockoptions of approximately $1,913,000 million for all unvested options grantedprior and after the adoption of SFAS No. 123(R). 

 

*Employee StockPurchase Plan (ESPP):*The stock-based compensation expense inconnection with the plan for the three months ended October 31, 2005 wasapproximately $318,000. This cost is amortized on a straight-line basis over aweighted-average period of approximately 1.0 year. 

 

*Valuation Assumptions*

 

In connection with the adoption ofSFAS No. 123(R), the Company estimated the fair value of stock optionsusing the Black-Scholes valuation model. The fair value of each option grant isestimated on the date of grant and is amortized on an accelerated basis overthe remaining vesting period consistent with the method described in FIN No. 28,“*Accounting for Stock Appreciation Rights and OtherVariable Stock Option or Award Plans*.”  The weighted-average estimated value ofoptions granted to officers and directors, and to non-officers and directors underthe stock option plans was $3.33 and $2.47, respectively, and shares grantedunder the stock purchase plan was $1.94 during the three months ended October 31,2005 using the Black-Scholes model with the following weighted-averageassumptions: 

 
| ** **                  | ** ** | **Three Months Ended   October 31, 2005** | ** ** |
|-----------------------------|------------|----------------------------------------------------------|------------|
| ** **                  | ** ** | **Stock Option Plans**                                   | ** ** | ** ** | ** ** |
| ** **                  | ** ** | **Officers and  Directors**                              | ** ** | **Non-officers  and Directors** | ** ** | **Employee Stock  Purchase Plan** | ** ** |
| Expected life  (in years)   |       | 5.1                                                      |       | 4.4 |   | 1.0 |   |
| Risk-free  interest rate    |       | 4.40                                                     | %          | 4.39 | % | 4.31 | % |
| Stock price  volatility     |       | 111                                                      | %          | 106 | % | 79 | % |
| Expected  dividend yield    |       | —                                                   |       | — |   | — |   |
| Forfeiture rate  (per year) |       | 4.0                                                      | %          | 5.5 | % | — |   |

 

18

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*Expected Term:*The Company’sexpected term represents the period that the Company’s stock-based awards areexpected to be outstanding and was determined based on historical experience ofsimilar awards, giving consideration to the contractual terms of thestock-based awards, vesting schedules and expectations of future employeebehavior as influenced by changes to the terms of its stock-based awards. 

 

*ExpectedVolatility:*The fair value of stock based payments made throughthe quarter ended October 31, 2005, were valued using the Black-Scholesvaluation method with a volatility factor based on the Company’s historicalstock prices over the most recent period commensurate with the estimatedexpected life of the stock options.  

 

*Expected Dividend:*The Black-Scholesvaluation model calls for a single expected dividend yield as an input. TheCompany has not issued any dividends. 

 

*Risk-Free InterestRate*: The Company bases the risk-free interest rate used in theBlack-Scholes valuation method on the implied yield currently available on U.S.Treasury zero-coupon issues with an equivalent remaining term.

 

*EstimatedPre-vesting Forfeitures:*When estimating forfeitures, theCompany considers voluntary termination behavior as well as future workforcereduction programs. 

 

*Stock Option Activity*

 

The following is a summary of optionsactivities:

 
| ** **                       | ** ** | ** **                       | ** ** | **Outstanding Options** | ** ** | **Exercisable Options**       | ** ** |
|----------------------------------|------------|----------------------------------|------------|-------------------------|------------|-------------------------------|------------|
| ** **                       | ** ** | **Options Available  For Grant** | ** ** | **Number of Shares**    | ** ** | **Range of Price  Per Share** | ** ** | **Weighted  Average Exercise  Price Per Share** | ** ** | **Number of Shares** | ** ** | **Weighted  Average Exercise  Price Per Share** | ** ** |
|                             |       | **(In thousands)**               |       | **(In thousands)**      |       |                          |       |   |   | **(In thousands)** |   |   |   |
| Balance at July 31, 2005    |       | 1,947                            |       | 12,756                  |       | $ 0.09 - $ 14.25    |       | $ | 2.29 |   | 5,093 |   | $ | 1.99 |   |
| Increase in shares authorized    |       | 700                              |       | —                  |       |                          |       |   |   |   |   |   |   |
| Granted                          |       | (1,793                           | )          | 1,793                   |       | $ 2.52 - $ 4.60     |       | $ | 3.96 |   |   |   |   |   |
| Exercised                        |       | —                           |       | (459                    | )          | $ 0.09 - $ 4.23     |       | $ | 1.48 |   |   |   |   |   |
| Canceled                         |       | 896                              |       | (896                    | )          | $ 0.36.- $ 7.51     |       | $ | 2.85 |   |   |   |   |   |
| Expired                          |       | (40                              | )          | —                  |       |                          |       |   |   |   |   |   |   |
|                             |       |                             |       |                    |       |                          |       |   |   |   |   |   |   |
| Balance at October 31, 2005 |       | 1,710                            |       | 13,194                  |       | $ 0.09 - $ 14.25    |       | $ | 2.51 |   | 5,362 |   | $ | 2.08 |   |

 

The options outstanding andexercisable at October 31, 2005 were in the following exercise priceranges:

 
| ** **                     | ** ** | **Options Outstanding**                     | ** ** | ** **                                  | ** ** |
|--------------------------------|------------|---------------------------------------------|------------|---------------------------------------------|------------|
| ** **                     | ** ** | ** **                                  | ** ** | **Weighted-Average**                        | ** ** | ** ** | ** ** | ** ** | ** ** | **Options Exercisable** | ** ** |
| **Range of  Exercise  Prices** | ** ** | **Number  Outstanding (In thousands)** | ** ** | **Remaining  Contractual Life  (In years)** | ** ** | **Weighted-Average  Exercise Price** | ** ** | **Aggregate Intrinsic Value** | ** ** | **Number  Exercisable  (In thousands)** | ** ** | **Weighted-Average  Exercise Price** | ** ** | **Aggregate Intrinsic Value** | ** ** |
| $ 0.09 - $ 0.59      |       | 2,031                                       |       | 6.89                                        |       | $ | 0.45 |   | $ | 7,962 |   | 1,928 |   | $ | 0.45 |   | $ | 7,558 |   |
| $ 0.61 - $ 1.85      |       | 968                                         |       | 4.52                                        |       | 1.24 |   | 3,030 |   | 872 |   | 1.18 |   | 2,782 |   |
| $ 2.00                    |       | 1,950                                       |       | 9.06                                        |       | 2.00 |   | 4,622 |   | 306 |   | 2.00 |   | 725 |   |
| $ 2.04 - $ 2.15      |       | 529                                         |       | 7.73                                        |       | 2.11 |   | 1,196 |   | 288 |   | 2.11 |   | 651 |   |
| $ 2.17                    |       | 1,997                                       |       | 9.22                                        |       | 2.17 |   | 4,393 |   | 54 |   | 2.17 |   | 119 |   |
| $ 2.24 - $ 2.76      |       | 1,483                                       |       | 8.95                                        |       | 2.60 |   | 2,625 |   | 268 |   | 2.60 |   | 474 |   |
| $ 2.90 - $ 3.94      |       | 1,353                                       |       | 8.72                                        |       | 3.40 |   | 1,312 |   | 427 |   | 3.39 |   | 418 |   |
| $ 3.96 - $ 4.60      |       | 1,846                                       |       | 9.17                                        |       | 4.36 |   | 18 |   | 419 |   | 4.22 |   | 63 |   |
| $ 4.65 - $ 8.10      |       | 1,027                                       |       | 7.90                                        |       | 4.88 |   | — |   | 790 |   | 4.88 |   | — |   |
| $ 14.25                   |       | 10                                          |       | 4.94                                        |       | 14.25 |   | — |   | 10 |   | 14.25 |   | — |   |
|                           |       | 13,194                                      |       | 8.24                                        |       | $ | 2.51 |   | $ | 25,158 |   | 5,362 |   | $ | 2.08 |   | $ | 12,790 |   |

 

The aggregate intrinsic value in thepreceding table represents the total pretax intrinsic value, based on theCompany’s closing stock price of $4.37 as of October 31, 2005, which wouldhave been received by the option holders had all option holders exercised theirin-the-money options as of that date. The total number of in-the-money

 

19

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options exercisable as of October 31, 2005 was4,556,821, with a weighted average exercise price of $1.56.  As of July 31, 2005, approximately5,093,000 outstanding options were exercisable, and the weighted averageexercise price was $1.99. 

 

The weighted average exercise price of options grantedduring the three months ended October 31, 2005 was $3.96 per share.  The total intrinsic value of optionsexercised during the three month period ended October 31, 2005 wasapproximately $761,000. The total cash received from employees as a result ofemployee stock option exercises and employee stock purchase plan during thethree months ended October 31, 2005 was approximately $1,035,000. Inconnection with these exercises, there was zero tax benefit realized by theCompany due to the Company’s current loss position.

 

The Company issues new shares ofcommon stock upon exercise of stock options. 

 

*ESPP Activity*

 

The following table shows the sharesissued, and their respective exercise price, pursuant to the employee stockpurchase plan during the three months ended October 31, 2005. 

 
| Purchase date                              |   | August 31, 2005 |   |
|--------------------------------------------|--------|----------------------|--------|
| Shares Issued                              |   | 181,614              |   |
| Weighted average  purchase price per share |   | $                    | 1.95   |   |
|                                            |        |                      |        |  |

 

*Stock-Based Benefit Plans*

 

*Inducement Option Agreements. *In additionto the equity compensation plans described in the Company’s Annual Report on Form 10-K/A,on October 3, 2005, the Company granted inducement options outside of theCompany’s existing equity compensation plans to David Eichler and Blair Hankinsto purchase 500,000 and 200,000 shares of the Company’s common stock,respectively. The shares subject to each of these options vest as to one-fourthof the total number of shares subject to the option on October 3, 2006 and1/48th of the total number of shares subject to the option each monththereafter, so that the option shall be fully vested and exercisable on October 3,2009 (assuming the optionholder remains in a continuous service relationshipwith the Company through that date).  These grants provide for acceleration ofvesting upon change of control.  Shareholderapproval was not required for either of these option grants and no suchapproval was obtained.

 

Also refer to Note 13 – SubsequentEvents for information on the changes made to the Company’s 2002 Stock OptionPlan.

 

**Note 9  Restructuring and Merger Charges**

** **

*RestructuringCharge*

 

TheCompany implemented a number of cost-reduction plans aimed at reducing coststhat were not integral to its overall strategy, better aligning its expenselevels with current revenue levels and ensuring conservative spending duringperiods of economic uncertainty.  Theseinitiatives included a reduction in workforce and facilitiesconsolidation.  

 

During the first fiscal quarter of 2006, the Companyimplemented reduction in workforce aimed at reducing excess capacity in itscontinued effort to streamline its operations, affecting 19 employees invarious business functions (four in research and development, six in sales andmarketing, four in general and administrative and five in information technology).  The program was completed by the end of September 2005,and the associated severance costs incurred were approximately $334,000 for the19 employees, including Steve Goldberg as described in Note 5.  Approximately $31,000 of the severance costs remainedunused as of October 31, 2005.  Theremaining unpaid amount was paid in November 2005.  

 

20

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Inaddition, the Company recorded $135,000 additional exit costs for its idlefacility in Santa Cruz, California.

 

Thefollowing table sets forth the activities in the restructuring accrual accountduring the first quarter of fiscal 2006 (in thousands):

 
| ** **                            | ** ** | **Workforce  Reduction** | ** ** | **Consolidation  of Excess  Facilities** | ** ** | **Total** | ** ** |
|---------------------------------------|------------|--------------------------|------------|------------------------------------------|------------|-----------|------------|
| **Balance  at July 31, 2005**    |       | $                        | —     |                                     | $          | 86        |       | $ | 86 |   |
| Restructuring  provision              |       | 334                      |       | —                                   |       | 334       |       |
| Adjustment                            |       | —                   |       | 135                                      |       | 135       |       |
| Cash payments                         |       | (303                     | )          | (54                                      | )          | (357      | )          |
| **Balance  at October 31, 2005** |       | $                        | 31         |                                     | $          | 167       |       | $ | 198 |   |

 

Theremaining unpaid amount as of October 31, 2005 of $167,000 related to thenet lease expense due to the consolidation of excess facilities, will be paidover the respective lease terms through June 2006 using cash fromoperations.  The total restructuringaccrual of $198,000 is reflected accordingly in “Accrued Liabilities” in thecondensed consolidated balance sheet as of October 31, 2005.

 

TheCompany continually evaluates the balance of the restructuring reserve itrecords in prior periods based on the remaining estimated amounts to bepaid.  Differences, if any, between theestimated amounts accrued and the actual amounts paid will be reflected inoperating expenses in future periods.

 

# ***Costs Relating to Potential Merger with Nokia***

# ** **

TheCompany incurred approximately $272,000 for operating expenses, mainly legal,relating to the proposed merger with Nokia, Inc. during the first quarterof fiscal 2006.  Refer to Note 13 –Subsequent Events.  The Company expectsto incur additional merger related costs of approximately $1,800,000 during thesecond quarter of fiscal 2006.

 

**Note 10  Net Loss Per Common Share**

 

Basic net loss per common share is computed by dividing net lossavailable to common stockholders by the weighted average number of commonshares outstanding for the period. Diluted net loss per common share is computed by dividing net loss bythe weighted average number of dilutive potential common shares that wereoutstanding during the period.  Dilutedweighted average shares reflect the dilutive effect, if any, of potentialcommon shares based on the treasury stock method.

 

Basicand diluted net loss per common share were calculated as follows (in thousands,except per common share amounts): 

 
| ** **                                                                                       | ** ** | **Three Months Ended  October 31,** | ** ** |
|--------------------------------------------------------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                                                       | ** ** | **2005**                                 | ** ** | **2004** | ** ** |
| *Numerator:*                                                                                     |       |                                     |       |   |   |
| Net loss                                                                                         |       | $                                        | (8,014     | ) | $ | (3,506 | ) |
|                                                                                             |       |                                     |       |   |   |
| *Denominator:*                                                                                   |       |                                     |       |   |   |
| Weighted average shares  outstanding used to compute basic and diluted net loss per common share |       | 66,981                                   |       | 64,418 |   |
|                                                                                             |       |                                     |       |   |   |
| Basic and diluted net loss per  common share                                                     |       | $                                        | (0.12      | ) | $ | (0.05 | ) |

 

21

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All common shares that were held in escrow or thatwere subject to repurchase by the Company, totaling approximately zero and 1,360,000as of October 31, 2005 and 2004, respectively, were excluded from basicand diluted net loss per common share calculations.

 

Potential common shares attributable to stock options,convertible senior notes, shares held in escrow and shares subject torepurchase by the Company of 27,756,240 and 24,492,427  were outstanding at October 31, 2005 and2004, respectively. However, as a result of a net loss incurred by the Companyin the three months ended October 31, 2005 and 2004, none of thein-the-money potential common shares were included in the weighted averageoutstanding shares (using the treasury stock method or the if-converted method,as applicable) used to calculate net loss per common share because the effectwould have been antidilutive.

 

**Note 11  Comprehensive Loss**

 

Accumulated other comprehensive loss consists of net unrealizedgain/loss on available for sale investments and foreign currency translationadjustments.  Total comprehensive lossfor the three months ended October 31, 2005 and 2004, respectively, ispresented in the following table (in thousands): 

 
| ** **                                    | ** ** | **Three Months Ended  October 31,** | ** ** |
|-----------------------------------------------|------------|------------------------------------------|------------|
| ** **                                    | ** ** | **2005**                                 | ** ** | **2004** | ** ** |
| Net loss                                      |       | $                                        | (8,014     | ) | $ | (3,506 | ) |
| Other comprehensive income (loss):            |       |                                     |       |   |   |
| Change in net unrealized gain  on investments |       | 17                                       |       | 19 |   |
| Change in currency translation  adjustments   |       | (18                                      | )          | 629 |   |
| Total other comprehensive  income (loss)      |       | (1                                       | )          | 648 |   |
| Total comprehensive loss                      |       | $                                        | (8,015     | ) | $ | (2,858 | ) |

 

**Note 12  Business Segments**

 

Operatingsegments are identified as components of an enterprise about which separate,discrete financial information is available that is evaluated by the chiefoperating decision maker or decision-making group to make decisions about howto allocate resources and assess performance. The Company’s chief operatingdecision maker is the chief executive officer. To date, the Company hasreviewed its operations principally in a single segment.

 

TheCompany operates in a single industry segment encompassing the development,marketing and support of software and services that provide synchronization,wireless messaging, mobile application development, application/devicemanagement, real-time remote information access, secure VPN and identitysearching/matching/screening capabilities. The Company’s customer base consists primarily of corporateorganizations, business development organizations, industry associations,mobile carriers, resellers, international system integrators, large OEMs in thepersonal computer market and selected distributors, which primarily market tothe retail channel, in North America, Europe, the Asia-Pacific region, SouthAmerica, and Africa.

