Table of Contents

 

 

 

# **UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

## **WASHINGTON, D.C. 20549**

## ** **

### **FORM 10-K**

### ** **

**ANNUALREPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934**

## ** **

## **For the year endedDecember 31, 2009**

## ** **

**Commission File Number 0-25882**

 

**EZENIA! INC.**

(Exact name of registrant as specified in itscharter)

 

| **DELAWARE**                                                    | ** ** | **04-3114212**                           |
|-----------------------------------------------------------------|------------|------------------------------------------|
| (State or other  jurisdiction of incorporation or organization) |       | (I.R.S. employer identification  number) |

 

## **14 Celina Ave, Suite 17-18,Nashua, New Hampshire 03063**

(Address of principal executive offices,including zip code)

 

**(603) 589-7600**

(Registrant’s telephone number, including areacode)

 

----

 

Securities RegisteredPursuant to Section 12(b) of the Act:

**None**

 

Securities RegisteredPursuant to Section 12(g) of the Act:

**Common Stock $.01 par value**

**Preferred Stock Purchase Rights**

 

Indicate by check mark if theRegistrant is a well-known seasoned issuer, as defined in Rule 405 of theSecurities Act Yes  o No  x

 

Indicate by check mark if theRegistrant is not required to file reports pursuant to Section 13 or 15(d) ofthe Act Yes  o No  x

 

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  x  No  o

 

Indicate by check markwhether the registrant has submitted electronically and posted on its corporateWeb site, if any, every Interactive Data File required to be submitted andposted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter)during the preceding 12 months (or for such shorter period that the registrantwas required to submit and post such files).  Yes  o No  o

 

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K is notcontained herein, and will not be contained, to the best of Registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment to this Form 10-K.  x

 

**Indicate by check mark whether theRegistrant is a large accelerated filer, an accelerated filer, anon-accelerated filer or a smaller reporting company.  See the definitions of “large acceleratedfiler”, “accelerated filer” and “smaller reporting company” in Rule 12b-2of the Exchange Act.**

** **

| Large Accelerated  Filer o |   | Accelerated  Filer o         |
|----------------------------|--------|------------------------------|
|                       |   |                         |
| Non-Accelerated  Filer o   |   | Smaller  Reporting Company x |

 

**Indicate by checkmark whether theRegistrant is a shell company (as defined in Rule 12b-2 of the ExchangeAct) Yes  **o  No  x

** **

**The aggregate market value of thevoting and non-voting common stock held by non-affiliates of the Registrant asof June 30, 2009 was**$2,931,643(computed by reference to the price at which the Registrant’s common stock waslast sold on the OTC Bulletin Board on June 30, 2009).

** **

**The number of shares outstandingof the Registrant’s common stock as of**March 30, 2010was 14,658,217.

** **

**DOCUMENTS INCORPORATED BYREFERENCE**

 

Portionsof the definitive Proxy Statement to be delivered to stockholders in connectionwith the Annual Meeting of Stockholders are incorporated by reference into Part IIIhereof. With the exception of the portion of such Proxy Statement that isexpressly incorporated herein, such Proxy Statement shall not be deemed filedas part of this Annual Report on Form 10-K.

 

 

 

----

Table of Contents

 

**Ezenia! Inc.**

**2009 Form 10-K Annual Report**

**Table of Contents**

 
| ** **        | ** **                                                                                                          | **Page** |
|-------------------|---------------------------------------------------------------------------------------------------------------------|----------|
| **PART I**   |
| Item 1.           | Business                                                                                                            | 3        |
| Item 1A.          | Risk Factors                                                                                                        | 8        |
| Item  1B          | Unresolved  Staff Comments                                                                                          | 12       |
| Item  2.          | Description  of Property                                                                                            | 12       |
| Item 3.           | Legal Proceedings                                                                                                   | 13       |
| Item 4.           | (Removed and  Reserved.)                                                                                            | 13       |
|              |                                                                                                                |     |
| **PART II**  |
|              |                                                                                                                |     |
| Item 5.           | Market for  Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases  of Equity Securities | 14       |
| Item 6.           | Selected  Financial Data                                                                                            | 14       |
| Item 7.           | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                         | 15       |
| Item 7A.          | Quantitative  and Qualitative Disclosures about Market Risk                                                         | 22       |
| Item 8.           | Financial  Statements and Supplementary Data                                                                        | 23       |
| Item 9            | Changes in  and Disagreements with Accountants on Accounting and Financial Disclosure                               | 40       |
| Item 9A           | Controls and  Procedures                                                                                            | 40       |
| Item 9B           | Other Information                                                                                                   | 41       |
|              |                                                                                                                |     |
| **PART III** |
|              |                                                                                                                |     |
| Item 10.          | Directors  and Executive Officers of the Registrant                                                                 | 42       |
| Item 11.          | Executive  Compensation                                                                                             | 42       |
| Item 12.          | Security  Ownership of Certain Beneficial Owners and Management and Related Stockholder  Matters                    | 42       |
| Item 13.          | Certain  Relationships and Related Transactions                                                                     | 43       |
| Item 14.          | Principal  Accountant Fees and Services                                                                             | 43       |
|              |                                                                                                                |     |
| **PART IV**  |
|              |                                                                                                                |     |
| Item 15.          | Exhibits  and Financial Statements Schedules                                                                        | 44       |
|              |                                                                                                                |     |
| Signatures        |                                                                                                                | 47       |

 

The Company’strademarks include Ezenia!, the Ezenia! Logo, InfoWorkSpace, LaunchPad, andEncounter.   All other trademarksreferred to in this document are the property of their respective companies.

 

2

----

Table of Contents

 

**PART I**

 

**This Annual Report on Form 10-K containsforward-looking statements within the meaning of Section 27A of theSecurities Act of 1933, as amended, and Section 21E of the SecuritiesExchange Act of 1934, as amended.  Actualresults could differ materially from those set forth in the forward-lookingstatements.  Certain factors that mightcause such a difference are discussed in this report, including in Item 1A “RiskFactors” beginning on page 8.**

 

**ITEM 1. BUSINESS**

 

Founded in 1991, Ezenia! Inc., a Delaware corporation (“Ezenia”, “we”,or the “Company”), develops and markets products that enable organizations toprovide technically advanced high-quality group communication to commercial,governmental, consumer and institutional users. Our products allow individualsand groups, regardless of proximity constraints, to interact and shareinformation in a natural, spontaneous way — voice-to-voice, face-to-face,mouse-to-mouse, or keyboard-to-keyboard flexibly, securely and in real time.Using our products, individuals can interact through a natural meetingexperience, allowing groups to work together effectively and disseminate vitalinformation quickly in an extremely secure manner using advanced technology forboth network security and data encryption.

 

We offer one of the most comprehensive commerciallyavailable lines of group communication products.  Our InfoWorkSpace software product enablesvoice communication, secure messaging, white boarding, virtual workspaces, andJPEG-based video across a wide range of networks including local area networks,and wide area networks.  Furthermore,because our products are well suited for operating from small enclave environmentsto large multi-locations on public networks, they can be deployed with relativeease at small sites or in locations with a large number of users.  Users can be virtually anywhere on the planetso long as they have network access.

 

We sold InfoWorkSpace and related services to customers in the federalgovernment, mostly in the Department of Defense (“DoD”) and the intelligencecommunity (“IC”), either directly, or in many instances, in partnership withthe premier defense contractors and/or integrators.  We believe that it is in our interest toleverage these partnerships with well-established contractors and/orintegrators to further expand the deployment and provide the support ofInfoWorkSpace in large-scale opportunities.

 

***Company Background and Evolution —True Collaboration versus Videoconferencing***

*** ***

In 1991, Ezenia, known at the time as VideoServer, designed, developed,manufactured, and sold Multipoint Control Systems or Units (“MCS” or “MCU”) forboth the circuit-oriented, Integrated Services Digital Network based andpacket-switched, Internet Protocol-based videoconferencing applications. OurMCS was unique at the time with its PC-based, flexible hardware design approachand system configurations, leveraging commercial off-the-shelf base operatingsystems.  At that time, traditional videoconferencingvendors concentrated mostly on the development of more and more sophisticated,standard-based endpoints to be used in point-to-point videoconferencing.  We focused our business, not on theendpoints, but on systems deployed in the infrastructure backroom, to enablethree or more sites or parties involved in videoconferencing to properlycommunicate among themselves, by switching video sources based on audioprocessing of current and immediately preceding speakers. Our technicaladvantages were derived by masking and compensating for incompatibilitiesbetween endpoints from different manufacturers, algorithmic transcoding,compensation for different bandwidth requirements, and simultaneousmulti-windowed video arrangements on the monitor known as “Hollywood Squares,”just to name a few.

 

In the late 1990’s, we fully realized the limitations and narrowapplications of our videoconferencing products which, among many deficiencies,were monolithic, required highly specialized support and services, stood apartfrom the normal office environment that most information workers wereaccustomed to, and did not provide a solution to the need to truly collaborateand disseminate information in real time. Contrary to how most 

 

3

----

Table of Contents

 

videoconferencing vendors would like to indoctrinate potentialcustomers, video — in particular talking heads as in the case of most video conferences— was and is, now more than ever, far from being the “piece de resistance” oftrue, meaningful real-time collaboration. Furthermore, its monolithic approach,whereby you either get a successful videoconference session or get nothing,relegates all other more critical collaboration activities second to videotalking heads.  Most importantly, thelack of presence awareness detection and the inability to leverage the web forease of access, prevent flexible, on-demand, free-flowing collaboration sessionswhereby participants can come, go, or be invited at will.

 

In March 2001, we completed the first phase of our transformationwith the acquisition of the InfoWorkSpace business from General Dynamics.  As an application solution and technologybuilt on top of Placeware’s (see “Third-Party Technology” below) webconferencing technology, InfoWorkSpace:

 

·      Allows users to be aware of the onlinepresence of colleagues, enables true multimedia collaboration sessions startingwith the simplest secure information messaging (keyboard-to-keyboard) andexpanding to the most complex all-encompassing (mouse-to-mouse) sharing anddissemination of mission critical information simultaneously with in-session,super-imposed audio conferencing and/or JPEG-based video;

·      Leverages commercially off-the-shelf baseoperating systems such as the Windows and Solaris platforms;

·      and

·      Fits into the virtual office environmentwith which most information workers are familiar.

 

We believe thatthe use and growth of real-time collaborative technologies within commercial orgovernmental enterprises, while still early in their adoption curve, areincreasing.  The investment ininformation and collaborative technologies helps customers flatten theirorganizations, improve enterprise wide communication, shorten thedecision-making process, and facilitate real-time reactions to criticalissues.  Rather than just providingaccess to inert data stored on a server, the goal today is to find ways toenable information workers to collaborate and share their expertise to deriveknowledge from databases in real-time and in a secure environment.  Collaborative technologies are about creatinginformational value through better, faster and more efficient human interactionand cooperation, not just more data. Businesses and governmental organizations today need solutions that makeit easier for people to work together, share information and expertise,coordinate activities across departments, networks, agencies, buildingcomplexes, facilities spread all over the country, and field deployments aroundthe world.

 

As a result, weintend to concentrate our product development efforts on technical advancementsthat allow users to convey critical information that must be delivered and thatensures security to our customers.

 

**Products**

 

Our expertise isin developing products that deliver highly secure and flexible support forinformational collaboration, in-session audio conferencing, and video streamingcapabilities across a wide range of platforms. Our products have been designed with a scalable, modular architecture togive customers the flexibility to add capacity, processing power, andconferencing features as the customer network and application requirementsgrow. Using a common set of hardware and software building blocks, customerscan choose from a wide range of product configurations that differ in capacity,price, network connectivity and features, all of which share the same operatingsoftware user interface. Products may be configured for use in customerpremises or environments, or may be configured with specialized packaging foruse in a telephone carrier’s central office setting. We believe a keydifferentiator for our products is the built-in robust security features, whichallows them to be installed in some of the highest clearance and security sitesin the market.

 

***InfoWorkSpace***

*** ***

InfoWorkSpace is a comprehensive suite of collaboration applicationsdesigned to allow any organization to more efficiently communicate,particularly when attempting to work as, and within, a group.  From an overall perspective, InfoWorkSpace,when used effectively can reduce or even eliminate dependency on travel,traditional 

 

4

----

Table of Contents

 

video conferencing, traditional audio conferencing and the phone, andeven e-mail and file servers. Essentially, InfoWorkSpace presents and enables a corporate campus orenterprise whose resources can be accessed by an information worker through hisor her own desktop or laptop PC.  Userscan browse through the virtual campus, facility, or building to locate the roomto be used for a meeting, or just pick the needed contact(s) and initiatethe meeting with the click of the mouse.

 

Our customers, including the U.S. intelligence community, the U.S.Joint Forces Command, and various branches of the U.S. Armed Forces includingthe Marines, Navy, Air Force and Army, have leveraged the flexibility ofInfoWorkSpace to aid in a myriad of missions. From daily mission briefs to medevac procedures in Afghanistan tooperational support in Iraq, InfoWorkSpace has increasingly become a vital partof the U.S. defense network.  Thestability, scalability and security of InfoWorkSpace allow our customers todepend on our software to complete mission-critical assignments and save livesin some of the world’s most dangerous areas.

 

At a basic level, InfoWorkSpace is a cross-platform solution in a box,supporting both UNIX and Windows-based operating systems. A standard softwaresuite comes complete with our server software package, database, applicationserver, and user directory along with a number of ancillary add-ons. This suiteprovides a self-sufficient workgroup environment for a user base of up toseveral hundred and even thousands of users. However, with a few simple systemconfigurations, InfoWorkSpace servers can be federated in such a way thatmultiple servers can trust one another in order to support collaboration acrossan enterprise with an even larger audience of participants.

 

InfoWorkSpace security infrastructure is built uponthe best practices that have been in use in operating systems for decades.  Much like a UNIX administrator can restrictaccess to a directory or even a file to a limited set of users, InfoWorkSpace administratorscan lock rooms down to prevent users from seeing sensitive data that is outsidetheir area of responsibility. Permission-based access allows administrators tofinely tune a user’s access profile to the file level.  Data can be encrypted using standard SSLprotocols and access can be controlled with PKI and X.509 certificates; ourPKI/PKE implementation has been certified by the Joint Interoperability TestCenter (JITC) in Fort Huachuca, Arizona. All data within the application can be audited and searched for specificwords or patterns of words. InfoWorkSpace provides a high level of security capabilities and anaudit safety net to capture any breaches that may arise from human errors.

 

The stability, scalability, flexibility and securitycapabilities of InfoWorkSpace are critically important for our customers, butthe true power of InfoWorkSpace is in its collaboration applications.  Users can participate in an interactiveconference with absolutely no set up procedures.  This is a significant leap forward from wherethe industry was just a few years ago, using videoconferences as the onlyinteractive medium.  InfoWorkSpace eliminatesthe need to have a heavy piece of hardware at each terminal point ofcollaboration, to schedule a conference with a bridge operator, or to have awhole new network infrastructure to support an interactive conferencingcapability.  Information workers, oncelogged into InfoWorkSpace, can initiate a conference by going to a virtual roomand inviting the participants as needed. Rooms are either pre-defined or created on demand as needs dictate. Onceinside a room, either by joining or being invited into a session, participantscan have an audio conference straight from the software. With InfoWorkSpace, noset up is required and no additional cost is incurred.  Participants even can be in multiple rooms atthe same time, offering a more productive virtual environment than in thephysical world. Participants can share and work on documents from the filecabinet associated with a room. Users can have an interactive whiteboardsession and save the results. Users also can manage their calendars andparticipate in message boards and save that information to the server wherethey can access it at any time from any place.