 

22

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Revenueis attributed to regions based on the location of customers.  Revenue information by geographic region isas follows (in thousands):

 
| ** **          | ** ** | **Three Months Ended  October 31,** | ** ** |
|---------------------|------------|------------------------------------------|------------|
| ** **          | ** ** | **2005**                                 | ** ** | **2004** | ** ** |
| United States       |       | $                                        | 11,223     |   | $ | 8,131 |   |
| Japan               |       | 2,106                                    |       | 1,060 |   |
| Other International |       | 3,016                                    |       | 3,111 |   |
| Total revenue       |       | $                                        | 16,345     |   | $ | 12,302 |   |

 

Revenueinformation by customer group is as follows (in thousands):

 
| ** **             | ** ** | **Three Months Ended  October 31,** | ** ** |
|------------------------|------------|------------------------------------------|------------|
| ** **             | ** ** | **2005**                                 | ** ** | **2004** | ** ** |
| Enterprise and  retail |       | $                                        | 7,795      |   | $ | 7,522 |   |
| OEMs                   |       | 3,612                                    |       | 3,663 |   |
| Mobile carriers        |       | 4,938                                    |       | 1,117 |   |
| Total revenue          |       | $                                        | 16,345     |   | $ | 12,302 |   |

 

Revenuefrom Verizon Wireless accounted for greater than 10% of the Company’s totalrevenue for the three months ended October 31, 2005.  No customers accounted for more than 10% ofthe Company’s total revenue for the three months ended October 31,2004.  No other customers accounted formore than 10% of total revenue during these periods.  Verizon Wireless accounted for greater than 10% and 10% of the total accountsreceivable balance at October 31,2005 and July 31, 2005, respectively. No other customers accounted for more than 10% of total of accountsreceivable during the same periods.

 

Goodwill information by geographic region is asfollows (in thousands):

 
| ** **           | ** ** | **October 31,  2005** | ** ** | **July 31,  2005** | ** ** |
|----------------------|------------|----------------------------|------------|-------------------------|------------|
| United States        |       | $                          | 62,050     |                    | $          | 62,050 |   |
| United Kingdom       |       | 4,764                      |       | 4,744                   |       |
| Other  International |       | 1,680                      |       | 1,680                   |       |
| Total revenue        |       | $                          | 68,494     |                    | $          | 68,474 |   |

 

Otherlong-lived asset information by geographic region is as follows (in thousands):

 
| ** **              | ** ** | **October 31, 2005** | ** ** | **July 31,  2005** | ** ** |
|-------------------------|------------|---------------------------|------------|-------------------------|------------|
| United States           |       | $                         | 3,059      |                    | $          | 2,651 |   |
| Romania                 |       | 177                       |       | 156                     |       |
| Japan                   |       | 100                       |       | 45                      |       |
| Other  International    |       | 181                       |       | 176                     |       |
| Total long-lived assets |       | $                         | 3,517      |                    | $          | 3,028 |   |

 

23

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**Note 13****   SubsequentEvents**

 

*MergerAgreement with Nokia*

 

Pursuant to the merger agreement theCompany entered into with Nokia Inc., a Delaware corporation, on November 15,2005, each issued and outstanding share of common stock of the Company, shallbe automatically converted into the right to receive $5.25 in cash per share,without interest, at the effective time of the merger.  The merger is conditioned upon, among otherthings, the adoption of the merger agreement by the stockholders of the Companypursuant to applicable law, the termination or expiration of the waiting periodunder the Hart-Scott-Rodino Antitrust Improvements Act of 1976, and thetermination or expiration of the applicable waiting periods of antitrust lawsof certain foreign jurisdictions and other conditions.

 

Concurrently with the execution ofthe merger agreement with Nokia, each director and officer of the Companyentered into a voting agreement with Nokia pursuant to which such director orofficer agreed to vote his or her Common Stock in favor of approving andadopting the merger.  Also, simultaneously with the execution of the mergeragreement, certain key employees of the Company entered into employment-relatedor consulting agreements with Nokia (which contain non-competition andnon-solicitation provisions), which agreements will take effect as of theeffective time of the merger.

 

*Resignation of Officer*

 

On November 21, 2005, J. Keith Kitchen resignedhis position as the Company’s Principal Accounting Officer, but will remain asthe Company’s Controller.  The Board ofDirectors appointed David Eichler as the Company’s Principal Accounting Officereffective the same day.

 

*ChangesMade to the 2002 Stock Option Plan*

 

On December 2, 2005, the Company’s stockholdersapproved the following changes made to the Company’s 2002 Stock Option Plan(the “2002 Plan”): 

 

•                  Permitthe award of restricted stock units. 

 

•                  Establishnew annual limitations on the number of stock options and restricted stockunits that may be granted to any participant in the 2002 Plan in any singlefiscal year. No participant will be able to be granted options covering morethan 1,000,000 shares during any of the Company’s fiscal years; and noparticipant will be granted more than 500,000 shares of restricted stock unitsduring any fiscal year. 

 

•                  Allowthe administrator of the 2002 Plan to grant options and restricted stock unitsunder the amended 2002 Plan to qualify as “performance-based compensation”under Section 162(m) of the Internal Revenue Code. 

 

The amended version of the 2002 Plan does not differfrom the old version of the 2002 Plan in any other material respect. 

 

24

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**Item 2.****      Management’s Discussion andAnalysis of Financial Condition and Results of Operations**

 

*Thefollowing information should be read in conjunction with the condensedconsolidated financial statements and the notes thereto contained elsewhere inthis Form 10-Q/A and in conjunction with the consolidated financialstatements and management’s discussion and analysis of financial condition andresults of operations in our Annual Report on Form 10-K.  This quarterly report on Form 10-Q/A,and in particular management’s discussion and analysis of financial conditionand results of operations, contains forward-looking statements regarding futureevents or our future performance that involve certain risks and uncertaintiesincluding those discussed in “Factors That May Affect Future OperatingResults” below.  In this Form 10-Q/A,the words “anticipates,” “believes,” “expects,” “intends,” “future” and similarexpressions identify forward-looking statements.  All statements that address operatingperformance, our stock price, events or developments that we expect oranticipate will occur in the future, including statements relating to plannedproduct releases and composition of revenue, both in terms of segment andgeographical source, are forward-looking statements.  Such forward-looking statements are based onmanagement’s current views and assumptions regarding future events andoperating performance, and speak only as of the date hereof.  We undertake no obligation to publicly updateor revise any forward-looking statements whether as a result of newinformation, future events or otherwise. Actual events or our actual future results may differ materially fromany forward-looking statements due to the risks and uncertainties outlinedbelow. *

 

**BusinessOverview**

 

Wedevelop, market and support desktop, enterprise and mobile carrier-classsoftware that enables consumers, business executives and information technologyprofessionals to extend the capabilities of enterprise groupware and verticalapplications, data-enabled mobile devices and other personal communicationplatforms.  The primary softwareapplications we have developed and marketed include push-email, datasynchronization and systems management software.  Our software also enables organizations tosearch, find, match and synchronize identity data within their computer systemsand network databases. 

 

We haveorganized our operations into a single operating segment encompassing thedevelopment, marketing and support of software and services that providesynchronization, wireless messaging, mobile application development, databaseapplication/device management, real-time remote information access, secure VPN,and identity synchronization capabilities. 

 

We licenseour software products directly to corporations, mobile carriers, originalequipment manufacturers, or OEMs, and business development organizationsworldwide.  In addition, we sell ourretail products through several distribution channels both in the United Statesand internationally, including major distributors, resellers, computer dealers,retailers and mail-order companies. Internationally, we are represented by over 150 distributors, resellersand retailers in North America, Europe, the Asia-Pacific region, South Americaand Africa. 

 

***RecentEvent***

 

On November 15, 2005, we enteredinto an agreement and plan of merger with Nokia Inc., a Delaware corporation,whereby, at the effective time of the merger, each issued and outstanding shareof common stock of Intellisync shall be automatically converted into the rightto receive $5.25 in cash per share, without interest.

 

The merger is conditioned upon, amongother things, the adoption of the merger agreement by our stockholders pursuantto applicable law, the termination or expiration of the waiting period underthe Hart-Scott-Rodino Antitrust Improvements Act of 1976, the termination orexpiration of the applicable waiting periods of antitrust laws of certainforeign jurisdictions and other conditions.

 

# **Estimates, Assumptions and Critical AccountingPolicies**

# ** **

Our financial statements and accompanyingnotes are prepared in accordance with generally accepted accounting principlesin the United States of America.  Preparing financial statements requiremanagement to make estimates and assumptions that affect the reported amountsof assets, liabilities, sales and expenses. These estimates

 

25

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and assumptions are affected by management’sapplication of accounting policies.  Our critical accounting policiesinclude license and service revenue recognition, channel inventory and productreturns, valuation of goodwill, other intangibles, investments and otherlong-lived assets, restructuring accruals, loss contingencies and provision fordoubtful accounts which are discussed in more detail under the caption “*Estimates, Assumptions and Critical Accounting Policies*” inour 2005 Annual Report on Form 10-K. 

 

One other policy that we believe is as critical as the others to aid in fullyunderstanding and evaluating our reported financial results is as follows: 

 

•                  *Stock-based Compensation. *We estimate the fair value ofstock options granted using the Black-Scholes option-pricing formula and amultiple-option award approach. This fair value is then amortized on anaccelerated basis over the requisite service periods of the awards, which isgenerally the vesting period. This option-pricing model requires the input ofhighly subjective assumptions, including the option’s expected life and theprice volatility of the underlying stock. The expected stock price volatilityassumption was determined using historical volatility of our common stock. 

 

**Results of Operations**

 

The following table sets forth items included in the condensedconsolidated statements of operations as a percentage of revenue for theperiods indicated.  

 
| ** **                                    | ** ** | **Three Months Ended  October 31,** | ** ** |
|-----------------------------------------------|------------|------------------------------------------|------------|
| ** **                                    | ** ** | **2005**                                 | ** ** | **2004** | ** ** |
|                                          |       |                                     |       |   |   |
| Revenue                                       |       |                                     |       |   |   |
| License                                       |       | 62.8                                     | %          | 63.6 | % |
| Services                                      |       | 37.2                                     |       | 36.4 |   |
| Total revenue                                 |       | 100.0                                    | %          | 100.0 | % |
|                                          |       |                                     |       |   |   |
| Cost and  operating expenses:                 |       |                                     |       |   |   |
| Cost of revenue                               |       | 18.8                                     |       | 19.0 |   |
| Amortization of developed and core technology |       | 7.7                                      |       | 9.4 |   |
| Research and development                      |       | 30.5                                     |       | 27.1 |   |
| Sales and marketing                           |       | 52.5                                     |       | 45.4 |   |
| General and administrative                    |       | 25.7                                     |       | 16.7 |   |
| Amortization of intangibles                   |       | 6.4                                      |       | 8.5 |   |
| Restructuring and merger charges              |       | 3.7                                      |       | — |   |
| Total cost and operating expenses             |       | 145.3                                    |       | 126.1 |   |
| Operating loss                                |       | (45.3                                    | )          | (26.1 | ) |
| Other income  (expense):                      |       |                                     |       |   |   |
| Interest income                               |       | 1.9                                      |       | 1.9 |   |
| Interest expense                              |       | (3.5                                     | )          | (1.9 | ) |
| Other, net                                    |       | (1.5                                     | )          | (1.5 | ) |
| Total other income (expense)                  |       | (3.1                                     | )          | (1.5 | ) |
| Loss before  income taxes                     |       | (48.4                                    | )          | (27.6 | ) |
| Provision for  income taxes                   |       | (0.6                                     | )          | (0.9 | ) |
| Net loss                                      |       | (49.0                                    | )%         | (28.5 | )% |

 

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*Revenue*

 
| ** **    | ** ** | **Three Months Ended October 31,** | ** ** |
|---------------|------------|-----------------------------------------|------------|
| ** **    | ** ** | **2005**                                | ** ** | **Percent  Change** | ** ** | **2004** | ** ** |
| ** **    | ** ** | **(In thousands, except  percentage)**  | ** ** |
| Total revenue |       | $                                       | 16,345     |   | 32.9 | % | $ | 12,302 |   |
|               |            |                                         |            |  |  |  |  |  |  |

 

 

Wederive revenue from two primary sources: software licenses and fees forservices.  

 

•                  *License Revenue*.  

 
| ** **                      | ** ** | **Three Months Ended October 31,** | ** ** |
|---------------------------------|------------|-----------------------------------------|------------|
| ** **                      | ** ** | **2005**                                | ** ** | **Percent  Change** | ** ** | **2004** | ** ** |
| ** **                      | ** ** | **(In thousands, except  percentages)** | ** ** |
| License revenue                 |       | $                                       | 10,265     |   | 31.2 | % | $ | 7,825 |   |
| As percentage of  total revenue |       | 62.8                                    | %          |   |   | 63.6 | % |
|                                 |            |                                         |            |  |  |  |  |  |  |

 

Licenserevenue is earned from the sale and use of software products (including ourtechnology licensing components) and royalty agreements with OEMs. The31.2% increased in license revenue for the first quarter of fiscal 2006 wasprimarily the result of increased license revenue from our mobile carriercustomers ($2,731,000 or 418% increase), increased license revenue from OEMcustomers ($490,000 or 16% increase) offset in part by continued decreasedsales in wired or traditional PDA (personal digital assistant) sales throughour retail channel of approximately $300,000 or 31%.  We expect that the decreasing revenue fromPDAs will continue as more consumers move to smartphones and other wirelessmobile devices.

 

•                  *Service Revenue.*

 
| ** **                      | ** ** | **Three Months Ended October 31,** | ** ** |
|---------------------------------|------------|-----------------------------------------|------------|
| ** **                      | ** ** | **2005**                                | ** ** | **Percent  Change** | ** ** | **2004** | ** ** |
| ** **                      | ** ** | **(In thousands, except  percentages)** | ** ** |
| Service revenue                 |       | $                                       | 6,080      |   | 35.8 | % | $ | 4,477 |   |
| As percentage of  total revenue |       | 37.2                                    | %          |   |   | 36.4 | % |
|                                 |            |                                         |            |  |  |  |  |  |  |

 

Service revenue isderived from fees for services, including fixed-price and time-and-materialsprofessional services arrangements, amortization of maintenance contractprograms and hosting fees.  The increasein service revenue for the first quarter of fiscal 2006 as compared with thatfor the corresponding quarter of fiscal 2005 was due to increased maintenancecontract revenues of approximately $1,100,000, which relate to the increase inlicense revenue, plus a net $200,000 increase in professional service revenueprimarily from carriers as well as an increase in hosting fees from carriers ofapproximately $300,000.  

 

In any period,service revenue from time and materials contracts is dependent, among other things,on license transactions closed during the current and preceding quarters andcustomer decisions regarding implementations of licensed software.

 

27

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*Revenue by Customer Group*

 
| ** **                     | ** ** | **Year Ended August 31,**         | ** ** |
|--------------------------------|------------|----------------------------------------|------------|
| ** **                     | ** ** | **2005**                               | ** ** | **Percent  Change** | ** ** | **2004** | ** ** |
| ** **                     | ** ** | **(In thousands, except  percentage)** | ** ** |
| Enterprise and retail          |       | $                                      | 7,795      |   | 3.6 | % | $ | 7,522 |   |
| As percentage of total revenue |       | 47.7                                   | %          |   |   | 61.1 | % |
| OEMs                           |       | $                                      | 3,612      |   | (1.4 | )% | $ | 3,663 |   |
| As percentage of total revenue |       | 22.1                                   | %          |   |   | 29.8 | % |
| Mobile carriers                |       | $                                      | 4,938      |   | 342.1 | % | $ | 1,117 |   |
| As percentage of total revenue |       | 30.2                                   | %          |   |   | 9.1 | % |
| Total revenue                  |       | $                                      | 16,345     |   |   |   | $ | 12,302 |   |

 

Our enterprise and retail products revenue includessales to retail distribution channels, as well as direct sales of our personaland server products licensed to corporations for internal use.  The 3.6% net increase in revenue fromenterprise and retail for the first quarter of fiscal 2006 as compared withthat for the corresponding quarter of fiscal 2005 was largely due to a$500,000, or 17% increase in sales of our identity matching and verification products,offset in part by a decrease of approximately $300,000, or 31%, in retailrevenue as a result of overall decline in sales of wired or traditionalPDAs.  Enterprise sales frequentlyinvolve large up-front license fees, which can result in lengthy sales cyclesand uncertainties as to the timing of sales driven by customers’ budgetaryprocesses. As a result, we generally have less visibility into futureenterprise sales than is typically the case with OEMs in our royalty-basedtechnology licensing business. In addition, while enterprise sales generallyresult in ongoing maintenance revenue and may lead to follow-on purchases orupgrades, we are typically dependent on sales to new customers for asignificant portion of our enterprise revenue in a given quarter.

 

Ourrevenue from OEMs remained relatively flat for the first quarter of fiscal 2006as compared with that for the corresponding quarter of fiscal 2005. 

 

Ourmobile carrier revenue, license and service, increased by 342% in absolutedollars during the first quarter of fiscal 2006 compared with that for thecorresponding quarter of 2005 reflecting increased license, hosting andprofessional service volume from existing as well as new customers during thefirst quarter of fiscal year 2006. Revenue from Verizon Wireless accounted for greater than 10% of totalrevenues in the first quarter of fiscal year 2006 compared to 8% of totalrevenues in the comparable period of fiscal year 2005. 

 

*InternationalRevenue*

 
| ** **                      | ** ** | **Three Months Ended October 31,** | ** ** |
|---------------------------------|------------|-----------------------------------------|------------|
| ** **                      | ** ** | **2005**                                | ** ** | **Percent  Change** | ** ** | **2004** | ** ** |
| ** **                      | ** ** | **(In thousands, except  percentages)** | ** ** |
| International  revenue          |       | $                                       | 5,122      |   | 22.8 | % | $ | 4,171 |   |
| As percentage of  total revenue |       | 31.3                                    | %          |   |   | 33.9 | % |
|                                 |            |                                         |            |  |  |  |  |  |  |

 

Internationalrevenue represented approximately 31% of our total revenue during the firstquarter of fiscal year 2006 compared to approximately 34% in the correspondingperiod in fiscal year 2005.  However, interms of absolute dollars international revenues accounted for 23% of our totalrevenue increase for the first quarter of fiscal 2006.  Our international revenue growth was a resultof a number of factors including an increase in the number of our internationaltechnology licensing partners and closing of certain contracts associated withour new products, particularly in Japan; and the effect of foreign exchangefluctuation.  The slight decrease ininternational revenue as a percentage of total revenue for the first quarter offiscal 2006 was primarily due to increased revenue from mobile carriercustomers in the United States. We believe that international revenue willfluctuate on a quarter to quarter basis as we periodically enter into newagreements for professional services and new international partner contractsfor technology licensing. International revenue may be subject to certain risksnot normally encountered in operations in the United States, including exposureto tariffs, various trade regulations, fluctuations in currency

 

28

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exchange rates, as wellas international software piracy as described more fully in “*Factors That May Affect Future Operating Results*” setforth below. We believe that continued growth will require further expansion ininternational markets. We have utilized and will likely continue to utilizesubstantial resources both to expand and establish international operations inthe future.

 

*TopCustomers*

 

Revenuefrom Verizon Wireless accounted for greater than 10% of our total revenue forthe first quarter of fiscal 2006.  Noother customers accounted for more than 10% of total revenue during this period.  No customers accounted for more than 10% of ourtotal revenue for the corresponding quarter of fiscal 2005.

 

*Cost ofRevenue*

 
| ** **                      | ** ** | **Three Months Ended October 31,** | ** ** |
|---------------------------------|------------|-----------------------------------------|------------|
| ** **                      | ** ** | **2005**                                | ** ** | **Percent  Change** | ** ** | **2004** | ** ** |
| ** **                      | ** ** | **(In thousands, except  percentages)** | ** ** |
| Cost of revenue                 |       | $                                       | 3,073      |   | 31.3 | % | $ | 2,341 |   |
| As percentage of  total revenue |       | 18.8                                    | %          |   |   | 19.0 | % |
|                                 |            |                                         |            |  |  |  |  |  |  |

 

Costof revenue consists of license costs and service costs.  License costs comprise product-packagingexpenses such as product media and duplication, manuals, packing supplies, andshipping costs.  Service costs comprisepersonnel-related expenses such as salaries and other related costs associatedwith work performed under professional service contracts, non-recurringengineering agreements, post-sales customer support costs and hosting costs forhosting services associated with technology licensing partners and end users.Hosting costs include expenses related to bandwidth for hosting, tape backup,security and storage, third-party fees and internal personnel costs associatedwith logistics and operational support of the hosting services. Service costscan be expected to vary significantly from period to period depending on themix of services we provide.

 

In general, license revenue costs represent a smallerpercentage of license revenue when compared with services revenue costs as apercentage of services revenue; this is due to the high cost structure ofservices revenue. Additionally, license costs tend to be variable based onlicense revenue volumes, whereas service costs tend to be fixed within certainservices revenue volume ranges. We would expect that an increase in servicesrevenue as a percentage of our total revenue would generate lower overall grossmargins as a percentage of total revenue. Also, given the high level of fixedcosts associated with the professional services group and our hostingoperations, our inability to generate revenue sufficient to absorb these fixedcosts could lead to low or negative service gross margins.

 

Theincrease in cost of service revenue in absolute dollars reflected an increaseof approximately $200,000 in costs associated with the increase in our revenuefrom mobile hosting, $100,000 in post-sales support infrastructure for ourcarrier customers, $191,000 in noncash stock compensation expense (furtherdiscussed below) and $240,000 in other related expenses.  In future periods, cost of revenue mayfurther fluctuate from quarter to quarter due to potential changes in theinternal infrastructure and other requirements of our hosting operations tomeet carriers demand. These changes, which may be costly, are difficult toforecast. In addition, our cost of revenue is primarily driven by ourexpectation for different margin characteristics within and between license andservice revenue as well as the expected mix between products and channels.

 

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*Amortizationof Developed and Core Technology*

 
| ** **                                    | ** ** | **Three Months Ended October 31,** | ** ** |
|-----------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                    | ** ** | **2005**                                | ** ** | **Percent Change** | ** ** | **2004** | ** ** |
| ** **                                    | ** ** | **(In thousands, except  percentages)** | ** ** |
| Amortization of developed and core technology |       | $                                       | 1,257      |   | 8.7 | % | $ | 1,156 |   |
| As percentage of total revenue                |       | 7.7                                     | %          |   |   | 9.4 | % |
|                                               |            |                                         |            |  |  |  |  |  |  |

 

Theincrease in the amortization of developed and core technology was primarily dueto the impact of recently purchased technology from PDAapps, Inc. andTourmaline Networks, Inc., which were acquired during the second half offiscal 2005.  Based on acquisitions completedas of October 31, 2005, we expect the future amortization expense ofdeveloped and core technology is as follows (in thousands): 

 
| Nine months ending July 31,  2006 |   | $      | 3,735  |   |
|----------------------------------------|--------|--------|--------|--------|
| Fiscal year ending July 31,       |   |   |   |
| 2007                                   |   | 4,872  |   |
| 2008                                   |   | 2,568  |   |
| 2009                                   |   | 1,195  |   |
| 2010 and thereafter                    |   | 925    |   |
|                                   |   | $      | 13,295 |   |

 

Weexpect that we may acquire additional developed and core technology associatedwith any acquisitions we may complete in the future.  As a result, we may further increase ouramortization expense of developed and core technology.

 

*Research and Development*

 
| ** **                      | ** ** | **Three Months Ended October 31,** | ** ** |
|---------------------------------|------------|-----------------------------------------|------------|
| ** **                      | ** ** | **2005**                                | ** ** | **Percent Change** | ** ** | **2004** | ** ** |
| ** **                      | ** ** | **(In thousands, except  percentages)** | ** ** |
| Research and  development       |       | $                                       | 4,981      |   | 49.6 | % | $ | 3,329 |   |
| As percentage of  total revenue |       | 30.5                                    | %          |   |   | 27.1 | % |
|                                 |            |                                         |            |  |  |  |  |  |  |

 

Researchand development expenses consist primarily of salaries and other related costsfor research and development personnel, quality assurance personnel, productlocalization, fees to outside contractors and the cost of facilities anddepreciation of capital equipment. We invest in research and development bothfor new products and to provide continuing enhancements to existing products.Our engineering group is currently focused on developing new functionality forwireless handhelds, smartphones, laptops and tablets, on extending our coresynchronization technology to increase scalability and extensibility, and onsupporting next generation wireless technology and device platforms.  The increase in research and developmentspending was due to the added headcount due to the acquisition of approximately25 engineers from acquisitions of Tourmaline and PDAapps during the second halfof fiscal 2005.  The increase was alsodue to $599,000 of noncash stock compensation expense as described below.  We expect that research and developmentexpenses will increase in absolute dollars as we continue to increaseassociated costs to pursue additional new product development opportunities,but such expenses will fluctuate as a percentage of revenue due to changes insales volume.

 

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*Sales andMarketing*

 
| ** **                      | ** ** | **Three Months Ended October 31,** | ** ** |
|---------------------------------|------------|-----------------------------------------|------------|
| ** **                      | ** ** | **2005**                                | ** ** | **Percent Change** | ** ** | **2004** | ** ** |
| ** **                      | ** ** | **(In thousands, except  percentages)** | ** ** |
| Sales and  marketing            |       | $                                       | 8,583      |   | 53.6 | % | $ | 5,589 |   |
| As percentage of  total revenue |       | 52.5                                    | %          |   |   | 45.4 | % |
|                                 |            |                                         |            |  |  |  |  |  |  |

 

Salesand marketing expenses consist primarily of salaries, commissions, promotionalexpenses (marketing and sales literature and presentations), marketing programs(trade shows, public relations) and other costs relating to sales and marketingemployees.  Sales and marketing expensesalso include costs relating to technical support personnel associated withpre-sales activities such as building brand awareness, performing product andtechnical presentations and answering customers’ product and serviceinquiries.  Sales and marketing expensesfor the first quarter of fiscal 2006 as compared with those for thecorresponding quarter of fiscal 2005 increased due to $854,000 of noncash stockcompensation (further discussed below) and an increase in number of salespeople worldwide as we increased our selling efforts in the mobile carriersales channel.  The added personnel costsresulted in an increase of approximately $368,000 in the first quarter offiscal 2006. 

 

Theincrease in sales and marketing expenses for the first quarter of fiscal 2006was also due to an increase in marketing programs and other related activitiesof approximately $1,772,000 to support increased revenue activities driven byestablishing strategic relationships with our existing and prospectiveenterprise customers.  We intend toincrease awareness and market presence of our existing and new products,services or technology over time, which may require us to substantiallyincrease the amount we spend on sales and marketing in future periods. Weexpect that our sales and marketing expenses will continue to increase in termsof absolute dollars as we increase and expand our sales and marketing effortsworldwide. 

 

*General andAdministrative*

 
| ** **                      | ** ** | **Three Months Ended October 31,** | ** ** |
|---------------------------------|------------|-----------------------------------------|------------|
| ** **                      | ** ** | **2005**                                | ** ** | **Percent Change** | ** ** | **2004** | ** ** |
| ** **                      | ** ** | **(In thousands, except  percentages)** | ** ** |
| General and  administrative     |       | $                                       | 4,201      |   | 105.0 | % | $ | 2,049 |   |
| As percentage of  total revenue |       | 25.7                                    | %          |   |   | 16.7 | % |
|                                 |            |                                         |            |  |  |  |  |  |  |

 

General and administrative expenses consist primarily of salaries andother costs relating to administrative, executive and financial personnel andoutside professional fees.  The increasein general and administrative spending for the first quarter of fiscal 2006 ascompared with those for the corresponding quarter of fiscal 2005 was due to anincrease in audit and consulting fees of approximately $924,000 which wererelated to complying with the new reporting requirements under theSarbanes-Oxley Act of 2002.  The increasewas also due to the noncash stock compensation charge of approximately $603,000(further described below), the additional rent expense we incurred for an idlefacility of $135,000 (discussed below) and all other immaterial charges.

 

Forthe first quarter of fiscal 2006, we recorded an adjustment related to theunder accrual of restructuring costs for an idle facility.  The out-of-period adjustment recorded was for$135,000 additional rent expense in the first quarter relating to priorperiods.  We believe that such amount isnot material to previously reported financial statements. There was no impacton net loss per share from these adjustments.

 

31

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*StockBased Compensation Expense*

 

On August 1, 2005, we adopted Statementof Financial Accounting Standards (SFAS) No. 123(R), which requires themeasurement and recognition of compensation expense for all share-based paymentawards made to our employees and directors including employee stock options andemployee stock purchases related to the stock purchase plan based on estimatedfair values. The following table summarizes stock-based compensation expenserelated to employee stock options and employee stock purchases under SFAS No. 123(R)for the three months ended October 31, 2005 which was allocated as follows(in thousands, except per share amount): 

 
| ** **                                      | ** ** | **Three Months Ended  October 31, 2005** | ** ** |
|-------------------------------------------------|------------|-----------------------------------------------|------------|
| Stock-based  compensation expense:              |       |                                          |       |
| Cost of revenue                                 |       | $                                             | 175        |   |
| Research and development                        |       | 599                                           |       |
| Sales and marketing                             |       | 854                                           |       |
| General and administrative                      |       | 603                                           |       |
| Total stock-based  compensation expense         |       | 2,231                                         |       |
| Tax effect on  stock-based compensation expense |       | 21                                            |       |
| Net effect on  net loss                         |       | $                                             | 2,210      |   |
| Effect on loss  per share:                      |       |                                          |       |
| Basic and diluted                               |       | $                                             | 0.03       |   |

 

*Amortizationof Other Intangibles*

 
| ** **                         | ** ** | **Three Months Ended October 31,** | ** ** |
|------------------------------------|------------|-----------------------------------------|------------|
| ** **                         | ** ** | **2005**                                | ** ** | **Percent Change** | ** ** | **2004** | ** ** |
| ** **                         | ** ** | **(In thousands, except  percentages)** | ** ** |
| Amortization of  other intangibles |       | $                                       | 1,048      |   | 0.2 | % | $ | 1,046 |   |
| As percentage of  total revenue    |       | 6.4                                     | %          |   |   | 8.5 | % |
|                                    |            |                                         |            |  |  |  |  |  |  |

 

Basedon acquisitions completed as of October 31, 2005, we expect the futureamortization expense of other intangible assets is as follows (in thousands): 

 
| Nine months ending July 31,  2006 |   | $      | 2,576  |   |
|----------------------------------------|--------|--------|--------|--------|
| Fiscal year ending July 31,       |   |   |   |
| 2007                                   |   | 3,106  |   |
| 2008                                   |   | 1,835  |   |
| 2009                                   |   | 994    |   |
| 2010 and thereafter                    |   | 1,841  |   |
|                                   |   | $      | 10,352 |   |

 

We expectthat we may acquire additional intangibles associated with any acquisitions wemay complete in the future.  As a result,we may further increase our amortization expense of other intangibles.

 

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*Restructuringand Merger Charges.*

 
| ** **                        | ** ** | **Three Months Ended October 31,** | ** ** |
|-----------------------------------|------------|-----------------------------------------|------------|
| ** **                        | ** ** | **2005**                                | ** ** | **Percent  Change** | ** ** | **2004** | ** ** |
| ** **                        | ** ** | **(In thousands, except  percentages)** | ** ** |
| Restructuring  and merger charges |       | $                                       | 606        |   | N/A |   | $ | — |   |
| As percentage of  total revenue   |       | 3.7                                     | %          |   |   | — | % |
|                                   |            |                                         |            |  |  |  |  |  |  |

 

*RestructuringAccrual. *Weimplemented a number of cost-reduction plans over the past few years aimed atreducing costs that were not integral to our overall strategy, better aligningour expense levels with current revenue levels and ensuring conservativespending during periods of economic uncertainty.  These initiatives included a reduction inworkforce and facilities consolidation.  

 

During the first fiscal quarter of 2006, weimplemented a reduction in workforce aimed at continued efforts to streamline operations,affecting 19 employees in various business functions (four in research anddevelopment, six in sales and marketing, four in general and administrative andfive in information technology).  Theprogram was completed by the end of September 2005, and the associatedseverance costs incurred were approximately $334,000, approximately $31,000 ofwhich remained unused as of October 31, 2005.  The remaining unpaid amount was paid in November 2005.  

 

Inaddition, we recorded $135,000 additional exit costs for an idle facility inSanta Cruz, California.

 

Thefollowing table sets forth the activities in the restructuring accrual accountduring the first quarter of fiscal 2006 (in thousands):

 
| ** **                            | ** ** | **Workforce  Reduction** | ** ** | **Consolidation  of Excess  Facilities** | ** ** | **Total** | ** ** |
|---------------------------------------|------------|--------------------------|------------|------------------------------------------|------------|-----------|------------|
| **Balance  at July 31, 2005**    |       | $                        | —     |                                     | $          | 86        |       | $ | 86 |   |
| Restructuring  provision              |       | 334                      |       | —                                   |       | 334       |       |
| Adjustment                            |       | —                   |       | 135                                      |       | 135       |       |
| Cash payments                         |       | (303                     | )          | (54                                      | )          | (357      | )          |
| **Balance  at October 31, 2005** |       | $                        | 31         |                                     | $          | 167       |       | $ | 198 |   |

 

Theremaining unpaid amount as of October 31, 2005 of $167,000 related to thenet lease expense due to the consolidation of excess facilities will be paidover the respective lease terms through June 2006 using cash fromoperations.  The total restructuringaccrual of $198,000 is reflected accordingly in “Accrued Liabilities” in thecondensed consolidated balance sheet as of October 31, 2005.

 

Wecontinually evaluate the balance of the restructuring reserve it records inprior periods based on the remaining estimated amounts to be paid.  Differences, if any, between the estimatedamounts accrued and the actual amounts paid will be reflected in operatingexpenses in future periods.

 

# ***Costs Relating to Proposed Mergerwith Nokia..*** We incurredapproximately $272,000 for mainly legal expenses relating to the proposedmerger with Nokia, Inc. during the first quarter of fiscal 2006.  We expect that we will incur additional costsof $1,800,000 during the second quarter of fiscal 2006 in connection with theproposed merger.