 

A high-level summary of InfoWorkSpace features andfunctions is listed below:

·    Information messaging, in a one-to-one arrangement, ina conference environment, or in multiple combinations of one-on-one and/orconference environments;

·    Audio conversation and conferencing, in a one-to-onearrangement, in a conference environment, or in multiple combinations ofone-on-one and/or conference environments;

·    Interactive whiteboard which all users can see andmodify in real time;

 

5

----

Table of Contents

 

·    Application sharing which allows the screen view ofany application on any desktop or laptop PC of any information worker to bebroadcasted to all other participants;

·    Secure file cabinet, from which permission-basedaccess allows for documents to be stored, retrieved, and monitored at any timefrom any place;

·    EZinFORM, a forms manager designed for an agency todocument a task order where multiple sites and people are deployed on a missionthat requires rapid updates to critical events;

·    EZinCMD, a unit commander can consolidate views andpeople into a critical command and control battlefield situation for rapidresponse;

·    Multi-Level security allows users of one securitylevel to have real-time collaboration sessions with users at another securitylevel with the use of the DIA-certified Information Support Server Environment(ISSE) Guard;

·    SSL and PKI encryption, which, when configured,renders traffic secure across the wire;

·    Full system auditing, which allows all data andactions to be audited and searchable;

·    Informal meetings, a lightweight application thatprovides all interactive capabilities;

·    Virtual campuses, buildings, offices and persistentmeetings, a robust all encompassing application that provides rich, secure,scalable, real-time collaborative capabilities and recreates the officeenvironment with facilities like file cabinet, document storage and retrievalmessage board, calendaring, etc.; and

·    Virtual auditorium-style meetings with geographicallydispersed presenter panels and large audiences, coupled with fully functionalmultimedia presentations and recordings, including in-band audio, as well asseating control and assignment, private sidebar discussions, moderator control,audience Q&A sessions, etc.

 

###### **Marketand Channels**

###### ** **

We market our InfoWorkSpace products andrelated services to customers within the U.S. federal government, primarily tothe DoD and to the intelligence community worldwide. We also provide theseproducts and services to the defense and intelligence organizations of foreignallies of the U. S. government.

 

InfoWorkSpace products andservices are licensed on an annual subscription and renewal basis, during whichsoftware updates and basic technical support are included as part of baseofferings. Enhanced service offerings are also offered in a subscription model.Training, installation, and customization are sold on an “as needed” basis.

 

The worldwide government marketplace is best understood as a matrix ofcustomers, sales vehicles (contracts), and sales channels.  We employ a sales model which is an analog tothis government market matrix. InfoWorkSpace products and relatedservices are available to specific segments of the government, using variousvehicles, including our GSA Schedule, and multiple channels both directly, withour own sales force, and indirectly with partners such as General Dynamics,Harris Corporation, Science and Applications International Corporations, andNorthrop Grumman, among others.

 

During the year ended December 31, 2009, approximately 73% of oursales of InfoWorkSpace and relatedservices were through our indirect channels. Our top end-user customers for InfoWorkSpace products and relatedservices in 2009 were the Armed Forces, and intelligence, and securityagencies. Sales to these customers accounted for approximately 56%, 16% and 5%,respectively, of total revenue in 2009.

 

We conduct oursales and marketing activities from our principal offices in Nashua, NewHampshire, and Sterling, Virginia.

 

###### **Researchand Product Development**

###### ** **

We believe that our future success depends on our ability to continueto enhance and expand our existing enterprise collaboration products and todevelop new products that maintain our technology leadership. We have investedand will continue to invest in the development of products and coretechnologies while also leveraging the integration of “best-of-breed” softwarecomponents through strategic partnerships. Extensive product development inputis obtained via direct feedback from end-users and suggested improvements fromstrategic 

 

6

----

Table of Contents

 

partners and resellers.  Wecarefully monitor the migration of industry standards and remain committed todeveloping products utilizing such standards. This includes the development of interoperable collaboration products tomeet either industry needs and/or DoD-driven interoperability criteria, whilemaintaining a keen focus on the security aspects of enterprise collaboration,including solutions in the web conferencing arena.

 

As of December 31, 2009, our research and development staffconsisted primarily of software engineers augmented with U.S.-based andU.S.-citizen software contractors. Many of our software engineers carry eithersecret or top-secret levels of security clearance. Our research and developmentexpenditures were approximately $1.7 million and $2.1 million in 2009 and 2008,respectively, representing approximately 49% and 32% of revenue, respectively.

 

Costs that are incurredinternally in researching and developing computer software products are chargedto expense until technological feasibility has been established. Oncetechnological feasibility is established, all software costs are capitalizeduntil the product is available for general release to customers.

 

Judgment is required indetermining when technological feasibility of a product is established. In mostcases, we have determined that technological feasibility for our softwareproducts/updates is reached shortly before the products are released tomanufacturing.  With the exception of InfoWorkSpace version3.0 released in 2006, costs incurred after technological feasibility havehistorically not been material, and accordingly, were expensed when incurred.

 

###### **CustomerSupport and Service**

###### ** **

We provide technicalsupport and services to our resellers and direct customers. A high level ofcontinuing service and support is critical to our objective of developinglong-lasting relationships with customers and partners. Our partners andresellers offer a broad range of support including installation, maintenanceand on-site and headquarters-level technical support of products to theirend-user customers. We provide a comprehensive service program, includingproblem management, training, diagnostic tools, software updates and upgrades,as well as spare parts programs to facilitate and supplement the efforts of ourpartners and resellers.

 

We offer atechnical support hotline to our resellers and customers, which is staffed byour network engineers who generally provide either immediate or same-dayresponses to most questions. As our products have built-in remote diagnosticcapabilities, most problems can be diagnosed without incurring travel expensesfor on-site visits. When necessary, however, support engineers are dispatchedto the customer’s facility for critical situations. All of our supportengineers carry various levels of security clearance.

 

**Third-Party Technology**

 

We license technology from third-parties, including software which isintegrated with internally developed software, and used in our products toperform key functions.  There can be noassurance that functionally similar technology will continue to be available oncommercially reasonable terms in the future, or at all.  In particular, in April 2007 we enteredinto a new agreement with Microsoft Corporation, with an effective date of January 1,2007, to extend an existing software distribution license agreement through December 2008.This agreement was subsequently amended to, among other things, extend thepayment terms through June 2011. The software distribution licenseagreement allows us to integrate Microsoft’s Live Communication software intoour InfoWorkSpace product line.

 

****Competition****

 

The market formultimedia collaboration is an emerging segment with new vendors entering thecompetitive landscape and old vendors from existing industries. Furthermore,multimedia collaboration can also be grouped into two main groups: real-timesynchronous solutions versus asynchronous products.  While most vendors adopt the client-serverarchitecture, some insist on the merit of peer-to-peer. Still yet, largevendors offer both types of 

 

7

----

Table of Contents

 

products. Fromanother perspective, vendors could be classified into two classes ofproviders:  the first group providescustomer-premise solutions while the second implements a hosted environment.