 

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*Interest Income*

 
| ** **                      | ** ** | **Three Months Ended October 31,** | ** ** |
|---------------------------------|------------|-----------------------------------------|------------|
| ** **                      | ** ** | **2005**                                | ** ** | **Percent  Change** | ** ** | **2004** | ** ** |
| ** **                      | ** ** | **(In thousands, except  percentages)** | ** ** |
| Interest income                 |       | $                                       | 310        |   | 31.4 | % | $ | 236 |   |
| As percentage of  total revenue |       | 1.9                                     | %          |   |   | 1.9 | % |
|                                 |            |                                         |            |  |  |  |  |  |  |

 

Interest income represents interest earned on cash andshort-term investments and realized gains on miscellaneous investments.  The increase in net interest income was dueto higher yield, averaging 3.3 % for the first quarter of fiscal 2006, on ourcash balances and investments,.as compared with 2.2% for the correspondingperiod of fiscal 2005. 

 

*Interest Expense*

 
| ** **                      | ** ** | **Three Months Ended October 31,** | ** ** |
|---------------------------------|------------|-----------------------------------------|------------|
| ** **                      | ** ** | **2005**                                | ** ** | **Percent  Change** | ** ** | **2004** | ** ** |
| ** **                      | ** ** | **(In thousands, except  percentages)** | ** ** |
| Interest expense                |       | $                                       | (563       | ) | 134.6 | % | $ | (240 | ) |
| As percentage of  total revenue |       | (3.5                                    | )%         |   |   | 1.9 | % |
|                                 |            |                                         |            |  |  |  |  |  |  |

 

Interest expense for the firstquarter of fiscal 2006 reflects primarily a higher variable interest rate,averaging 3.8% for the first quarter of fiscal 2006, associated with convertible senior notes, as compared with1.8% for the corresponding period of fiscal 2005.  

 

During fiscal 2004, we entered into aninterest rate swap agreement with a financial institution for two interest rateswaps on a total notional amount of $60,000,000, whereby we receive fixed-rateinterest of 3% in exchange for variable interest payments.  The interest rate swaps expire upon thematurity of our $60,000,000, 3% convertible senior notes in March 2009,and effectively convert fixed-rate notes into variable-rate borrowings. Theinterest rate is reset semi-annually and is equal to the 6-month LIBOR rateless a rate spread. The total variable interest rate was approximately 3.8% at October 31,2005. 

 

*Other, Net*

 
| ** **                      | ** ** | **Three Months Ended October 31,** | ** ** |
|---------------------------------|------------|-----------------------------------------|------------|
| ** **                      | ** ** | **2005**                                | ** ** | **Percent  Change** | ** ** | **2004** | ** ** |
| ** **                      | ** ** | **(In thousands, except  percentages)** | ** ** |
| Other, net                      |       | $                                       | (250       | ) | 39.7 | % | $ | (179 | ) |
| As percentage of  total revenue |       | (1.5                                    | )%         |   |   | 1.5 | % |
|                                 |            |                                         |            |  |  |  |  |  |  |

 

Other,net, represents amortization of debt issuance costs, miscellaneous bank feesand charges and realized gains or losses on foreign exchange andinvestments.  Other, net, for the firstquarter of fiscal 2006 reflects $164,000 of amortization of debt issuance costsassociated with the convertible senior notes we issued in March 2004,$31,000 of bank charges and investment management fees, and $55,000 of netrealized losses on foreign exchange and other expenses.  Other, net, for the first quarter of fiscal2004 reflects $159,000 of amortization of debt issuance costs amortizationexpense associated with the convertible senior notes we issued in March 2004and $20,000 of bank charges and investment management fees, net realized gainson foreign exchange and other expenses. 

 

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*Provisionfor Income Taxes*

 
| ** **                      | ** ** | **Three Months Ended October 31,** | ** ** |
|---------------------------------|------------|-----------------------------------------|------------|
| ** **                      | ** ** | **2005**                                | ** ** | **Percent  Change** | ** ** | **2004** | ** ** |
| ** **                      | ** ** | **(In thousands, except  percentages)** | ** ** |
| Provision for  income taxes     |       | $                                       | (107       | ) | 7.0 | % | $ | (115 | ) |
| As percentage of  total revenue |       | (0.6                                    | )%         |   |   | (0.9 | )% |
|                                 |            |                                         |            |  |  |  |  |  |  |

 

# **The provision for income taxes primarily represents foreignwithholding taxes on royalties earned from certain foreign customers and statefranchise and income taxes and estimated taxes for foreign subsidiaries.  We expect our effective income tax rate toremain at a relatively low rate in fiscal 2006.**

# ** **

# **Recently Issued Accounting Pronouncements**

# ** **

*Share-BasedPayment*****

 

In September 2005,the Financial Accounting Standards Board (FASB) issued FASB Staff Position(FSP) No. FAS 123(R)-1, “*Classification and Measurement ofFreestanding Financial Instruments Originally Issued in Exchange for EmployeeServices under FASB Statement No. 123(R)*,” to defer therequirement of SFAS No. 123(R) that a freestanding financial instrumentoriginally subject to SFAS No. 123(R) becomes subject to the recognitionand measurement requirements of other applicable GAAP when the rights conveyedby the instrument to the holder are no longer dependent on the holder being anemployee of the entity. The rights under stock-based payment awards we issuedto our employees are all dependent on the recipient being an employee of Intellisync.Therefore, this FSP currently does not have an impact on our consolidatedfinancial statements and its measurement of stock-based compensation inaccordance with SFAS No. 123(R). 

 

In October 2005,the FASB issued FSP No. FAS 123(R)-2, “*Practical Accommodation tothe Application of Grant Date as Defined in FASB Statement No. 123(R)*,”to provide guidance on determining the grant date for an award as defined inSFAS No. 123(R). This FSP stipulates that assuming all other criteria inthe grant date definition are met, a mutual understanding of the key terms andconditions of an award to an individual employee is presumed to exist upon theaward’s approval in accordance with the relevant corporate governancerequirements, provided that the key terms and conditions of an award (a) cannotbe negotiated by the recipient with the employer because the award is aunilateral grant, and (b) are expected to be communicated to an individualrecipient within a relatively short time period from the date of approval. Wehave applied the principles set forth in this FSP upon our adoption of SFAS No. 123(R).

 

*Accountingfor Conditional Asset Retirement Obligations, an interpretation of FASBStatement No. 143*

 

In March 2005,the FASB issued Interpretation (FIN) No. 47, “*Accountingfor Conditional Asset Retirement Obligations, an interpretation of FASBStatement No. 143, ‘Accounting for Asset Retirement Obligations.’*”  FIN No. 47 clarifies when anentity would be required to recognize a liability for the fair value of anasset retirement obligation that is conditional on a future event if theliability’s fair value can be reasonably estimated. Uncertainty surrounding thetiming and method of settlement that may be conditional on events occurring inthe future would be factored into the measurement of the liability rather thanthe recognition of the liability.  FIN No. 47is effective no later than the end of fiscal years ending after December 15,2005.  We do not expect the adoption ofthis statement will have a material impact on our financial statements. 

 

*AccountingChanges and Error Corrections*

 

In June 2005,the FASB issued SFAS No. 154, “*AccountingChanges and Error Corrections*,” which replaces Accounting PrinciplesBoard (APB) Opinion No. 20, “*AccountingChanges*,” and SFAS No. 3, “*ReportingAccounting Changes in Interim Financial Statements*.” SFAS No. 154changes the requirements for the accounting and reporting of a change inaccounting principle. APB Opinion No. 20 previously required that mostvoluntary

 

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changes in an accountingprinciple be recognized by including the cumulative effect of the newaccounting principle in net income of the period of the change. SFAS No. 154now requires retrospective application of changes in an accounting principle toprior period financial statements, unless it is impracticable to determineeither the period-specific effects or the cumulative effect of the change. TheStatement is effective for fiscal years beginning after December 15, 2005.We do not expect the adoption of this statement on August 1, 2006 willhave a material impact on our financial statements. 

 

*Other-Than-TemporaryImpairment*

 

In June 2005,the FASB decided not to provide additional guidance on the meaning ofother-than-temporary impairment, and directed the staff to issue proposed FSPEITF 03-1-a, “*Implementation Guidance forthe Application of Paragraph 16 of EITF Issue No. 03-1*,” asfinal. The final FSP will supersede EITF Issue No. 03-1, “*The Meaning of Other-Than-Temporary Impairment andIts Application to Certain Investments*,” and EITF Topic No. D-44,“*Recognition of Other-Than-TemporaryImpairment upon the Planned Sale of a Security Whose Cost Exceeds Fair Value*.”The final FSP (retitled FSP FAS No. 115-1, “*The Meaning of Other-Than-Temporary Impairment and Its Application toCertain Investments*”)will replace the guidance set forth in paragraphs 10-18 of EITF No. 03-1with references to existing other-than-temporary impairment guidance, such asSFAS No. 115, “*Accounting for CertainInvestments in Debt and Equity Securities*,” SEC Staff AccountingBulletin (SAB) No. 59, “*Accounting forNoncurrent Marketable Equity Securities*,” and APB Opinion No. 18,“*The EquityMethod of Accounting for Investments in Common Stock.*”** FSP FAS No. 115-1 will codify theguidance set forth in EITF Topic D-44 and clarify that an investor shouldrecognize an impairment loss no later than when the impairment is deemed otherthan temporary, even if a decision to sell has not been made. FSP FAS No. 115-1will be effective for other-than-temporary impairment analysis conducted inperiods beginning after September 15, 2005.  We do not believe the adoption of FSP FAS No. 115-1will have a significant impact on our consolidated results of operations orfinancial position. 

 

*AmortizationPeriod for Leasehold Improvements*

 

In June 2005,the EITF reached a consensus on Issue No. 05-06, “*Determiningthe Amortization Period for Leasehold Improvements.*”  The guidance requires that leaseholdimprovements acquired in a business combination or purchased subsequent to theinception of a lease be amortized over the lesser of the useful life of theassets or a term that includes renewals that are reasonably assured at the dateof the business combination or purchase. The guidance is effective for periodsbeginning after June 29, 2005. The adoption of this guidance did not andis not expected to have an impact on our financial position, results ofoperations or cash flows in the future.

 

*RentalCosts Incurred during a Construction Period*

 

On October 6, 2005, the FASB issued FSP No. 13-1,“*Accounting for Rental Costs Incurred during aConstruction Period.*” FSP No. 13-1 requires that rental costsassociated with ground or building operating leases that are incurred during aconstruction period be recognized as rental expense.  FSP No. 13-1 iseffective for the first reporting period after December 15, 2005.  Wehave historically expensed rental costs incurred during a construction period;therefore, the adoption of this guidance did not and is not expected to have animpact on our net earnings, cash flows or financial position in the future. 

 

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**Liquidityand Capital Resources**

 

*Working Capital*

 

The following summarizes our cash and cash equivalents,short-term investments and working capital:

 
| ** **                 | ** ** | **October 31,  2005**                         | ** ** | **Percent  Change** | ** ** | **July 31,  2005** | ** ** |
|----------------------------|------------|----------------------------------------------------|------------|---------------------|------------|-------------------------|------------|
| ** **                 | ** ** | **(In thousands, except  percentages and ratios)** | ** ** |
| Cash and cash  equivalents |       | $                                                  | 19,246     |                | (1.5       | )%                      | $          | 19,533 |   |
| Short-term  investments    |       | $                                                  | 16,448     |                | (14.9      | )%                      | $          | 19,319 |   |
| Working capital            |       | $                                                  | 35,021     |                | (8.0       | )%                      | $          | 38,068 |   |
| Current ratio              |       | 3.0                                                |       | —              |       | 3.2                     |       |

 

We invest excess cash in fixed income securities thatare highly liquid, of high-quality investment grade. We intend to make suchfunds readily available for operating purposes, if needed. In addition to theabove cash, cash equivalents and short-term investments at October 31,2005, we have a total of $5,102,000 restricted cash that is pledged ascollateral for certain stand-by letters of credit issued by certain financialinstitutions and collateral to match any unfavorable mark-to-market exposure onour interest swap agreement. Refer to the discussion under the caption “*Restricted Cash*” set forth below for moreinformation.

 

Thesignificant factors underlying the decrease in cash, cash equivalents andinvestments during the first quarter of fiscal 2006 were net cash flow used inoperations of $2,589,000, capital acquisitions of $880,000 and an increase inrestricted cash of $685,000, offset by the proceeds from stock issuance of $1,035,000. This decrease in cash, cash equivalentsand short-term investments resulted in a decrease in working capital.

 

*Cash Flows*

 

*Operating Activities.*Significant items included in cash flows from operating activities are asfollows (in thousands):

 
| ** **                             | ** ** | **Three Months Ended October 31,** | ** ** |
|----------------------------------------|------------|-----------------------------------------|------------|
| ** **                             | ** ** | **2005**                                | ** ** | **Change** | ** ** | **2004** | ** ** |
| Net cash used in  operating activities |       | $                                       | (2,589     | ) | $ | (1,491 | ) | $ | (1,098 | ) |
|                                        |            |                                         |            |  |  |  |  |  |  |  |

 

The majority of cash applied to working capital forthe current fiscal year resulted from a decrease in other current assets of$658,000 and an increase in deferred revenue of $598,000.  Offsetting the net decrease in workingcapital was an increase in accounts receivable of $278,000 and a decrease in accountspayable and accrued liabilities of $473,000. The majority of cash applied to cash working capital for the previousfiscal year resulted from a decrease in accrued liabilities of $1,179,000 dueto timing of payments particularly of the interest associated with our seniornotes. 

 

Wehave not experienced any significant trends in accounts receivable other thanchanges relative to the increase in our revenue.  Fluctuations in accounts receivable fromperiod to period relative to changes in revenue are a result of timing ofcustomer invoicing and receipt of payments from customers.  Days sales outstanding (average collectionperiod) remained relatively unchanged at 78 days for the first fiscal quarterof 2006 compared with 79 days for the same period in 2004. 

 

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*Investing Activities.*Significant items included in cash flows from investing activities are asfollows (in thousands):

 
| ** **                                                | ** ** | **Three Months Ended October 31,** | ** ** |
|-----------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                | ** ** | **2005**                                | ** ** | **Change** | ** ** | **2004** | ** ** |
| Net  sale/maturities (purchase) of short-term investments |       | $                                       | 2,888      |   | $ | 2,416 |   | $ | 472 |   |
| Capital  expenditures                                     |       | (880                                    | )          | (125 | ) | (755 | ) |
| Decrease  (Increase) in restricted cash                   |       | (685                                    | )          | (1,101 | ) | 416 |   |
| Net cash provided by investing activities                 |       | $                                       | 1,323      |   | $ | 1,190 |   | $ | 133 |   |

 

Thenet cash flows provided in investing activities during the first fiscal quarterof fiscal 2006 were due primarily to cash movement between investments and cashand cash equivalents, partially offset by capital expenditures and the increasein restricted cash associated as required under the interest rate swap agreement.  The net cash flows provided in investingactivities during the first quarter of fiscal 2005 were due primarily to cashmovement between investments and cash and cash equivalents and the decrease inrestricted cash associated with the collateral under the interest rate swapagreement, partially offset by capital expenditures. 

 

*Financing Activities.*Significant items included in cash flows from financing activities are asfollows (in thousands):

 
| ** **                                          | ** ** | **Three Months Ended October 31,** | ** ** |
|-----------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                          | ** ** | **2005**                                | ** ** | **Change** | ** ** | **2004** | ** ** |
| Proceeds from  stock option exercises               |       | $                                       | 1,035      |   | $ | 574 |   | $ | 461 |   |
| Debt issuance  costs and repayment of capital lease |       | (32                                     | )          | 81 |   | (113 | ) |
| Net cash provided by financing activities           |       | $                                       | 1,003      |   | $ | 655 |   | $ | 348 |   |

 

During the first quarter of fiscal 2006 and 2005, cashflows generated from financing activities were primarily from stock optionexercises and employee stock purchases under the employee stock purchase plan.  Our future cash flows from stock options aredifficult to project as such amounts are a function of our stock price, thenumber of options outstanding, and the decisions by employees to exercise stockoptions. In general, we expect proceeds from stock option exercises to increaseduring periods in which our stock price has increased relative to historicallevels.

 

*Commitments*

 

*CapitalLeases. *During fiscal2005, we entered into a capital lease agreement for computer peripherals, whichexpires in September 2007.  Inaddition, during fiscal 2004, we entered into a capital lease agreement for aphone system, which expires in February 2008.  The agreements resulted in capitalized costsof $296,000 and $231,000 during fiscal 2005 and 2004, respectively.  Current and long-term portions of the capitalleases amounted to $154,000 and $173,000, respectively, at October 31,2005.

 

*Operating Leases.*We lease our facilities under operating leases that expire at various datesthrough December 2008. The leases provide for escalating lease payments.

 

# ***3% Convertible Senior Notes.***  During the third quarter of fiscal 2004, wecompleted the offering of $60,000,000 of 3% convertible senior notes toqualified institutional buyers in reliance on Rule 144A under theSecurities Act.  The notes areconvertible into shares of our common stock at any time prior to the close ofbusiness on the final maturity date of the notes, subject to prior redemptionof the notes. The initial conversion rate is 250.0000 shares per each $1,000principal amount of notes which represents an initial conversion price of $4.00per share. The conversion rate is subject to adjustment for certain events,including the payment of dividends, and other events specified in the indentureincluding a change of control.  The notesbear interest at a rate of 3% per annum. Interest on the notes is paid on March 1and on September 1 of each year. 

 

38

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* *

*Interest Rate Swap.*  Duringfiscal 2004, we entered into an interest rate swap agreement with a financialinstitution for two interest rate swaps on a total notional amount of$60,000,000, whereby we receive a fixed-rate interest of 3% in exchange for variableinterest payments.  The interest rateswaps expire upon the maturity of our $60,000,000, 3% convertible senior notesin March 2009, and effectively convert fixed-rate notes into variable-rateborrowings. The interest rate is reset semi-annually and is equal to the 6-monthLIBOR rate less a rate spread. The total variable interest rate wasapproximately 3.8% at October 31, 2005. Under the provisions of SFAS No. 133, “*Accountingfor Derivative Instruments and Hedging Activities*,” as amended, theinterest rate swaps have been designated and qualify as an effective fair valuehedge of interest rate risk related to the $60,000,000 convertible seniornotes. As the terms of the swaps match those of the underlying hedged debt, thechanges in the fair value of these swaps are offset by corresponding changes inthe carrying value of the hedged debt, and therefore do not impact our netearnings. As of October 31, 2005, the fair value of the interest rateswaps was approximately $3,037,000 and is recorded in “Other Liabilities” withan equal adjustment recorded to the carrying value of the $60,000,000convertible senior notes.

 

Thefollowing table summarizes our material obligations and commitments to makefuture payments, for which we anticipate using cash from operations, undercertain contracts, including long-term debt obligations and operating leases asof October 31, 2005 (in thousands): 

 
| ** **                    | ** ** | ** ** | ** ** | **Nine months**                | ** ** | **Fiscal year ending  July 31,** | ** ** |
|-------------------------------|------------|------------|------------|--------------------------------|------------|---------------------------------------|------------|
| ** **                    | ** ** | **Total**  | ** ** | **ending  July 31, 2006** | ** ** | **2007**                              | ** ** | **2008** | ** ** | **2009** | ** ** | **2010 and Thereafter** | ** ** |
| Long-term debt(1):            |       |       |       |                           |       |                                  |       |   |   |   |   |   |   |
| Principal                     |       | $          | 60,000     |                           | $          | —                                |       | $ | — |   | $ | — |   | $ | 60,000 |   | $ | — |   |
| Interest                      |       | 9,487      |       | 1,153                          |       | 2,756                                 |       | 2,770 |   | 2,808 |   | — |   |
| Capital lease obligation(2)   |       | 364        |       | 136                            |       | 182                                   |       | 46 |   | — |   | — |   |
| Operating  leases:            |       |       |       |                           |       |                                  |       |   |   |   |   |   |   |
| Operating leases              |       | 4,559      |       | 2,242                          |       | 1,099                                 |       | 849 |   | 369 |   | — |   |
| Proceeds from  subleases      |       | (21        | )          | (21                            | )          | —                                |       | — |   | — |   | — |   |
| Net operating leases          |       | 4,538      |       | 2,221                          |       | 1,099                                 |       | 849 |   | 369 |   | — |   |
| Future minimum lease payments |       | $          | 74,389     |                           | $          | 3,510                                 |       | $ | 4,037 |   | $ | 3,665 |   | $ | 63,177 |   | $ | — |   |

 

----

(1) Represents our 3% convertiblesenior notes and the associated interest rate swaps.  Interest on the senior notes and interestrate swap is payable in cash on March 1 and September 1 of eachyear.  The senior notes mature on March 1,2009. 

(2) Includes interest paymentsdue. 

 

*ContingentEarnout Consideration. *InJune 2005, we completed our acquisition of all of the issued andoutstanding stock of PDAapps.  Under theterms of an Agreement and Plan of Merger, dated as of June 23, 2005, theoutstanding shares of PDAapps common stock were converted into the right toreceive (i) an aggregate of approximately $4,000,000 in aggregate initialcash consideration and (ii) an aggregate of up to $2,600,000 in cashearnout consideration (based on future revenue we generated from the formerPDAapps client base), subject to the deposit of $1,000,000 in escrow to beavailable to compensate Intellisync pursuant to the indemnification obligationsof the holders of PDAapps common stock. The earnout consideration, if achieved, is due and payable shortlyfollowing the first anniversary of the acquisition.

 

In March 2005,we completed our acquisition of all of the issued and outstanding stock ofTourmaline.  Under the terms of anAgreement and Plan of Merger, dated as of February 9, 2005, theoutstanding shares of Tourmaline common stock were converted into the right toreceive (i) an aggregate of approximately $4,118,000 in aggregate initialcash consideration and (ii) an aggregate of up to $2,881,918 in cash earnoutconsideration (based on future revenue we generated from the former Tourmalineclient base), subject to the deposit of a certain portion of the initial cashconsideration and earnout consideration in escrow to be available to compensateIntellisync pursuant to the indemnification obligations of the holders ofTourmaline common stock.  The earnoutconsideration, if achieved, is due and payable shortly following the firstanniversary of the acquisition.

 

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As of October 31,2005, we have not accrued any contingent earnout payment amounts discussedabove.  Any earnout consideration paidwill be recorded as additional goodwill associated with the respectiveacquisition.

* *

*Other.*  In the event of early termination of ourservice agreement with eˆdeltacom, a division of ITC^DeltaCom, Inc. and amanaged service provider, we may be required to pay eˆdeltacom a penalty fee ofup to approximately $45,000.

 

*Capital Expenditures*

* *

Weexpect total capital expenditures of approximately $3,000,000 for the remainingnine months of fiscal 2006, primarily to support hosting operations and variousother system upgrades.

 

*Officers’Resignations*

* *

On August 29,2005, we entered into a severance agreement and mutual release with our ChiefStrategy Officer, Steve Goldberg, in connection with Mr. Goldberg’sresignation from employment effective August 31, 2005. Pursuant to theterms of the agreement, Mr. Goldberg will receive, among other items, alump sum payment of $110,000, twelve months of accelerated vesting of hisoptions to purchase shares of our common stock, the right to exercise hisvested options until six months following his termination date and six monthsof COBRA premiums paid by Intellisync. The agreement includes a general mutualrelease by Intellisync and Mr. Goldberg and a non-solicitation agreementby Mr. Goldberg for twelve months following the effective date of theagreement. 

 

On October 15,2005, we entered into a severance agreement and mutual release with our ChiefTechnology Officer, Said Mohammadioun, in connection with Mr. Mohammadioun’sresignation from employment by Intellisync effective October 15, 2005.Pursuant to the terms of the agreement, Mr. Mohammadioun will receive,among other items, a lump sum payment of $46,875, two and a half months ofaccelerated vesting of his options to purchase shares of our common stock, theright to exercise his vested options until six months following his terminationdate and two and a half months of COBRA premiums paid by Intellisync. Theagreement includes a general mutual release by Intellisync and Mr. Mohammadiounand a non-solicitation agreement by Mr. Mohammadioun for twelve monthsfollowing the effective date of the agreement. 

 

*RestrictedCash*

 

We have three letters of credit thatcollateralize certain operating lease obligations and total approximately$281,000 and $321,000 at October 31, 2005 and July 31, 2005,respectively.  We collateralize theseletters of credit with cash deposits made with two financial institutions andhave classified the short-term and the long-term portions of approximately$211,000 and $70,000 at October 31, 2005, and $196,000 and $125,000 at July 31,2005 as “Other Current Assets” and  “RestrictedCash,” respectively, in the condensed consolidated balance sheets.  The long-term portion expires June 2006.  The holders of the letters of credit are ableto draw on each respective letter of credit in the event that we are found tobe in default of its obligations under each of its operating leases.

 

Underthe terms of the interest rate swap agreement into which we entered duringfiscal 2004, we must provide collateral to match any unfavorable mark-to-marketexposure (fair value) on the swaps. The amount of collateral required totals aminimum of $1,800,000 plus an amount equal to the unfavorable mark-to-marketexposure on the swaps. Generally, the required collateral will rise as interestrates rise. As of October 31, 2005, and July 31, 2005, we have providedapproximately $4,821,000 and $4,181,000, respectively, of cash collateral underthis swap agreement which is included in “Restricted Cash” in the condensedconsolidated balance sheet.

 

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*Litigation*

* *

On October 5,2005, Spontaneous Technology, Inc. served us with a complaint filed in theThird Judicial District Court, of Salt Lake County, State of Utah.  In the Complaint, Spontaneous Technologyasserts a cause of action for breach of contract related to the calculation ofan earnout payment in the Asset Purchase Agreement entered into between theparties on July 30, 2003.  SpontaneousTechnology seeks compensatory damages in the amount of $673,750 and recovery ofits attorneys’ fees and costs.  We areinvestigating this matter, and at this time, do not believe this matter willhave a material adverse effect on our consolidated financial position, resultsof operation or liquidity.

 

Weare also involved in various litigation and claims arising in the normal courseof business.  In management’s opinion,these matters are not expected to have a material impact on our consolidatedresults of operations or financial condition or cash flows. 

 

Webelieve that our current cash, cash equivalents and short-term investmentbalances, including cash generated from operations, if any, will be sufficientto meet our working capital and other cash requirements for at least the next12 months. Beyond the next 12 months, we expect our future cash flow fromoperations and the remaining proceeds from the convertible senior notes weissued in fiscal 2004 to remain sufficient to fund any ongoing investments incapital equipment and interest payments on our senior notes. We expect to haveavailable to us enough cash from operations to also pay the principal of our notes.There are no arrangements and other relationships with unconsolidated entitiesor other persons that are reasonably likely to materially affect liquidity orthe availability of our requirements for capital.

 

Webelieve that the most strategic use of our cash resources include strategicinvestments and acquisitions to gain access to new technologies, as well asincreased spending in research and development and working capital needs.  To the extent that our current cash, cashequivalents and short-term investment balances and cash flow from operationsare insufficient to fund any new acquisition, business opportunity or venture,as well as to fund future operating requirements, we may seek to raise cashthrough further issuance of debt or equity securities. We cannot be certainthat such financing would be available to us at all, or on terms favorable tous.

 

**FactorsThat May Affect Future Operating Results**

** **

Thereare many factors that affect our business and the results of our operations,some of which are beyond our control. The following is a description of some of the important factors that maycause the actual results of our operations in future periods to differmaterially from those currently expected or desired.

 

***Failure to complete our proposed acquisitionby Nokia could adversely affect our stock price and future business andoperations.***

 

On November 16, 2005, we announced that we hadentered into a definitive agreement to be acquired by Nokia Inc. in an all-cashtransaction. The proposed acquisition by Nokia is subject to the satisfactionof closing conditions, including the approval by our stockholders and otherconditions described in the agreement and plan of merger. We cannot assure youthat these conditions will be satisfied or that the acquisition will besuccessfully completed. In the event that the acquisition is not completed: 

 

•      wewould not realize the potential benefits of the acquisition, including thepotentially enhanced financial and competitive position of combining ourcompany with Nokia; 

 

•      management’sattention from our day-to-day business may be diverted, we may lose keyemployees and our relationships with customers and partners may be disrupted asa result of uncertainties with regard to our business and prospects; 

 

•      themarket price of shares of our common stock may decline to the extent that thecurrent market price of those shares reflects a market assumption that theacquisition will be completed; and 

 

•      wemust pay significant costs related to the acquisition, such as legal,accounting and advisory fees.

 

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Any such events could adversely affect our stock priceand harm our business and operating results. 

 

***Our business could suffer due to the announcement and consummation ofthe proposed acquisition by Nokia.***

 

The announcement and consummation of the acquisitionmay have a negative impact on our ability to sell our products and services,attract and retain key management, technical, sales or other personnel,maintain and attract new customers and maintain strategic relationships withthird parties. For example, we may experience the deferral, cancellation or adecline in the size or rate of orders for our products or services or adeterioration in our customer relationships. Any such events could harm ouroperating results and financial condition. 

 

***We have historically incurred losses and we expect theselosses to continue in the future. We may not be able to sustain consistentfuture revenue growth on a quarterly or annual basis, or achieve or maintainprofitability.***

*** ***

Wehave not been profitable since fiscal 1998. Although we reported record revenuefor fiscal 2005, we cannot be certain that our revenue will continue to grow,that we will produce sufficient revenue to achieve profitability or that ourrevenue will not decline in the future. We have experienced losses of $8,014,000for the three months ended October 31, 2005 and $3,506,000 million for thecorresponding period in fiscal 2005. At October 31, 2005, we had anaccumulated deficit of $152,544,000. To become profitable and sustainprofitability, we will need to generate additional revenues to offset ourexpenses. We may not achieve or sustain revenue growth and our losses maycontinue or increase in the future. The synchronization market is evolving, andas a result we cannot accurately predict either the future growth rate, if any,or the ultimate size of the market for our products and services. Because ouroperating expenses are relatively fixed in the short term, any shortfalls inrevenues would materially affect our results of operations.

 

***Our quarterly revenue and operating results are subject tosignificant fluctuations, and our stock price may decline if we do not meet theexpectations of investors and analysts.***

 

Ourquarterly revenue and operating results are difficult to predict and have andmay in the future fluctuate significantly from quarter to quarter due to anumber of factors, many of which are outside our control. These factorsinclude, but are not limited to:

 

•       growthin the market for enterprise synchronization applications and our ability tosuccessfully address this market;

 

•       ourreliance on international sales and growth;

 

•       ourability to penetrate the international market;

 

•       marketacceptance of products in which our software is integrated by originalequipment manufacturers, or OEMs;

 

•       ourability to realize our goals with respect to recent and potential futureacquisitions;

 

•       ourneed and ability to generate and manage growth;

 

•       rapidevolution of technology;

 

•       ourevolving business model;

 

•       litigation-relatedexpenses;

 

•       fluctuationsin gross margins;

 

•       theseasonal nature of the market for some of our products;

 

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•       changesin the market for mobility and identity search/screening software;

 

•       introductionof new products and services by us or our competitors;

 

•       therecent decline in the market for traditional personal digital assistants;

 

•       changesin our mix of sources of revenue; and

 

•       entrenchedand substantial competition.

 

Additionally,we generally derive our technology licensing revenue from multi-year contractswith enterprise and other customers that frequently include license fees,professional services fees, royalty payments and maintenance. We typically earnboth the license fees and the professional services in the initial one or twoquarters subsequent to the signing of a contract. We periodically have largeprofessional services implementations that individually contribute as much as5% or more to quarterly revenue. Combined with related license revenue, totalrevenue from individual customers in the initial quarters of a contract mayexceed the revenue we earn during subsequent periods covered by the contract.To the extent that we do not secure additional contracts with the same customeror secure comparably sized commitments from other customers, we may not be ableto sustain or grow our revenue.

 

***Beginning with fiscal year 2006, we are required to recognize expensefor stock-based compensation related to employee stock options and stockpurchases and there is no assurance that the expense that we are required torecognize measures accurately the value of our share-based payment awards andthe recognition of this expense could cause the trading price of our commonstock to decline.***

* *

On August 1,2005, we adopted Statement of Financial Accounting Standards (SFAS) No. 123(R)“*Share-Based Payment, an amendment of FASBStatements Nos. 123 and 95*,” which requires the measurement andrecognition of compensation expense for all stock-based compensation based onestimated fair values. As a result, our operating results for the fiscalquarter ending October 31, 2005 contain, and our operating results forfuture periods will contain, a charge for stock-based compensation related toemployee stock options and employee stock purchases.  The application of SFAS No. 123(R)requires the use of an option-pricing model to determine the fair value ofshare-based payment awards. This determination of fair value is affected by ourstock price as well as assumptions regarding a number of highly complex andsubjective variables. These variables include, but are not limited to, ourexpected stock price volatility over the term of the awards, and actual andprojected employee stock option exercise behaviors. Option-pricing models weredeveloped for use in estimating the value of traded options that have novesting or hedging restrictions and are fully transferable. Because ouremployee stock options have certain characteristics that are significantlydifferent from traded options, and because changes in the subjectiveassumptions can materially affect the estimated value, in management’s opinionthe existing valuation models may not provide an accurate measure of the fairvalue of our employee stock options. Although the fair value of employee stockoptions is determined in accordance with SFAS No. 123(R) using anoption-pricing model, that value may not be indicative of the fair valueobserved in a willing buyer/willing seller market transaction. 

 

As aresult of our adoption of SFAS No. 123(R), our earnings for the fiscalquarter ending October 31, 2005 were lower than they would have been hadwe not been required to adopt SFAS No. 123(R).  This will continue to be the case for futureperiods. We cannot predict the effect that this adverse impact on our reportedoperating results will have on the trading price of our common stock. 

 

***We face intense competition in the market for mobilecomputing synchronization products and services, which could reduce our marketshare and revenue.***

*** ***

Ourmarket contains few substantial barriers to entry. We believe we will faceadditional competition from existing competitors and new market entrants in thefuture. We are subject to current and potential competition with respect to our IntellisyncHandheld Edition, Intellisync Handheld Edition for Enterprise, IntellisyncMobile Suite, Intellisync SyncML and Identity Search Servers.

 

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•       IntellisyncMobile Suite enterprise server software—CommonTime, Good Technology, Inc.,Research In Motion Limited, Sybase Inc.’s iAnywhere, and others.