 

Even though ourbusiness primarily focuses on the real-time synchronous, client-server,customer-premise market segment within the government, depending upon thepossible perspectives, various vendors could be considered as likelycompetitors, including Adobe, Cisco, EMC, IBM, and Oracle, in this intenselycontested market segment. 

 

Many of thesecompanies, as well as other current and potential competitors, havesubstantially greater financial, technical, and sales and marketing resourcesthan we do. If we are unable to retain our existing customers in the U.S.government, or are unable to convince a sufficient number of new companies orcustomers with an interest in collaborative technologies to adopt ourInfoWorkSpace collaborative software product over alternative technologiesmarketed by our competitors, our financial results will suffer, through pricereductions and loss of market share.

 

The principalcompetitive factors in the market for multimedia collaboration are security,scalability, reliability, price, performance, network management capabilities,integration, breadth of capabilities, customer support and interoperability. Weplan to compete by offering the best-of-breed enterprise solutions encompassingall of these factors.  However, we cannotbe certain that potential customers will be attracted to our products,especially if our competitors invest substantially more money into theirproducts and technology.

 

###### **ProprietaryRights**

###### ** **

We rely on a combination of contractual rights, trade secrets andcopyright laws to establish and protect our intellectual property rights. Webelieve that, because of the rapid pace of technological change in the datacommunications and telecommunications industries, intellectual propertyprotection for our products is only one factor in our success, complementingthe knowledge, abilities and experience of our employees, the frequency of ourproduct enhancements, our relationships with our partners, our relationshipswith our customers and their satisfaction with the performance ofInfoWorkSpace, the effectiveness of our marketing activities, and theresponsiveness and quality of our services.

 

###### **Employees**

###### ** **

At December 31, 2009, we employed 24 people on a full-time basis.None of our employees is represented by a labor organization.

 

Our success depends, to a significant degree,upon the continuing contributions of our key management, sales, marketing andresearch and development personnel, many of whom would be difficult to replace,including Khoa Nguyen, our Chief Executive Officer and President.  We do not carry key-man life insurance on anyof our employees, including Mr. Nguyen. We do not have employment contracts with our key personnel other than Mr. Nguyen.We believe that our future success will depend in large part upon our abilityto attract additional key employees and retain our key employees.

 

**Availability of Filings**

 

You may access, free of charge, through ourwebsite at www.ezenia.com, our Annual Report on Form 10-K, QuarterlyReports on Form 10-Q, Current Reports on Form 8-K and any amendmentsto such reports, all filed pursuant to Section 13(a) and 15(d) ofthe Securities Exchange Act of 1934, as amended (the “Exchange Act”). Theinformation contained on our website is not incorporated by reference into thisdocument and should not be considered a part of this report.  Our website address is included in thisdocument as an inactive textual reference only.

 

###### **ITEM 1A. RISK FACTORS**

###### ** **

The risks and uncertainties described below are not the only ones thatwe face. Additional risks and uncertainties of which we are unaware, or that wecurrently deem immaterial, also may become important factors that affect us 

 

8

----

Table of Contents

 

in the future. If any of these risks were to occur, our business,financial condition, or results of operations could be materially and adverselyaffected. This section includes or refers to certain forward-lookingstatements; you should read the explanation of the qualifications andlimitations on such forward-looking statements found in the section captioned“Management’s Discussion and Analysis of Financial Condition and Results ofOperations.”

 

**Adverseeconomic and market conditions may result in further budgetary constraintswithin the defense and intelligence communities, as well as a downturn inspending on real-time collaboration solutions by other users, that couldadversely affect our revenues and results of operations.**

 

Unfavorable changes in economic and marketconditions, including inflation, recession, or other changes, may result infurther budgetary constraints on governmental users, and lower spending bycommercial, consumer and institutional users of real-time collaborationsolutions. If demand for real-time collaboration products declinessignificantly, or government or corporate spending for those products declines,our business, results of operations, and financial condition would be adverselyaffected. Challenging economic conditions also may impair the ability of ourcustomers to pay for products and services they have purchased. The adverseeffects of any sustained downturn in spending on our operating results may beexacerbated by our investment in expanding our sales, service, engineering, andmarketing organizations, which may continue despite any such downturn. There isno assurance that, if operations were to deteriorate and additional financingwere to become necessary, we would be able to obtain financing in amountssufficient to meet operating requirements or at terms which are satisfactoryand which allow us to remain competitive.

 

**The continued redirection of budget funds andincreased competition within our Department of Defense customer base wouldnegatively impact our results of operations and financial condition.**

 

We believe our revenue has declined due to redirections of the ITbudget by the Defense Information Systems Agency (“DISA”) to competingsolutions selected for the Net-Centric Enterprise Services (“NCES”)programs.  While we believe that thereare potential opportunities for limited recovery and new sales in our existingDoD customer base, we will continue to face severe difficulties in this marketdue to such redirection of budget funds and the promotion of competingsolutions by the DISA, including a collaborative product being sponsored andoffered free by the DISA to these customers.

 

**We may beunable to return to profitability**.

 

As further described under “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations”, despite our net loss in 2009,management believes that its existing cash and other resources are sufficientto fund operations for at least the next 12 months. However, we can provide no assurances that we will achieve our goal ofconsistent quarterly revenue and profit growth, both of which are largelydependent on whether we can meet our future new order booking targets. If weare unable to secure new orders, we may not be able to generate sufficientrevenue and may not be able to return to profitability.  Moreover, there are a numberof circumstances which could result in our needing additional capital soonerthan anticipated, such as unexpected costs associated with our productdevelopment and sales and marketing efforts. If adequate capital is not available to us when weneed it, we may be required to further curtail our operations which would, inturn, further raise doubt about our ability to return to profitability.

 

**Asignificant portion of our revenue is attributable to a small number of majorcustomers,****none of whom is obligated to continue to useour products and services.**

 

While we are focusing efforts on broadening our customer base, sales toa relatively small number of customers within the U.S. government, specificallywithin the DoD and the intelligence community, have accounted for a significantportion of revenue.  This concentrationof customers may cause revenue and operating results to fluctuate from quarterto quarter based on major customers’ requirements, and the timing of theirorders and shipments. Our agreements with customers generally do not includeminimum purchase commitments or

 

9

----

Table of Contents

 

exclusivity arrangements.  Ouroperating results could be materially and adversely affected if any presentmajor customer were to reduce its level of orders, change to another vendor,realize a reduction in approved funding for collaborative technologies, ordelay paying or fail to pay amounts due to us.

 

**Loss of access to certain third-party technology utilized inour products could materially harm our business.**

 

We utilize certaintechnology which we license from third parties, including software which isintegrated with internally developed software, and use in our products toperform key functions.  There can be noassurance that functionally similar technology will continue to be available oncommercially reasonable terms in the future, or at all.  In April 2007, we entered into a newagreement with Microsoft Corporation to extend an existing softwaredistribution license agreement through December 2008. This agreement wassubsequently amended to, among other things, extend its payment terms through June 2011.  This software distribution license agreementallows us to integrate Microsoft’s Live Communication software with ourproprietary software, to create InfoWorkSpace.  Loss of access to this third-partytechnology, whether due to termination or expiration of the agreement withMicrosoft or the failure to renew the agreement, would result in material harmto our business and results of operations.

 

**Our successdepends upon market acceptance of our collaboration products.**

 

Sales of real-time collaboration productsaccount for all of our revenue. As a result, our success depends on theacceptance and the rate of adoption of Internet-based collaboration products,in general, and our InfoWorkSpace product, inparticular.  We can provide no assurancethat any of the markets for our products will develop to the extent, in themanner, or at the rate anticipated by us. In particular, while our sales have historically been within certainorganizations of the U.S. government and intelligence community, we arepursuing the sale of our products in the commercial market as well.  There can be no assurance of success in thecommercial market for InfoWorkSpace, or otherproducts that we may introduce in 2010 or beyond. In addition, future pricesthat we are able to obtain for our products may decrease as a result of newproduct introductions by others, price competition, technological change orother factors.

 

**If we areunable to adapt to the rapid pace of change in our market, our business couldbe adversely affected.**

 

Our market is characterized by changingtechnology, emerging industry standards, evolving network developments andproduct introductions.  The adoption rateof new technologies and products may adversely impact near-term growth of the conferencingmarket as users evaluate the alternatives. For 2010 we plan to continue investments in the enhancement anddevelopment of our current and new products to address the evolving technologylandscape.  Our success will depend, inpart, upon our ability through continued investments to maintain technologicalleadership, to enhance our existing product offerings, and to develop newproducts that achieve market acceptance.

 

**Our resultsof operations would suffer if we are unable to effectively compete in themarket for multimedia collaboration products.**

 

The market for multimedia collaborationproducts is highly competitive. A number of companies have introducedcompetitive products. Furthermore, the market may attract new entrants. Somecompetitors have longer operating histories and greater financial, technical,sales, and marketing resources.  If wewere unable to retain our existing customers, or convince a sufficient numberof new customers to adopt our collaborative software products over competitivealternatives, our financial results would suffer.

 

The principal competitive factors in the market for multimediacollaboration are, and  are expected tocontinue to be, breadth of capabilities, demonstrated interoperability, price,performance, network management capabilities, reliability, scalability,customer support and security.  We planto compete by offering collaboration

 

10

----

Table of Contents

 

and enterprise products with a broad range of capabilities and highperformance.  However, we cannot becertain that potential customers will be attracted to our products, especiallyif competitors were to invest substantially more money into their products andtechnology.

 

**If we release products containingdefects or experience delays in releasing new products, our competitiveposition could be adversely effected.**

 

As part of our strategy, we expect to releasenew products and new versions of our existing products.  Even if our new versions of existing productscontain the features and functionality that our customers desire, if we areunable to timely introduce these new products or product releases, ourcompetitive position will be harmed.  Wecan provide no assurances that we will be able to successfully complete thedevelopment of currently planned or future products or product releases in atimely manner or at all.  Also, due tothe complexity of our products, internal quality assurance testing and customertesting of pre-commercial releases may reveal product performance issues ordesirable product enhancements that could cause delays in development andrelease of future products or current upgrades of our existing products.

 

**We may be unsuccessful in protecting ourintellectual property rights which could result in the loss of a competitiveadvantage.**

 

Ourability to compete effectively against other companies in our industry depends,in part, on our ability to protect our current and future proprietarytechnology under patent, copyright, trademark, trade secret and unfaircompetition laws. We cannot assure that our means of protecting our proprietaryrights in the United States or abroad will be adequate, or that others will notdevelop technologies similar or superior to our technology or design around ourproprietary rights. In addition, we may incur substantial costs in attemptingto protect our proprietary rights.

 

Also,we may become subject to claims that we infringe the intellectual propertyrights of others in the future. We cannot assure that, if made, these claimswill not be successful. Any claim of infringement could cause us to incursubstantial costs defending against the claim even if the claim is invalid, andcould distract management from other business. Any judgment against us couldrequire substantial payment in damages and could also include an injunction orother court order that could prevent us from offering certain products.

 

**The loss ofor failure to retain or attract talented directors, officers and personnelcould harm our business.**

 

Our success depends, to a significant degree,upon the continuing contributions of our key management, sales, marketing, andresearch and development personnel, some of whom would be difficult to replace,including Khoa Nguyen, our Chief Executive Officer and President.  We do not carry key-man lifeinsurance on any of our employees, including Mr. Nguyen.  We do not have employmentcontracts with our key personnel other than Mr. Nguyen. We believe thatour future success will depend in large part upon our ability to retain andattract such key employees.

 

As the result of ourdiminishing financial resources, our workforce has been reduced byapproximately one-half since December 31, 2006, from 47 to 24 employees asof December 31, 2009.  As a result,our ability to continue many activities has been impaired, which in turn mayprevent or further delay our return to profitability and otherwise have amaterial adverse effect on our results of operations and financial condition.

 

Moreover, we have five directors on our Board of Directors, three ofwhom meet the standards for independence as specified by the SEC and thenational stock exchanges.  Historically,we have strived to have an audit committee comprised of at least threeindependent directors, as required by the national stock exchanges.  Currently, we have two directors serving onour audit committee. We are continuing in our attempts to identify additionalqualified individuals to serve as independent directors.  However, highly-qualified individuals may not

 

11

----

Table of Contents

 

be available or willing to serve as directors and there can be noassurance that we will be able to identify, recruit and ultimately secure theservices of such individuals in a timely manner or at all.

 

**The trading price of our common stock may continue to be volatile,which may adversely affect our business, and investors in our common stock mayexperience substantial losses.**

 

The market price of our common stock, like that of other technologycompanies, is highly volatile and is subject to wide fluctuations in responseto quarterly variations in operating results, or other events or factors. Ourstock price may also be affected by broader market trends unrelated to ourperformance.  Due to this volatility,investors in our common stock may experience substantial losses.

 

**Our common stock is traded on the OTC Bulletin Board, making it a less liquid investment than if it were traded on a national securities exchange.**

 

The shares of our common stock were delisted from The Nasdaq National Market in August 2003 and are now traded on the OTC Bulletin Board. As a result, an investor may find it more difficult to dispose of our stock due to low trading volume or obtain accurate quotations as to the market value of our stock. In addition, we are subject to Rule 15c2-11 promulgated by the SEC (“Rule 15c2-11”). If we fail to meet criteria set forth in such rule (for example, by failing to file periodic reports as required by the Exchange Act), various practice requirements are imposed on broker-dealers who sell securities governed by Rule 15c2-11 to persons other than established customers and accredited investors. For these types of transactions, the broker-dealer must make a special suitability determination for the purchaser and have received the purchaser’s written consent to the transactions prior to sale. Consequently, Rule 15c2-11 may have a material adverse effect on the ability of broker-dealers to sell our securities, which may materially affect the ability of stockholders to sell the securities in the secondary market. The listing of our securities on the OTC Bulletin Board may make it more difficult for investors to trade in our securities, which could lead to further declines in our share price. Our shares being traded on the OTC Bulletin Board also makes it more difficult for us to raise additional capital, as we may incur additional costs under state blue sky laws if we were to sell additional securities.

 

**Provisions of Delaware law, our charter and by-laws and ourshareholder rights plan may make a takeover more difficult.**

 

Provisions of our certificate of incorporation andby-laws and in the Delaware corporate law may make it difficult and expensivefor a third party to pursue a tender offer, change in control or takeoverattempt that is opposed by our management and Board of Directors. Moreover, ourshareholder rights plan, adopted in April 2008, could make it moredifficult for a third party to acquire, or could discourage a third party fromacquiring, our company or a large block of our common stock. A third party thatacquires 15% or more of our common stock (an “acquiring person”) could suffersubstantial dilution of its ownership interest under the terms of theshareholder rights plan through the issuance of common stock or common stockequivalents to all shareholders other than the acquiring person. We also have astaggered board of directors that makes it difficult for stockholders to changethe composition of our board of directors in any one year. These anti-takeoverprovisions could impede the ability of public stockholders to change ourmanagement and Board of Directors.