 

•       IntellisyncMobile Suite and Intellisync SyncML software for mobile carriers—GoodTechnology, Inc., Research In Motion Limited, Seven Networks, Inc.,Visto Corporation, and others.

 

•       Intellisyncconsumer and enterprise desktop sync products—Chapura, Inc.’s PocketMirror, CommonTime’s Cadenza mNotes, IBM Corporation, Microsoft CorporationActiveSync, Palm Desktop from PalmSource, Inc., Sybase Inc.’s iAnywhere,and others.

 

•       IdentitySearch Server—Ascential, Dataflux, Firstlogic, Group1, IBM Corporation,Intelligent Search Technology, Language Analysis Systems, Trillium Software,and others.

 

Inaddition to the direct competition noted above, we face indirect competitionfrom existing and potential customers that may provide internally developedsolutions for each of our technology licensing components. As a result, we musteducate prospective customers as to the advantage of our products compared tointernally developed solutions. We currently face limited direct competitionfrom major applications and operating systems software vendors who may in thefuture choose to incorporate data synchronization functionality into theiroperating systems software, thereby potentially reducing the need for OEMs toinclude our products in their devices. For example, Microsoft’s inclusion ofcertain features permitting data synchronization between computers utilizingthe Windows Mobile and Exchange operating systems, or the Exchange 2003platform, may have the effect of reducing revenue from our software if users ofthese operating systems perceive that their data synchronization needs areadequately met by Microsoft.

 

Manyof our competitors have substantially greater financial, technical andmarketing resources, larger customer bases, longer operating histories, greaterbrand recognition and more established relationships in the industry than wedo. Our larger competitors may be able to provide customers with additionalbenefits in connection with their products and costs, including reducedcommunications costs. As a result, these companies may be able to price theirproducts and services more competitively than we can and respond more quicklyto new or emerging technologies and changes in customer requirements. If we areunable to compete successfully against our current or future competitors, wemay lose market share, and our business and prospects would suffer.

 

Consolidationin wireless messaging and mobile computing synchronization industry maystrengthen our competitors’ position in our market. Consolidation of ourcompetitors has occurred, and we expect it to continue to occur in theforeseeable future. Acquisitions may further strengthen our competitors’financial, technical and marketing resources.

 

***If we fail to develop and sell products designed for OEMs,enterprises and mobile carriers, our revenue and operating results will beadversely affected.***

*** ***

Wehave recently made substantial investments to develop and offer an expandedrange of enterprise synchronization applications, including our acquisition ofPDAapps, Tourmaline, Synchrologic and Identity Systems. Our operating plansassume revenue growth from the enterprise market. Enterprise sales present avariety of challenges that are different from those inherent in our historicallicensing and consumer business model, and we have limited experienceaddressing these challenges. For example, enterprise sales typically involvelarge up-front license fees, which can result in lengthy sales cycles anduncertainties as to the timing of sales driven by customers’ budgetaryprocesses. As a result, we generally have less visibility into futureenterprise sales than is typically the case in our royalty-based technologylicensing business. In addition, while enterprise sales generally result inongoing maintenance revenue and may lead to follow-on purchases or upgrades, weare typically dependent on sales to new customers for a significant portion ofour enterprise revenue in a given quarter. If our product and service offeringsfail to achieve market acceptance, or if enterprise sales fail to meet ourexpectations in a particular quarter, our revenue and operating results may bematerially and adversely affected.

 

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***Our business and prospects depend, to a significant degree,on demand for wireless and other mobile computing devices.***

*** ***

Theuse of wireless and other mobile computing devices for retrieving, sharing andtransferring information among businesses, consumers, suppliers and partnershas begun to develop only in recent years. Our success will depend in largepart on continued growth in the use of wireless and other mobile computingdevices, including handheld computers, smart phones, pagers and other mobiledevices. In addition, our markets face critical unresolved issues concerningthe commercial use of wireless and other mobile computing devices, includingsecurity, reliability, cost, ease of access and use, quality of service,regulatory initiatives and necessary increases in bandwidth availability.Demand for, and market acceptance of, wireless and other mobile computingdevices which require our products and services are subject to a high level ofuncertainty and are dependent on a number of factors, including:

 

•       growthin sales of handheld devices, smart phones and other mobile computing devicessupported by our software and growth in wireless network capabilities to matchend-user demand and requirements;

 

•       emergenceof a viable and sustainable market for wireless and mobile computing services;

 

•       ourproduct and service differentiation and quality;

 

•       thedevelopment of technologies that facilitate interactive communication betweenorganizations;

 

•       ourdistribution and pricing strategies as compared with those of our competitors;

 

•       thegrowth in access to, and market acceptance of, new interactive technologies;

 

•       increasesin bandwidth for data transmission;

 

•       theeffectiveness of our marketing strategy and efforts;

 

•       ourindustry reputation; and

 

•       generalindustry and economic conditions such as slowdowns in the computer or softwaremarkets or the economy in general.

 

If themarket for wireless and other mobile computing devices as a commercial orbusiness medium does not develop, or develops more slowly than expected, ourbusiness, results of operations and financial condition will be seriouslyharmed.

 

Evenif the wireless and mobile computing services market does develop, our productsand services may not achieve widespread market acceptance. If our targetcustomers do not adopt, purchase and successfully deploy our other current andplanned products and services, our revenue will not grow significantly and ourbusiness, results of operations and financial condition will be seriouslyharmed.

 

***We are exposed to potential risks and we will continue toincur increased costs as a result of the internal control testing andevaluation process mandated by Section 404 of the Sarbanes-Oxley Act of2002.***

*** ***

Althoughwe have now completed the documentation and testing of the effectiveness of ourinternal control over financial reporting for fiscal 2005, as required by Section 404of the Sarbanes-Oxley Act of 2002, we expect we will have to incur continuingcosts, including increased accounting fees and increased staffing levels, inorder to maintain compliance with that section of the Sarbanes-Oxley Act.In the future, if we fail to complete the Sarbanes-Oxley 404 evaluation in atimely manner, or if our independent registered public accounting firm cannotattest in a timely manner to our evaluation, we could be subject to regulatoryscrutiny and a loss of public confidence in our internal controls. In addition,any failure to implement required new or improved controls, or difficultiesencountered in their implementation, could harm our operating results or causeus to fail to meet our reporting obligations.

 

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Also,if our efforts to comply with new or changed laws, regulations and standardsdiffer from the activities intended by regulatory or governing bodies due toambiguities related to our practices, our reputation may be harmed or we may besubject to litigation.

 

Futureacquisitions of companies, some of which may have operations outside the UnitedStates, may provide us with challenges in implementing the required processes,procedures and controls in our acquired operations. Acquired companies may nothave disclosure controls and procedures or internal control over financialreporting that are as thorough or effective as those required by securities lawin the United States. Although we intend to devote substantial time and incursubstantial costs, as necessary, to ensure ongoing compliance, we cannot becertain that we will be successful in complying with Section 404.

 

***We are placing increasing emphasis on our hosting services,of which potential growth may be difficult to manage effectively, and, as a result,our results of operations could be adversely affected.***

*** ***

We areincreasingly focusing our sales and marketing and engineering efforts onhosting services. This focus may cause increased business risks associatedspecifically with our ability to manage the level of complexity involved inexecuting successfully our strategies to provide superior services for mobilecarriers. The rapid growth of our hosting business may place a significantstrain on our management, operations and resources. Our future performance andprofitability will depend on our ability to:

 

•       increaseour capital investments and further build our infrastructure to meet thedemands of our carrier customers;

 

•       maintaintechnical capabilities to compete effectively in the hosting business; and

 

•       effectivelyoversee and manage our outsourced hosting center.

 

Therecan be no assurance that our systems, procedures and controls will be adequateto support rapid expansion of our hosting services. If we are unable to managesuch growth successfully, our business and results of operations could beharmed.

 

***Revenue from hosting services may carry lower gross marginsand an overall increase in such revenue as a percentage of total revenue couldhave an adverse impact on our business.***

*** ***

Ourcommitment to providing quality services to our enterprise and mobile carriercustomers may result in our hosting service revenue having a lower gross marginthan other services and license revenue. Due to the lower margin, an increasein the hosting service revenue as a percentage of total revenue could have adetrimental impact on our overall gross margins and could adversely affectoperating results. In addition, a change in the mix between services that areprovided by our own employees and those services provided by third-partyvendors may negatively affect our gross margins.

 

***System failures or accidental or intentional securitybreaches could disrupt our operations, cause us to incur significant expenses,expose us to liability and harm our reputation.***

*** ***

Our operations,including hosting services, depend upon our ability to maintain and protect ourcomputer systems and core business applications, which are located at ouroffices, as well as hosted by third-party vendors. Although we are takingvarious precautions to maintain and protect our systems, they could still bevulnerable to damage from break-ins, unauthorized access, vandalism, fire,floods, earthquakes, power loss, telecommunications failures and similarevents. We maintain insurance against break-in, unauthorized access, vandalism,fires, floods, earthquakes and general business interruptions. The amount ofcoverage, however, may not be adequate in any particular case, and will notlikely compensate us for all the damages caused by these or similar events. Inaddition, while we put various security measures in place to detect anyunauthorized access to our computers and computer networks, we may be unable toprevent computer programmers or hackers from penetrating our network securityor creating viruses to sabotage or otherwise attack our computer networks fromtime to time. A breach of our security could seriously damage our operations orreputation. In addition, because a hacker who penetrates our network

 

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security couldmisappropriate proprietary information or cause interruptions in our services,we might be required to expend significant resources to protect against, or toalleviate, problems caused by hackers. We might also face liability to personsharmed by misappropriation of secure information if it is determined that wedid not exercise sufficient care to protect our systems.

 

Systemsfailure or damage could cause an interruption of our services and result inloss of customers, difficulties in attracting new customers and could adverselyimpact our operating results. In addition, if the number of customers whopurchase our hosting services increases over time, our systems must be able toaccommodate increased usage. If we are unable to increase our capacity toaccommodate growth in usage, we could encounter system performance issues,which could harm our relationships with customers and our reputation.

 

***We expect that we may become increasingly dependent onmobile carriers for the success of our wireless software.***

*** ***

Thesuccess of our wireless business strategy is increasingly becoming dependent onour ability to establish new relationships and build on our existingrelationships with domestic and international mobile carriers. We cannot assureyou that we will be successful in establishing new relationships or advancingexisting relationships with mobile carriers or that these mobile carriers willact in a manner that will promote the success of our wireless products. Factorsthat are largely within the control of mobile carriers but which are importantto our success, include:

 

•       thedegree to which mobile carriers facilitate the introduction of and activelypromote, distribute and resell our products;

 

•       testingof our products on mobile carriers’ networks;

 

•       qualityand coverage area of wireless services offered by the mobile carriers;

 

•       theextent to which mobile carriers require specific hardware and software featureson our products to be used on their networks;

 

•       contractualterms and conditions imposed on us by mobile carriers that, in somecircumstances, could limit our ability to make similar products availablethrough competitive carriers in some market segments; and

 

•       mobilecarriers’ pricing requirements and subsidy programs.

 

Mobilecarriers have significant bargaining power as we negotiate agreements withthem. They could require contract terms that are difficult for us to meet andcould result in higher costs to complete certification requirements andnegatively impact our results of operations and financial condition. Mobilecarriers also place significant conditions on our ability to develop and launchproducts for use on their wireless networks. If we fail to address the needs ofmobile carriers, identify new product and service opportunities or modify orimprove our products in response to changes in technology, industry standardsor mobile carrier requirements, our products could rapidly become lesscompetitive or obsolete. If we fail to timely develop products that meet carrierproduct planning cycles or fail to deliver sufficient quantities of products ina timely manner to mobile carriers, those carriers may choose to offer similarproducts from our competitors and thereby reduce their focus on and ceaseoffering our products which would have a negative impact on our business,results of operations and financial condition.

 

Inaddition, the potential rapid growth of our business, as we become moredependent on mobile carriers, may place a strain on our management, operations,employees, or resources. We may not be able to maintain a rapid growth rate,effectively manage our expanding operations, or achieve planned growth on atimely or profitable basis. If we are unable to manage our growth effectively,we may experience operating inefficiencies, and our net income may bematerially adversely affected.

 

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***Most sales with mobile carriers and enterprises have a longsales cycle process, which increases the cost of completing sales and renderscompletion of sales less predictable.***

 

Thesales cycle process with mobile carriers could be long, making it difficult topredict the quarter in which we may recognize revenue from a sale, if at all.The general length of the sales cycle increases our costs and may cause licenserevenue and other operating results to vary significantly from period toperiod. Our products or technology often are part of significant strategicdecisions by our customers regarding their information systems. Accordingly,the decision to license our products typically requires significantpre-purchase evaluation. We spend substantial time providing information toprospective customers regarding the use and benefits of our products. Duringthis evaluation period, we may expend significant funds in sales and marketingefforts. If anticipated sales from a specific customer for a particular quarterare not realized in that quarter, our operating results may be adverselyaffected.

 

***Our stock price has historically been and may continue to bevolatile, which may cause you to lose money and could lead to costly litigationagainst us that could divert our resources.***

*** ***

Stockmarkets have recently experienced dramatic price and volume fluctuations,particularly for shares of technology companies. These fluctuations can beunrelated to the operating performance of these companies. Broad marketfluctuations may reduce the market price of our common stock and cause you tolose some or all of your investment. These fluctuations may be exaggerated ifthe trading volume of our common stock is low. In addition, due to thetechnology-intensive nature and growth rate of our business and the mobilecomputing synchronization market, the market price of our common stock has inthe past and may in the future rise and fall in response to:

 

•       quarterlyvariations in operating results;

 

•       seasonalfluctuations on product sales;

 

•       announcementsof technological innovations;

 

•       announcementsof new software or services by us or our competitors;

 

•       acquisitionsor strategic alliances by us or by our competitors;

 

•       commencementor outcome of litigation involving us;

 

•       changesin financial estimates by securities analysts; and

 

•       otherevents beyond our control, including general market conditions.

 

Furthermore,our operating results and prospects from time to time may be below theexpectations of public market analysts or investors. Any negative change in thepublic’s perception of companies in the wireless communications market coulddepress our stock price regardless of our operating results. Recently,companies experiencing high volatility or significant drops in their stockprices have faced securities class action lawsuits when the market price of astock has been volatile. Holders of that stock have often instituted securitiesclass action litigation against the company that issued the stock when suchstock declines. If any of our stockholders brought such a lawsuit against us,we could incur substantial costs defending the lawsuit. We maintain some levelof insurance for such matters however we cannot guarantee that such insurancewill be available or will cover the amount of any award. The lawsuit could alsodivert the time and attention of our management. Further, any settlement ofsuch a lawsuit could adversely affect us.

 

***We may be unable to adequately protect our proprietaryrights.***

*** ***

Therights we rely upon to protect our intellectual property underlying ourproducts and services may not be adequate, which could enable third parties touse our technology and would reduce our ability to compete in the market. Toprotect our proprietary rights, we rely on a combination of patent, trademark,copyright and trade secret laws, confidentiality agreements with our employeesand third parties, and protective contractual provisions. These efforts toprotect our intellectual property rights may not be effective in preventingmisappropriation of our technology. These efforts also may not prevent othersfrom developing products or technologies similar to,

 

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competitive with, orsuperior to those we develop. Any of these results could reduce the value ofour intellectual property. We may be forced to litigate to enforce or defendour intellectual property rights and to protect our trade secrets. Any suchlitigation could be very costly and could distract our management from focusingon operating our business. Moreover, our business could be harmed if ourpatents were determined to be invalid.

 

***We may be subject to intellectual property infringementclaims, which are costly to defend and could limit our ability to use certaintechnologies in the future.***

** **

Thirdparties may assert infringement or other intellectual property claims againstus. From time to time, we receive notices from third parties alleging that ourproducts or services infringe proprietary rights held by them. Our customers alsomay receive notices of patent or other infringement from third parties and askfor indemnification in the future. We cannot predict whether third parties willassert claims of infringement against us, or whether any past, present orfuture claims will prevent us from offering products or operating our businessas planned.

 

Due tothe inherently uncertain nature of intellectual property protection and thecompetitive area in which we operate our business, it is possible that some orall of our products and services could be found to be infringing on theintellectual property of others. We may have to pay substantial damages, includingtreble damages, for past infringement if it is ultimately determined that ourproducts or services infringe a third party’s proprietary rights. We may haveto comply with injunctions, or stop distributing our products and serviceswhile we re-engineer them or seek licenses to necessary technology, which mightnot be available on reasonable terms, or at all. We could also be subject toclaims for indemnification resulting from infringement claims made against ourcustomers, which could increase our defense costs and potential damages. Evenif the claims are without merit, defending a lawsuit takes significant time,may be expensive and may divert management’s attention from other businessconcerns.

 

***We have been, are and may in the future be involved inlitigation that could result in significant costs to us.***

*** ***

Inorder to protect our proprietary rights, we may decide to sue other companies.Litigation proceedings are inherently uncertain, and we may not prevail in ourdefenses or claims. In addition, such litigation is expensive andtime-consuming, and management has been in the past and may in the future berequired to spend significant time in the prosecution of such suits. If we donot prevail in our claims, we might be forced to accept an unfavorablesettlement or judgment and even be required to reimburse other companies in asuit for their legal expenses in defending the suit. An unfavorable settlementor judgment could also materially harm our ability to use existing intellectualproperty and severely harm our business as a result.