 

###### **ITEM1B. UNRESOLVED STAFF COMMENTS**

###### ** **

###### **There are no unresolved staffcomments as of the date of this report.**

###### ** **

###### **ITEM2. DESCRIPTION OF PROPERTY**

###### ** **

Our corporateoffice and principal research, development and manufacturing facility islocated in Nashua, New Hampshire, in an approximately 12,000 square footfacility.  We currently lease thisfacility pursuant to a lease agreement that terminates in 2010. We also have asales office located in Sterling, Virginia, which we lease pursuant to a leaseagreement that terminates in 2013. During 2007, we completed our consolidation of our Colorado Springs andNashua facilities in Nashua, New Hampshire.

 

12

----

Table ofContents

 

###### **ITEM 3. LEGAL PROCEEDINGS**

###### ** **

We are subject tovarious legal proceedings and claims that arise in the ordinary course ofbusiness. We believe that the outcomes of these matters will not materially andadversely affect our business, financial position or financial results.

 

###### **ITEM 4. (REMOVED AND RESERVED.)**

 

13

----

Table of Contents

 

**PART II**

 

**ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATEDSTOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES**

 

Since 2003, our common stock has been quoted on the OTC Bulletin Board,under the symbol “EZEN.OB”.  Thefollowing table sets forth, for the periods indicated, the high and low bid orsale prices per share of our common stock as reported on the OTC BulletinBoard.

 
| ** **                    | ** ** | **Quarter ended** | ** ** |
|-------------------------------|------------|-------------------|------------|
| ** **                    | ** ** | **March 31** | ** ** | **June 30** | ** ** | **September 30** | ** ** | **December 31** | ** ** |
| 2009                          | ** ** | ** **        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Common stock price - high     |       | $                 | 0.17       |   | $ | 0.25 |   | $ | 0.23 |   | $ | 0.18 |   |
| Common stock price – low |       | $                 | 0.06       |   | $ | 0.08 |   | $ | 0.11 |   | $ | 0.07 |   |
|                          | ** ** | ** **        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| 2008                          | ** ** | ** **        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Common stock price - high     |       | $                 | 0.75       |   | $ | 0.65 |   | $ | 0.47 |   | $ | 0.35 |   |
| Common stock price – low |       | $                 | 0.52       |   | $ | 0.46 |   | $ | 0.30 |   | $ | 0.05 |   |

 

As of March 16,2010, we had approximately 112 stockholders of record. This does not reflectpersons or entities that hold their stock in nominee or “street” name throughvarious brokerage firms. We have not paid dividends on our common stock and weanticipate that we will reinvest future earnings, if any, and therefore, do notintend to pay dividends in the foreseeable future.

 

See Part III,Item 12 for information regarding securities authorized for issuance under ourequity compensation plans.

 

###### **ITEM6. SELECTED FINANCIAL DATA**

###### ** **

The selected consolidated financial datashould be read in conjunction with “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations” and our audited consolidatedfinancial statements.

 

(Inthousands, except per share amounts)

 
| ** **                          | ** ** | **Year ended December 31,** | ** ** |
|-------------------------------------|------------|----------------------------------|------------|
| ** **                          | ** ** | **2009**                         | ** ** | **2008** | ** ** | **2007 (1)** | ** ** | **2006 (2)** | ** ** | **2005 (3)** | ** ** |
| **OPERATING DATA**                  |       |                             |       |   |   |   |   |   |   |   |   |
| Revenue                             |       | $                                | 3,532      |   | $ | 6,683 |   | $ | 8,988 |   | $ | 13,192 |   | $ | 13,175 |   |
|                                |       |                             |       |   |   |   |   |   |   |   |   |
| Operating income (loss)             |       | (3,518                           | )          | (3,126 | ) | (4,410 | ) | 2,899 |   | 3,511 |   |
|                                |       |                             |       |   |   |   |   |   |   |   |   |
| Income (loss) before income  taxes  |       | (3,427                           | )          | (3,069 | ) | (3,836 | ) | 3,405 |   | 3,712 |   |
|                                |       |                             |       |   |   |   |   |   |   |   |   |
| Net income (loss)                   |       | (3,427                           | )          | (3,069 | ) | (4,547 | ) | 3,918 |   | 3,803 |   |
| Net income (loss) per share:        |       |                             |       |   |   |   |   |   |   |   |   |
| Basic                               |       | (0.23                            | )          | (0.21 | ) | (0.31 | ) | 0.27 |   | 0.26 |   |
| Diluted                             |       | (0.23                            | )          | (0.21 | ) | (0.31 | ) | 0.26 |   | 0.25 |   |
| ** **                          |       |                             |       |   |   |   |   |   |   |   |   |
| **BALANCE SHEET DATA**              |       |                             |       |   |   |   |   |   |   |   |   |
| Cash and cash equivalents           |       | $                                | 4,383      |   | $ | 6,774 |   | $ | 9,395 |   | $ | 12,059 |   | $ | 9,405 |   |
| Total current assets                |       | 5,920                            |       | 8,856 |   | 13,598 |   | 19,482 |   | 16,864 |   |
| Stockholders’ equity (deficit) |       | 2,866                            |       | 5,420 |   | 7,773 |   | 11,901 |   | 7,932 |   |

 

14

----

Table of Contents

 

----

(1) 2007 amounts include a charge of $1.45 million to reserve forexcess purchase commitments under the Microsoft license agreement, which wasrecorded as a component of cost of product revenue, and income tax expense of$711,000 related to an increase in the valuation allowance for deferred taxassets recorded in 2006 and 2005.

 

(2) 2006 amounts include a tax benefit of $513,000, or $0.04 pershare, related to a reduction in the valuation allowance associated withdeferred tax assets of approximately $579,000 offset by approximately $66,000of current federal and state tax expense.

 

(3) 2005 amounts include a tax benefit of $91,000, or $0.01 pershare, related to a reduction in the valuation allowance associated withdeferred tax assets.

 

**Quarterly financialinformation (unaudited)**

 
| ** **            | ** ** | **Quarter ended** | ** ** |
|-----------------------|------------|-------------------|------------|
| ** **            | ** ** | **March 31** | ** ** | **June 30** | ** ** | **September 30** | ** ** | **December 31** | ** ** |
| 2009                  |       |              |       |   |   |   |   |   |   |
| Revenue               |       | $                 | 989        |   | $ | 907 |   | $ | 819 |   | $ | 817 |   |
| Gross profit          |       | 522               |       | 508 |   | 549 |   | 606 |   |
| Loss from operations  |       | (943              | )          | (1,002 | ) | (901 | ) | (672 | ) |
| Net (loss)            |       | $                 | (937       | ) | $ | (964 | ) | $ | (864 | ) | $ | (662 | ) |
| Net (loss) per share: |       |              |       |   |   |   |   |   |   |
| Basic                 |       | $                 | (0.06      | ) | $ | (0.07 | ) | $ | (0.06 | ) | $ | (0.04 | ) |
| Diluted               |       | $                 | (0.06      | ) | $ | (0.07 | ) | $ | (0.06 | ) | $ | (0.04 | ) |
| 2008                  |       |              |       |   |   |   |   |   |   |
| Revenue               |       | $                 | 1,811      |   | $ | 1,739 |   | $ | 1,745 |   | $ | 1,388 |   |
| Gross profit          |       | 1,122             |       | 1,063 |   | 1,076 |   | 847 |   |
| Loss from operations  |       | (587              | )          | (920 | ) | (747 | ) | (872 | ) |
| Net (loss)            |       | $                 | (553       | ) | $ | (883 | ) | $ | (748 | ) | $ | (885 | ) |
| Net (loss) per share: |       |              |       |   |   |   |   |   |   |
| Basic                 |       | $                 | (0.04      | ) | $ | (0.06 | ) | $ | (0.05 | ) | $ | (0.06 | ) |
| Diluted               |       | $                 | (0.04      | ) | $ | (0.06 | ) | $ | (0.05 | ) | $ | (0.06 | ) |