 

***Future sales of our common stock, including the sharesunderlying the convertible senior notes we recently issued, may depress ourstock price.***

*** ***

If ourcurrent stockholders sell substantial amounts of common stock in the publicmarket, the market price of our common stock could fall. In addition, thesesales of common stock could adversely affect the trading price of our recentlyissued convertible senior notes and impede our ability to raise funds in thefuture at an advantageous price, or at all, through another sales ofsecurities.

 

As of October 31,2005, we had approximately 67,281,000 shares of common stock outstanding.Assuming that the maximum number of shares and options are issued andregistered by us in connection with all of our recent acquisitions and assumingthat all shares subject to vested options to purchase common stock under ourstock plans are issued, additional shares of our common stock could becomeissued or issuable and freely tradeable in the public market throughapproximately October 31, 2006, as follows:

 

•       approximately720,000 shares of our common stock that may be issued in February 2006 andAugust 2006 under our employee stock purchase plan; and

 

•       approximately7,460,000 shares issuable upon exercise of outstanding options that will bevested by October 31, 2006.

 

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Inaddition, conversion of some or all of the $60,000,000 aggregate principalamount of convertible subordinated notes that we issued in March 2004 willdilute the ownership interests of investors. Any sales in the public market ofthe common stock issuable upon such conversion could adversely affectprevailing market prices for our common stock.

 

***If we fail to maintain our existing relationships or enterinto new relationships with OEM and business development organizations, or ifproducts offered by our OEM partners fail to achieve or maintain marketacceptance, our brand awareness, the sales of our products and use of our serviceswould suffer.***

*** ***

Ourrevenue from technology licensing depends, in large part, on our ability todevelop and maintain relationships with OEMs and business developmentorganizations that help distribute our products and promote our services. Wedepend on these relationships to:

 

•       distributeour products to purchasers of mobile devices;

 

•       increasethe use of our technology licensing components;

 

•       buildbrand awareness through product marketing; and

 

•       marketour products and services cooperatively.

 

If theproducts that these equipment manufacturers or business developmentorganizations sell, or if the operating systems upon which these products arebased, fail to achieve or sustain market acceptance, or if any of thesecompanies cease to use our product and service offerings in significantvolumes, our product sales would decline and our business would suffer. Forexample, if growth in the number of devices sold by our OEM partners is delayedor did not occur, our business would suffer.

 

Althoughseveral OEMs are subject to certain contractual minimum purchase obligations,we cannot be certain that any particular OEM will satisfy its minimumobligations. Weakening demand from any key OEM and the inability to replacerevenue provided by such an OEM could have a material adverse effect on ourbusiness, operating results and financial condition. We maintain individuallysignificant receivable balances from major OEMs. If these OEMs fail tomeet their payment obligations, our operating results could be materially andadversely affected.

 

Ouragreements with OEMs, distributors, and resellers generally are nonexclusiveand may be terminated on short notice by either party without cause.Furthermore, our OEMs, distributors and resellers are not within our control,are not obligated to purchase products from us, and may represent other linesof products, including competing products. A reduction in sales effort ordiscontinuance of sales of our products by our OEMs, distributors, andresellers could lead to reduced sales and could materially adversely affect ouroperating results.

 

***Our market changes rapidly due to evolution in technologyand industry standards. If we do not adapt to meet the sophisticated needs ofour customers, our business and prospects will suffer.***

*** ***

Themarket for our products and services is characterized by rapidly changingtechnology, evolving industry standards and frequent new product and serviceintroductions. For example, the traditional personal digital assistant market,is declining and may continue to do so. Our future success will depend to asubstantial degree on our ability to offer products and services that adapt tothese changing markets, incorporate leading technology, address theincreasingly sophisticated and varied needs of our current and prospectivecustomers and respond to technological advances and emerging industry standardsand practices on a timely and cost-effective basis. Our rapidly evolving marketmakes it more likely that:

 

•       ourtechnology or products may become obsolete upon the introduction of alternativetechnologies;

 

•       wemay not have sufficient resources to develop or acquire new technologies or tointroduce new products or services capable of competing with futuretechnologies or service offerings of other companies; and

 

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•       wemay not have sufficient resources to develop or acquire new technologies or tointroduce new products or services capable of competing with futuretechnologies or service offerings of other companies.

 

To theextent we determine that new technologies and equipment are required to remaincompetitive, the development, acquisition and implementation of thesetechnologies and equipment are likely to continue to require significantcapital investment by us. Moreover, we cannot be certain that we can develop,market and deliver new products and technology on a timely basis. Sufficientcapital may not be available for this purpose in the future, and even if it isavailable, investments in new technologies may not result in commerciallyviable technological processes and there may not be commercial applications forsuch technologies. If we do not develop, acquire and introduce new products andservices and achieve market acceptance in a timely manner, our business andprospects will suffer.

 

***If we fail to maintain an effective system of internalcontrols, we may not be able to detect fraud or report our financial resultsaccurately, which could harm our business.***

*** ***

Effectiveinternal controls are necessary for us to provide reliable financial reportsand to detect and prevent fraud. We periodically assess our system of internalcontrols, and the internal controls of service providers upon which we rely, toreview their effectiveness and identify potential areas of improvement. Theseassessments may conclude that enhancements, modifications or changes to oursystem of internal controls are necessary. In addition, from time to time weacquire businesses, many of which have limited infrastructure and systems ofinternal controls. Performing assessments of internal controls, implementingnecessary changes, and maintaining an effective internal controls process isexpensive and requires considerable management attention, particularly in thecase of newly acquired entities. Internal control systems are designed in partupon assumptions about the likelihood of future events, and all such systems,however well designed and operated, can provide only reasonable, and not absolute,assurance that the objectives of the system are met. Because of these and otherinherent limitations of control systems, there can be no assurance that anydesign will succeed in achieving its stated goals under all potential futureconditions, regardless of how remote. If we fail to implement and maintain aneffective system of internal controls or prevent fraud, we could suffer losses,could be subject to costly litigation, investors could lose confidence in ourreported financial information and our brand and operating results could be harmed,which could have a negative effect on the trading price of our common stock.

 

***We are dependent on our international operations for asignificant portion of our revenue.***

*** ***

Internationalrevenue, primarily from customers based in Europe and Asia Pacific, accountedfor 31% of our revenue for the three months ended October 31, 2005 and 34%for the corresponding period in fiscal 2005. In the future, we may further expand our international presence. As wecontinue to expand internationally, we are increasingly subject to risks ofdoing business internationally, including:

 

•       longerpayment cycles and problems in collecting accounts receivable;

 

•       seasonalreductions in business activity during the summer months in Europe and certainother parts of the world;

 

•       unexpectedchanges in regulatory requirements and tariffs;

 

•       exportcontrols relating to encryption technology and other export restrictions;

 

•       reducedprotection for intellectual property rights in some countries;

 

•       fluctuationsin currency exchange rates, against which we do not currently hedge;

 

•       difficultiesin staffing and managing international operations; and

 

•       anadverse effect on our provision for income taxes based on the amount and mix ofincome from international customers.

 

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Ourinternational sales growth will be limited if we, in the future, are unable toexpand international sales channel management and support, customize productsfor local markets, and develop relationships with international serviceproviders, distributors and device manufacturers. For example, in recentquarters we have invested substantially in expanding sales operations, andthese investments may not generate offsetting increases in revenue. Even if weare able to expand international operations successfully, we cannot be certainthat we will succeed in maintaining or expanding international market demandfor our products.

 

***Geographic expansion and growth, including the establishmentof new sales or engineering operations, may negatively affect our overalloperations and cause us to incur significant additional costs and expenses.***

*** ***

Wehave an engineering facility in Delhi, India, gained through our acquisition ofPDAapps, and we established engineering facilities in Sofia, Bulgaria andCluj-Napoca, Romania. In the future, we may further expand our engineering orsales operations to other geographic areas within the United States andinternationally. Our expansion may cause us to incur various costs andexpenses, and may place a significant strain upon our operating and financialsystems and resources that could materially adversely affect our financialresults following such an expansion. We also face significant business risksrelated to the difficulty in assimilating new operations and the diversion ofmanagement’s attention from other business. Additionally, if we fail to alignemployee skills and populations with revenue and market requirements, it mayhave a material adverse impact on our business and operating results. Moreover,these newly established operations may not contribute significantly to oursales or earnings.

 

***Foreign exchange fluctuations could decrease our revenue orcause us to lose money, especially since we do not hedge against currencyfluctuations.***

*** ***

Webelieve that in the future, an increasing portion of our costs will bedenominated in foreign currencies as we increase operations in Europe and openoffices in other countries. We currently do not engage in foreign exchange hedging activities and, althoughwe have not yet experienced any material losses due to foreign currencyfluctuation, a portion of our international revenue are currently subject tothe risks of foreign currency fluctuations, and these risks will increase asour international revenue increases.

 

***Our recent and any potential acquisitions could requiresignificant management attention and prove difficult to integrate with ourbusiness, which could distract our management, disrupt our business, dilutestockholder value and adversely affect our operating results.***

*** ***

Aspart of our strategy, we intend to continue to make investments incomplementary companies, products or technologies.  We recently acquired PDAapps, Inc. (June 2005),Tourmaline Networks, Inc. (in March 2005), SoftVision SRL’s workforce(through a transfer in June 2004), Identity Systems (in March 2004),Synchrologic, Inc. (in December 2003) and Spontaneous Technology, Inc.(in September 2003). We may not realize future benefits from any of theseacquisitions, or from any acquisition we may make in the future. If we fail tointegrate successfully our past [and future acquisitions], or the technologiesassociated with such acquisitions, into our company, the revenue and operatingresults of the combined company could be adversely affected. Any integrationprocess will require significant time and resources, and we may not be able tomanage the process successfully. If our customers are uncertain about ourability to operate on a combined basis, they could delay or cancel orders forour products. We may not successfully evaluate or utilize the acquiredtechnology and accurately forecast the financial impact of an acquisitiontransaction, including accounting charges.

 

Acquisitionsinvolve a number of additional difficulties and risks to our business,including, but not limited to, the following:

 

•       failureto integrate management information systems, personnel, research anddevelopment and marketing, sales and support operations;

 

•       potentialloss of key employees from Intellisync or the acquired company;

 

•       disruptionof our ongoing business;

 

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•       potentialloss of the acquired company’s customers;

 

•       failureto develop further the acquired company’s technology successfully, resulting inthe potential impairment of amounts capitalized as intangible assets under SFASNo. 142, “*Goodwill and Other IntangibleAssets*” and SFAS No. 144, “*Accountingfor the Impairment or Disposal of Long-Lived Assets;*”

 

•       unanticipatedcosts and liabilities, including those that may arise from disputes over theearnout provision of the acquisition agreement; and

 

•       amortizationexpenses related to intangible assets (other than goodwill).

 

Further,we have issued common stock and paid cash for recent acquisitions and may haveto pay cash, incur debt or issue equity securities to pay for any futureacquisition, each of which could affect our financial condition or the marketprice of our common stock. The sale of additional equity or debt to financesuch future acquisitions could result in dilution to our stockholders. Theincurrence of indebtedness would result in increased fixed obligations andcould also include covenants or other restrictions that would impede ourability to manage our operations.

 

***Goodwill and other intangibles resulting from ouracquisitions could become impaired.***

*** ***

As of October 31,2005, our goodwill, developed and core technology and other intangiblesamounted to $92,141,000, net of accumulated amortization. We ceased to amortizeour existing goodwill upon our adoption of SFAS No. 142 in the beginningof fiscal 2003. We will amortize approximately $6,311,000 for the nine monthsended July 31, 2006, and $7,978,000, $4,403,000, $2,189,000 and $2,766,000for fiscal 2007, 2008, 2009 and thereafter, respectively, of developed and coretechnology and other intangibles. We expect, however, that amortization expensemay increase significantly as a result of any future acquisitions. To theextent we do not generate sufficient cash flows to recover the net amount of anyinvestment in goodwill and other intangibles recorded, the investment could beconsidered impaired and subject to write-off. We expect to record furthergoodwill and other intangible assets as a result of any future acquisitions we maycomplete. Future amortization of such other intangible assets or impairments,if any, of goodwill would adversely affect our results of operations in anygiven period.

 

***We depend on key employees in a competitive market forskilled personnel.***

*** ***

Thesuccess of our business will continue to depend upon certain key technical andsenior management personnel, including our president and chief executiveofficer, chief operating officer, chief marketing officer, chief financialofficer and other key senior executives, many of whom would be extremelydifficult to replace. Competition for such personnel is intense, and we cannotbe certain that we will be able to retain our existing key managerial,technical, or sales and marketing personnel. The loss of these officers andother or key employees in the future might adversely affect our business andimpede the achievement of our business objectives. We believe our ability toachieve increased revenue and to develop successful new products and productenhancements will depend in part upon our ability to attract and retain highlyskilled sales and marketing and qualified product development personnel. Inaddition, competition for employees in our industry and geographic locationcould be intense. We may not be able to continue to attract and retain skilledand experienced personnel on acceptable terms. Our ability to hire and retainsuch personnel will depend in part upon our ability to raise capital or achieveincreased revenue levels to fund the costs associated with such personnel.Failure to attract and retain key personnel may adversely affect our business.

 

***If we are unable to provide satisfactory and high qualityservices through our professional services group, customer satisfaction anddemand for our products will suffer.***

*** ***

Manyof our customers have been successful in implementing our various technologyinitiatives without further provision of technical service. However, we believethat building strong relationships with our customers, as well as future growthin our product sales, depends on our ability to provide our customers withprofessional services, including customer support, training, consulting andinitial implementation and deployment of our products when

 

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necessary. We have anin-house professional services group and use international software developmentpartners with a workforce that can perform these tasks and that also educatesthird-party systems integrators in the use of our products so that these systemsintegrators can provide these services to our customers. If we are unable todevelop sufficient relationships with third-party systems integrators and othercustomers, unable to complete product implementations in a timely manner, orunable to provide customers with satisfactory and quality support, consulting,maintenance and other services, we could face customer dissatisfaction, damageto our reputation, decreased overall demand for our products and loss ofrevenue.

 

***We may have to spend substantial funds on sales andmarketing in the future.***

*** ***

Toincrease awareness for our new and existing products, technology and services,we may have to spend significantly more on sales and marketing in the future.We also plan to continue to leverage our relationships with industry leadersand to expand and diversify our sales and marketing initiatives to increase oursales to mobile carriers and enterprises. If our marketing strategy isunsuccessful, we may not be able to recover these expenses or even generate anyrevenue. We will be required to develop a marketing and sales campaign thatwill effectively demonstrate the advantages of our products, technology andservices. We may also elect to enter into agreements or relationships withthird parties regarding the promotion or marketing of our products, technologyand services. We cannot be certain that we will be able to establish adequatesales and marketing capabilities, that we will be able to enter into marketingagreements or relationships with third parties on financially acceptable terms,or that any third parties with whom we enter into such arrangements will besuccessful in marketing and promoting the products, technology and servicesoffered by us.

 

***Our products may contain errors that could subject us toproduct-related claims.***

*** ***

Ourproducts may contain undetected errors or failures, which can result in loss ofor delay in market acceptance and could adversely impact future operatingresults. Our insurance may not cover us for certain claims related to productfailures. Although our license agreements contain provisions limiting ourliability in the caseof damages resulting from use of the software, in the event of such damages, wemay be found liable, and in such event, such damages could materially affectour business, operating results and financial condition.

 

***Our revenue from consumer sales is subject to risksassociated with the declining wired PDA market and reliance on salesdistribution channels.***

*** ***

Whilethe market for converged mobile devices or smartphones and other wirelessmobile devices has experienced growth recently, the market for traditionalpersonal digital assistants, or PDAs, has declined. The decline in traditionalPDA sales had a direct impact on sales of our Intellisync products through theconsumer and online channels, where sales of our synchronization softwaretypically occur at the same time a PDA is purchased, or shortly thereafter. Theincrease in demand for smartphones and other such devices may not offset thedecline in traditional PDA sales. Our consumer sales are also dependent upondistribution and marketing channels outside our control. There are also asignificant number of our customers that purchase our products and servicesthrough other resellers, and we anticipate they will continue to do so as weexpand our product offerings. Our sales, therefore, could also be negativelyaffected by disruptions in our relationships with resellers or disruptions inthe relationships between our resellers and customers. Resellers may alsochoose not to emphasize our products to their customers. If we are unable tooffset declining revenue from PDA-related software, or if we experiencedisruption in, or reduced selling efforts from, our distribution channels, ourrevenue derived from consumer sales would be adversely affected.

 

***We may need to raise additional capital in the futureresulting in dilution to our stockholders.***

*** ***

We mayneed to raise additional funds for our business operations and to execute ourbusiness strategy. We may seek to sell additional equity or debt securities orto obtain an additional credit facility. The sale of additional equity orconvertible debt securities could result in additional dilution to ourstockholders. If additional funds are raised through the issuance of debtsecurities, these securities could have rights that are senior to holders ofcommon stock and could contain covenants that would restrict our operations.Any additional financing may not be available in amounts or on terms acceptableto us, if at all.

 

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***We may not have sufficient cash flow to make payments on anydebt we may incur.***

*** ***

Ourability to pay principal and interest on our existing and any futureindebtedness and to fund our planned capital expenditures depends on our futureoperating performance. Our future operating performance is subject to a numberof risks and uncertainties that are often beyond our control, including generaleconomic conditions and financial, competitive and regulatory factors.Consequently, we cannot assure you that we will have sufficient cash flow tomeet our liquidity needs, including making payments on existing and any futureindebtedness.

 

***The fundamental change redemption rights in our outstandingconvertible senior notes could discourage a potential acquirer.***

*** ***

If weengage in any transaction or event in connection with which all orsubstantially all of our common stock is exchanged for, converted into,acquired for or constitutes solely the right to receive, consideration which isnot all or substantially all common stock listed on a United States nationalsecurities exchange or approved for quotation on the Nasdaq National Market orany similar United States system of automated dissemination of quotations ofsecurities prices, or, if for any reason, our common stock is no longer listedfor trading on a United States national securities exchange nor approved fortrading on the Nasdaq National Market (a “fundamental change”), we may berequired to redeem all or part of the notes and this could discourage apotential acquirer. However, this redemption feature is not the result ofmanagement’s knowledge of any specific effort to obtain control of us by meansof a merger, tender offer or solicitation, or part of a plan by management toadopt a series of anti-takeover provisions. The term “fundamental change” islimited to specified transactions and may not include other events that mightadversely affect our financial condition or business operations. Our obligationto offer to redeem the notes upon a fundamental change would not necessarilyafford you protection in the event of a highly leveraged transaction,reorganization, merger or similar transaction involving us.

 

***We may not have the ability to raise the funds necessary tofinance the fundamental change redemption option associated with ouroutstanding convertible senior notes.***

*** ***

If weengage in any transaction or event in connection with which all orsubstantially all of our common stock is exchanged for, converted into,acquired for or constitutes solely the right to receive consideration which isnot all or substantially all common stock listed on a United States nationalsecurities exchange or approved for quotation on the Nasdaq National Market orany similar United States system of automated dissemination of quotations ofsecurities prices, or, if for any reason, our common stock is no longer listedfor trading on a United States national securities exchange nor approved fortrading on the Nasdaq National Market, we may be required to redeem all or partof the notes. We may not have enough funds to pay the redemption price for alltendered notes. In addition, any credit agreement or other agreements relatingto our indebtedness may contain provisions prohibiting redemption of the notesunder certain circumstances, or expressly prohibit our redemption of the notesupon a designated event or may provide that a designated event constitutes anevent of default under that agreement. Our failure to redeem tendered noteswould constitute an event of default under the indenture, which might alsoconstitute a default under the terms of our other indebtedness.

 

***Our certificate of incorporation, our bylaws, Delaware lawand our stockholder rights plan contain provisions that could discourage atakeover.***

*** ***

Provisionsof our certificate of incorporation, our bylaws, Delaware law and ourstockholder rights plan contain provisions that may discourage, delay orprevent a merger or acquisition or other change of control that a stockholdermay consider favorable.

 

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**Item 3.          Quantitativeand Qualitative Disclosures About Market Risk**

** **

Weare exposed to a variety of risks, including changes in interest rates andforeign currency fluctuations, which could impact our results of operations andfinancial condition.

 

*InterestRate Risk*

* *

Inaddition to our cash holdings of $12,336,000, at October 31, 2005, we hadan investment portfolio of mostly fixed income securities, including thoseclassified as cash equivalents and securities available-for-sale, of $23,358,000.These securities, like all fixed income instruments, are subject to interestrate risk and will fall in value if market interest rates increase. If marketinterest rates were to increase immediately and uniformly by 10% from levels asof October 31, 2005, the decline of the fair value of the portfolio wouldbe immaterial. We attempt to mitigate risk by holding our fixed incomeinvestments until maturity to avoid recognizing an adverse impact in income orcash flows in the event of an increase in market interest rates, but anincrease in our liquidity needs may require us to sell fixed-rate securitiesprior to maturity. 

 

Thetable below presents the carrying value (which approximates fair value) andrelated weighted average coupon interest rates for our investment portfolio at October 31,2005 (in thousands, except interest rates).

 
| ** **                                                           | ** ** | **Carrying  Amount** | ** ** | **Average Coupon  Interest Rate** | ** ** |
|----------------------------------------------------------------------|------------|----------------------|------------|-----------------------------------|------------|
| Cash equivalents                                                     |       | $                    | 6,910      |                              | 3.6        | % |
| Securities due  within one year or less                              |       | 8,508                |       | 2.8                               | %          |
| Auction rate  receipts due after 25 years through 40 years           |       | 4,700                |       | 3.9                               | %          |
| Annuities,  auction rate preferred stock and other, with no maturity |       | 3,240                |       | 3.2                               | %          |
| Total portfolio                                                      |       | $                    | 23,358     |                              | 3.3        | % |

 

*Debt andInterest Expense.*We incurred $60,000,000 of principalindebtedness from the issuance of convertible senior notes in March 2004.The fair market value of these 3% convertible senior notes is sensitive tochanges in interest rates and to the prices of our common stock into which itcan be converted as well as our financial stability. In order to manageinterest costs and risk, we entered into an interest rate swap agreement duringfiscal 2004 with a financial institution for two interest rate swaps with atotal notional amount of $50,000,000 and $10,000,000, respectively, whereby wereceive fixed-rate interest of 3% in exchange for variable interest payments.The interest rate swaps expire upon the maturity of our $60,000,000, 3%convertible senior notes in March 2009, and effectively converts thosefixed-rate notes into variable-rate borrowings. The interest rate is reset semi-annually and is equal to the 6-monthLIBOR rate less a rate spread.  The totalvariable interest rate was approximately 3.8% at October 31, 2005.  Under the provisions of SFAS No. 133, “*Accounting for Derivative Instruments and Hedging Activities*,”as amended, this arrangement has been designated and qualifies as an effectivefair value hedge of interest rate risk related to the $60,000,000 convertiblesenior notes. As the terms of the swaps match those of the underlying hedgeddebt, the changes in the fair value of these swaps are offset by correspondingchanges in the carrying value of the hedged debt, and therefore does not impactour net earnings. As of October 31, 2005, the fair value of the interestrate swaps was approximately $3,037,000 with an equal adjustment recorded tothe carrying value of the $60,000,000 convertible senior notes. Assuming a onepercentage point increase in the prevailing LIBOR rate, holding other terms ofthe swap constant, the fair value of the interest rate swap and the underlyingsenior notes would change by approximately $1,720,000.

 

*ForeignCurrency Risk*

* *

Sinceour acquisitions of Synchrologic, Inc. and Identity Systems in fiscal2004, more of our product and service revenue has been derived frominternational markets and denominated in the currency of the applicable market.As we increasingly pursue business opportunities in foreign countries, ourforeign revenue and operating results may

 

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become subject tosignificant currency fluctuation risk based upon changes in exchange rates ofcertain currencies in relation to the United States dollar.

 

We arealso exposed to foreign currency exchange rate fluctuations as the financialstatements of foreign subsidiaries are translated into United States dollar inconsolidation.  As exchange rates vary,these results, when translated, may vary from expectations and adversely impactoverall expected profitability.  Assetsand liabilities of most of our subsidiaries are translated into United Statesdollars at exchange rates in effect as of the applicable balance sheet date andany resulting translation adjustments are included as an adjustment tostockholders’ equity. Revenue and expenses generated from these subsidiariesare translated at average monthly exchange rates during the quarter thetransactions occur. Gains and losses from these currency transactions areincluded in net earnings. Recently, we have increasingly generated a portion ofour revenue and incurred a portion of our expenses in euros, British pounds,the Japanese yen and Australian dollars. 

 

Wecurrently do not have any hedging or similar foreign currency contracts tomitigate our exposure to the risk of changes in foreign currency rates.Although we may begin to hedge in the future, we cannot be sure that anyhedging techniques we may implement will be successful or that our business,results of operations, financial condition or cash flows will not be adverselyaffected by exchange rate fluctuations. 

 

We maycontinue to expand internationally in the future and become increasinglysubject to other risks of doing business internationally including, but notlimited to, differing economic conditions, changes in political climate,differing tax structures, and other regulations and restrictions. We will alsobe exposed to increased risk of non-payment by our customers in foreigncountries, especially those of highly inflationary economies. Accordingly, ourfuture results could be materially adversely impacted by changes in these andother factors. Furthermore, to the extent that we engage in international salesdenominated in United States dollars, an increase in the value of the UnitedStates dollar relative to foreign currencies could make our products andservices less competitive in international markets.

 

## **Item 4. Controls And Procedures**

## ** **

*Evaluationof disclosure controls and procedures*

* *

Basedon our management’s evaluation (with the participation of our principalexecutive officer and principal financial officer), as of the end of the periodcovered by this report, our principal executive officer and principal financialofficer have concluded that our disclosure controls and procedures (as definedin Rules 13a-15(e) and 15d-15(e) under the Securities ExchangeAct of 1934, as amended, (the “Exchange Act”)) are effective to ensure thatinformation required to be disclosed by us in reports that we file or submitunder the Exchange Act is recorded, processed, summarized and reported withinthe time periods specified in Securities and Exchange Commission rules andforms. 

 

*Changesin internal control over financial reporting*

* *

Therewas no change in our internal control over financial reporting during our firstquarter of fiscal 2006 that has materially affected, or is reasonably likely tomaterially affect, our internal control over financial reporting.

 

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**INTELLISYNC CORPORATION**

** **

**PART II- OTHER INFORMATION**

** **

**Item1.  Legal proceedings**

 

On October 5,2005, Spontaneous Technology, Inc. served us with a complaint filed in theThird Judicial District Court, of Salt Lake County, State of Utah.  In the Complaint, Spontaneous Technologyasserts a cause of action for breach of contract related to the calculation ofan earnout payment in the Asset Purchase Agreement entered into between theparties on July 30, 2003.   SpontaneousTechnology seeks compensatory damages in the amount of $673,750 and recovery ofits attorneys’ fees and costs.  We areinvestigating this matter, and at this time, do not believe this matter willhave a material adverse effect on our consolidated financial position, resultsof operation or liquidity.

 

We areparty to various legal proceedings and claims, either asserted or unasserted,which arise in the ordinary course of business, including proceedings andclaims that relate to acquisitions we have completed or to companies we haveacquired, commercial, employment and other matters. While the outcome of thesematters cannot be predicted with certainty, we do not believe that the outcomeof any of these claims or any of the above mentioned legal matters will have amaterial adverse effect on our consolidated financial position, results ofoperations or cash flow.  In accordancewith generally accepted accounting principles, we make a provision for aliability when it is both probable that a liability has been incurred and theamount of the loss can be reasonably estimated. These provisions are reviewed at least quarterly and adjusted to reflectthe impacts of negotiations, settlements, rulings, advice of legal counsel, andother information and events pertaining to a particular case. Litigation isinherently unpredictable. However, we believe that we have valid defenses withrespect to the legal matters pending against Intellisync. It is possible,nevertheless, that our consolidated financial position, cash flows or resultsof operations could be affected by the resolution of one or more of thesecontingencies.

 

Referto the discussion set forth in Item 1 under the caption “*Risk Factors– We may be unable toadequately protect our proprietary rights;*”*“**Risk Factors –  We may be subject to intellectual property infringementclaims, which are costly to defend and could limit our ability to use certaintechnologies in the future”  and “RiskFactors –  We have been, are and may in the future beinvolved in litigation that could result in significant costs to us.”*

* *

**Item 2.  Changes in securities and useof proceeds**– Not Applicable.

** **

**Item 3.  Defaults upon senior securities**– Not Applicable.

 

**Item 4.  Submission of matters to a voteof security holders**

 

Weheld our annual meeting of stockholders on December 2, 2005.  At that meeting, the following individualswere elected to serve as directors until the next annual meeting ofstockholders or until their earliest resignation or removal:

 
| **Nominee**          | ** ** | **For**    | ** ** | **Withheld** | ** ** |
|----------------------|------------|------------|------------|--------------|------------|
| Woodson Hobbs        |       | 58,303,589 |       | 1,347,356    |       |
| Michael M. Clair     |       | 57,006,474 |       | 2,644,471    |       |
| Kirsten Berg-Painter |       | 57,588,372 |       | 2,062,573    |       |
| Richard Arnold       |       | 58,405,425 |       | 1,245,520    |       |
| Terrence Valeski     |       | 58,370,850 |       | 1,280,095    |       |
| Keith Cornell        |       | 58,105,705 |       | 1,545,240    |       |

 

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Alsoat that meeting, the following matters were voted upon with the number of votescast for, against or withheld as set forth in the columns opposite therespective matters.

 
| **Matter**                                                                                                                                                                   | ** ** | **For**    | ** ** | **Against** | ** ** | **Abstain** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|-------------|------------|-------------|------------|
| To consider and  vote upon an amendment to Intellisync’s 2002 Stock Option Plan to add  Restricted Stock units                                                          |       | 19,525,407 |       | 3,860,383   |       | 112,959     |       |
|                                                                                                                                                                         |       |       |       |        |       |        |       |
| To ratify the  appointment of PricewaterhouseCoopers LLP as Intellisync’s independent  registered public accounting firm for the fiscal year ending July 31,  2006 |       | 58,184,854 |       | 1,407,302   |       | 58,789      |       |

 

**Item 5.  Other information**– Not Applicable.  

* *

**Item 6.  Exhibits**

** **

**a)****              Exhibits**

 

31.1     Certification ofPrincipal Executive Officer Pursuant to Section 302 of the Sarbanes-OxleyAct of 2002

 

31.2     Certification ofPrincipal Financial Officer Pursuant to Section 302 of the Sarbanes-OxleyAct of 2002

 

32.1     Certification ofPrincipal Executive Officer Pursuant to 18 U.S.C. Section 1350 as AdoptedPursuant to Section 906 of the Sarbanes-Oxley Act of 2002 

 

32.2     Certification ofPrincipal Financial Officer Pursuant to 18 U.S.C. Section 1350 as AdoptedPursuant to Section 906 of the Sarbanes-Oxley Act of 2002 

 

99.1     IndemnityAgreement, dated as of November 14, 2005, is made by and between IntellisyncCorporation and David Eichler*

 

99.2     IndemnityAgreement, dated as of November 14, 2005, is made by and between IntellisyncCorporation and Rip Gerber*

 

99.3     IndemnityAgreement, dated as of November 14, 2005, is made by and between IntellisyncCorporation and Blair Hankins*

 

99.4     IndemnityAgreement, dated as of November 14, 2005, is made by and between IntellisyncCorporation and Scott Hrastar*

 

99.5     IndemnityAgreement, dated as of November 14, 2005, is made by and between IntellisyncCorporation and Said Mohammadioun*

----

*Incorporatedby reference to the corresponding exhibit number as filed with the Company'sQuarterly Report on Form 10-Q filed on December 12, 2005.

 

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**SIGNATURE**

** **

Pursuantto the requirements of Sections 13 or 15(d) of the Securities Exchange Act of1934, the Registrant has duly caused this report to be signed on its behalf bythe undersigned hereunto duly authorized.

 

 
|                          | **INTELLISYNC  CORPORATION**                  |
|-------------------------------|-----------------------------------------------|
|                          | (Registrant)                                  |
|                          |                                          |
|                          |                                          |
| Date:  December 21, 2005 | By:                                           | /s/ DAVID P. EICHLER |   |
|                          |                                          | **David P. Eichler** |   |
|                          |                                          | *Chief Financial Officer* |   |
|                          | (Principal  Financial and Accounting Officer) |

 

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**EXHIBIT INDEX**

 
| **Exhibit No.** | ** ** | ** **                                                                                                                                                       |
|----------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                 |       |                                                                                                                                                             |
| 31.1                 |       | Certification of  Principal Executive Officer Pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002                                                    |
| 31.2                 |       | Certification of  Principal Financial Officer Pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002                                                    |
| 32.1                 |       | Certification of  Principal Executive Officer Pursuant to 18 U.S.C. Section 1350 as  Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| 32.2                 |       | Certification of  Principal Financial Officer Pursuant to 18 U.S.C. Section 1350 as  Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| 99.1                 |       | Indemnity  Agreement, dated as of November 14, 2005, is made by and between Intellisync  Corporation and David Eichler*                                          |
| 99.2                 |       | Indemnity  Agreement, dated as of November 14, 2005, is made by and between Intellisync  Corporation and Rip Gerber*                                             |
| 99.3                 |       | Indemnity  Agreement, dated as of November 14, 2005, is made by and between Intellisync  Corporation and Blair Hankins*                                          |
| 99.4                 |       | Indemnity  Agreement, dated as of November 14, 2005, is made by and between Intellisync  Corporation and Scott Hrastar*                                          |
| 99.5                 |       | Indemnity  Agreement, dated as of November 14, 2005, is made by and between Intellisync  Corporation and Said Mohammadioun*                                      |

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*Incorporated by reference to the correspondingexhibit number as filed with the Company's Quarterly Report on Form 10-Q filedon December 12, 2005.

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