** **

**ITEM 7. MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

** **

**Safe Harbor For Forward Looking Statements**

 

*Management’s Discussionand Analysis of Financial Condition and Results of Operations (“MD&A”)should be read in conjunction with the Consolidated Financial Statements andNotes included in Item 8 of this Annual Report. MD&A contains “forward-looking”statements and information which involve risks and uncertainties.  Statements indicating that we “expect,” “estimate,”“believe,” “are planning,” “plan to,” “intend” or “will” are forward-looking,as are other statements**concerningour business strategy, our proposed new product offerings, key differentiatorsin our market, changes in the competitive landscape, future financial results,our ability to generate cash and to meet our working capital needs, and otherevents that have not yet occurred. These forward-looking statements are neitherpromises nor guarantees, but involve risks and uncertainties that may causeactual results to differ materially from those in the forward-lookingstatements. Factors that may cause such differences include, but are notlimited to, the impact of global economic and political conditions on ourbusiness, our ability to maintain or accurately forecast revenue growth, ourhistory of liquidity concerns and operating losses,  customer acceptance of our**InfoWorkSpace**product and other new products, our ability to compete inan intensely competitive market, our ability to develop and introduce newproducts or enhancements on schedule and that respond to customer requirementsand rapid technological change, our dependence on the*

 

15

----

Table of Contents

 

*U.S.government as our largest customer, budgetary constraints within the defenseand intelligence communities, our ability to select and implement appropriatebusiness models, plans and strategies and to execute on them, our ability toidentify, hire, train, motivate, and retain highly qualified management/other keypersonnel and our ability to manage changes and transitions in management/otherkey personnel, our reliance on third-party technology, and unauthorized use ormisappropriation of our intellectual property, as well as the risk factorsdiscussed in Item 1A of this Annual Report and in other periodic reports filedwith the SEC.  Readers should not placeundue reliance on any such forward-looking statements, which speak only as ofthe date they are made. We disclaim any obligation to publicly update or reviseany such statement to reflect any change in our expectations or in events,conditions, or circumstances on which any such statements may be based, or thatmay affect the likelihood that actual results will differ from those containedin the forward-looking statements.*

 

**Overview**

 

In 2009, overall revenue decreased approximately 47% when compared tothe year ended December 31, 2008. The reduction in revenue is primarily attributed to a decrease inrenewals and sales from certain DoD customers as well as budgetaryconsolidations and the promotion of competing solutions by the DISA, includinga collaborative product being sponsored and offered for free by the DISA tothese customers.   As a result, weexperienced an operating loss of $3.5 million and a net loss of approximately$3.4 million in 2009 compared to an operating loss of $3.1 million and a netloss of approximately $3.1 million in 2008, resulting in a loss of $0.23 pershare in 2009, compared to a loss of $0.21 per share in 2008.

 

Revenue relating to our InfoWorkSpace product decreased approximately47% in 2009 compared to 2008.  Grossprofit also declined approximately 47% compared to 2008, but the gross profitpercentage increased .7% to 61.9% in 2009 as compared to 2008. Operatingexpenses decreased $1.5 million to $5.7 million for 2009, as compared to $7.2million for 2008. The decrease in our operating expenses in 2009, whichincludes an increase of $143,000 share-based compensation expense resultingfrom a revision to our forfeiture rate estimates based on actual historicalactivity, was a result of further spending reductions and belt-tighteningmeasures in all areas of the company in response to declining revenue. Ourother income increased slightly year over year as we saw an increase in investmentgains, offset partially by a decrease in our interest earned, due to lowerinterest rates and a lower average cash balance.

 

In 2007, we entered into a new agreement withMicrosoft to extend an existing software distribution license agreement throughDecember 2008.  Under the agreement,we were required to purchase a minimum of $1.7 million during 2007 and $2.75million of licenses during 2008, plus purchase an additional $0.5 million overthe life of the two year agreement. During 2007, we reviewed our forecast forlicense sales over the balance of the agreement and recorded a charge of $1.45million to reserve for an excess purchase commitment.  The charge was recorded as a component ofcost of product revenue during the year ended December 31, 2007.

 

In December 2008, the Microsoftagreement was amended to extend the term through June 2011 and reduce theremaining purchase commitment to $2.75 million, $154,000 of which was satisfiedduring 2008 and $840,000 in 2009.  Theamended agreement requires that we make additional payments of $1.1 million and$0.7 million during 2010 and 2011, respectively.  In addition to the remaining $1.8 millionlicense purchase commitment, we have approximately $1.1 million of prepaidlicenses on hand that have yet to be deployed to customers.  During 2009, we continued to experience adecline in the volume of our customer license renewals.  As of December 31, 2009, we reviewed ourforecast for license sales through the amended term (June 2011) andbelieve that the $1.45 million reserve remains the appropriate reserve for theexcess purchase commitment.   Thecomputation of the excess purchase commitment reserve requires management tomake certain assumptions regarding future license renewals and salesgrowth.  Actual results may differmaterially from management’s estimates.

 

Although our revenue has declined as a resultof the redirections of IT budget by the DISA, coupled with the currentdifficult economic conditions which lengthen the business development and salesactivities on the commercial segment, our immediate focus is to continue toenhance our existing various collaborative product and service offerings and todevelop and ultimately deploy the next generation of products and services, viaaggressive 

 

16

----

Table of Contents

 

and concentrated sales, service, engineering,and marketing efforts. We plan to continue to vigorously defend and endeavor toprotect our customer base within the military and intelligence community, whilepursuing new opportunities with various agencies and first responders dealingwith the threat of terrorism and natural disasters, as well as emergingcommercial applications. This focus is subject to change as the drivinginfluence in our future direction is based on the needs and requirements of ourcustomer base, both current and future, and may be adversely affected bycurrent economic and market conditions.

 

**Critical Accounting Policies**

 

****The discussion and analysis of our financialcondition and results of operations are based upon our consolidated financialstatements, which have been prepared in accordance with accounting principlesgenerally accepted in the United States. The preparation of these financialstatements requires us to make estimates and judgments that affect the reportedamounts of assets, liabilities, revenue and expenses and related disclosure ofcontingent assets and liabilities. On an ongoing basis, we evaluate ourestimates, including those related to revenue recognition, bad debts,inventories, income taxes and warranty obligations. We base our estimates onhistorical experience and on various other assumptions that we believe to bereasonable under the circumstances, the results of which form the basis formaking judgments about the carrying value of assets and liabilities that arenot readily apparent from other sources. Actual results may differ from theseestimates under different assumptions or conditions. We believe the followingcritical accounting policies and the related judgments and estimates affect thepreparation of our consolidated financial statements.****

 

****Revenue Recognition****

 

****Product revenue consists of sales of****InfoWorkSpace****software licenses and maintenance agreements,****InfoWorkSpace****product related training, installation, andconsulting. Revenue from sales of****InfoWorkSpace****software license and maintenance agreements isrecognized ratably over the subscription software license contract periods,which are generally one year. Revenue from****InfoWorkSpace****training, installation, and consulting services arerecognized as the services are performed provided there is vendor specificobjective evidence of fair value, which is the price charged when the servicesare sold separately.****

 

****Product development revenue relates to contractsinvolving customization of the****InfoWorkSpace****product according to a customer’s specifications.When reliable estimates are available for the costs and efforts necessary tocomplete the product development and the contract does not include contractualmilestones or other acceptance criteria, product development revenue isrecognized under the percentage-of-completion contract method based upon inputmeasures, such as hours.  When suchestimates are not available, we defer all revenue recognition until we havecompleted the contract and have no further obligations to the customer.  Revenue associated with contracts for productdevelopment revenue with milestone-based deliverables requiring a customer’sacceptance is recognized upon the customer’s acceptance in accordance with theterms of the contract.  The associatedcost recognition with these deliverables or milestones is deferred until theterms of acceptance are satisfied and revenue is recognized. Certain of ourproduct development contracts are subject to government audit and retroactiveadjustment of the direct and indirect costs used to determine the contractbillings.  Product development revenueand accounts receivable reported in the financial statements are recorded atthe amount expected to be received. Product development revenue is adjusted to actual upon final audit andretroactive adjustment.  Estimatedcontractual allowances are provided based on management’s evaluation of currentcontract terms.****

 

****Products and software licenses are sold without anycontractual right of return by the customer. Deferred revenue represents amounts received from customers undersubscription software licenses, maintenance agreements, or for product sales inadvance of revenue recognition. Judgments are required in evaluating the creditworthiness of ourcustomers.  In all instances, revenue isnot recognized until we have evidence of an arrangement, the fee is fixed anddeterminable and collectability is reasonably assured.  Amounts billed to customers related toshipping and handling charges are recorded upon shipment and the related costsare included in cost of goods sold.****

 

17

----

Table of Contents

 

****Allowance for Doubtful Accounts****

 

****Our policy is to maintain allowances for estimatedlosses resulting from the inability of our customers to make required payments.Credit limits are established through a process of reviewing the financialhistory and stability of each customer. Where appropriate, we obtain creditrating reports and financial statements of the customer when determining ormodifying their credit limits. We regularly evaluate the collectability of ourtrade receivable balances based on a combination of factors. When a customer’saccount balance becomes past due, we initiate dialogue with the customer todetermine the cause. If it is determined that the customer will be unable tomeet its financial obligation to us, such as in the case of a bankruptcyfiling, deterioration in the customer’s operating results or financialposition, or other material events impacting the customer’s business, we recorda specific allowance to reduce the related receivable to the amount we expectto recover given all information presently available.****

 

****At December 31, 2009, our accounts receivablebalance of approximately $129,000 is reported net of allowances ofapproximately $28,000. We believe our reported allowances are adequate. If thefinancial conditions of our customers were to deteriorate, however, resultingin their inability to make payments, we may need to record additionalallowances, which would result in additional expenses being recorded for theperiod in which such determination was made.****

 

**Accountingfor Share-Based Compensation**

 

Wehave stock option plans that provide for the purchase of our common stock bycertain of our employees, directors, and advisory board members. We recognizecompensation expense for our share-based payments based on the fair value ofthe awards. Share-based payments include stock option grants under our stockoption plans.

 

The determination of the fair value of share-based payment awardsincludes estimating the expected life of the award, the expected stock pricevolatility over the expected life of the awards, expected dividend yield, andrisk-free interest rate. Expected volatilities are based on historicalvolatility of our common stock.  We basethe expected term of the options on our historical option exercise data with aminimum life expectancy equal to the vesting period of the option.  We base the risk-free interest rate on theU.S. Treasury yield in effect at the time of the grant for a term closest tothe expected life of the options. Expected dividend yield is not considered aswe have not made any dividend payments and have no plans of doing so in theforeseeable future. Forfeitures are estimated based upon our historicalexperience. This estimate is adjusted periodically based on the extent to whichactual forfeitures differ, or are expected to differ, from the previousestimate.

 

**We recorded $873,000 and $703,000of share-based compensation expense in 2009 and 2008, respectively.**During 2009 wereviewed our recent unvested option forfeiture history and revised ourestimated forfeitures to an annual rate of 15% and trued up the recordedcompensation expense to the revised rate. This estimate revision increased expenses by approximately $143,000 in2009.

** **

****Income Taxes****

 

****The calculation of tax assets and liabilitiesinvolves significant judgment in estimating the impact of uncertainties in theapplication of complex tax laws. Deferred tax assets and liabilities are determined at the end of eachyear based on the future tax consequences that can be attributed to netoperating loss and credit carryovers as well as the differences between thefinancial statement carrying amounts of existing assets and liabilities andtheir respective tax bases.  The deferredtax assets are reduced by a valuation allowance if it is more likely than notthat the tax benefits will not be realized. The realization of deferred tax assets is dependent upon the generationof future taxable income.  In determiningthe valuation allowance, we consider past performance, expected future taxableincome, and qualitative factors when estimating future taxable income.  Our forecast of expected future taxableincome is for future periods that can be reasonably estimated.  Changes in results that differ materiallyfrom our current expectations may cause us to change our judgment on futuretaxable income. These changes, if any, may require us to adjust our existingtax valuation allowance higher or lower than the amount we have previouslyrecorded.****

 

18

----

Table of Contents

 

**Results of Operations — Years Ended December 31, 2009 and 2008**

 

## **Revenue**

## ** **

## **Revenuedeclined 47% in 2009 to approximately $3.5 million when compared to 2008.Product revenue related to**InfoWorkSpace declined approximately $3.1 million or 47%, while product developmentrevenue declined by approximately $52,000. Product development revenue isrevenue related to product customization work performed for customers seekingenhancements to our current product. During 2008, product development revenueincluded $67,000 related to the completion of reviews of development projectsthat occurred from 2004 to 2007.  Thedecline in license revenue in 2009 was the result of a shortfall in licenserenewals primarily due to redirections of the IT budget by the DISA and thesecond NCES contract award to our competitor, which resulted in a number of ourexisting customers not renewing their licenses and/or reducing the number oflicenses used.  We believe that if wesuccessfully execute on our strategy, we will be able to compensate for thisdecline in license renewals, at least in part, by the introduction of our productto new customers.

## ** **

## **Gross profit**

## ** **

## **Cost ofrevenue includes material costs, costs of third-party software licenses, directlabor and overhead, customer support costs, and engineering and developmentcosts associated with sponsored and customized product development revenue.Gross profit as a percentage of revenue increased in 2009 to 61.8%, from 61.5%in 2008.**

## ** **

**Research and development**

 

Research and development expenses include payroll, employee benefits,other headcount-related costs, and miscellaneous costs associated with productdevelopment. Research and development expenses decreased to approximately $1.7million in the year ended December 31, 2009, from approximately $2.1million in 2008. This decrease is primarily attributable to a reduction in thenumber of employees, recruiting, supplies and consulting costs.

 

**Sales and marketing**

 

Sales and marketing expenses include payroll, employee benefits, andother headcount-related costs associated with sales and marketing personnelalong with expenses pertaining to advertising, tradeshows, seminars, and othermarketing-related programs.  Sales andmarketing expenses decreased 50% to approximately $1.0 million in 2009 fromapproximately $2.0 million in the year ended December 31, 2008. Thisdecrease is primarily attributable to an elimination of commercial and federalsales and business development personnel located in New Jersey, Florida,California and associated consultants in addition to a flattening of theorganization, thereby resulting in significant cost savings and bringing theexpense profile more in line with the focus of the business.  Currently, all new Federal and DoD businessis primarily consolidated in our Sterling, Virginia office while renewals andcommercial business is mainly driven from the Nashua, New Hampshireheadquarters.  As the current productline InfoWorkSpace evolves with additional enhancements and new productderivatives are expected to be launched, sales and marketing currently remainour primary focus for investment in order to rebuild our revenue.. .

 

**General and administrative**

 

General and administrative costs include payroll, employee benefits,and other headcount-related costs associated with the finance, human resources,management information systems, and other administrative headcount, and legaland investor relations costs, and other administrative fees.  General and administrative expenses wereapproximately $2.5 million in 2009, an increase of $0.1 million over thoseincurred in 2008.  An increase ofapproximately $115,000 is attributable to a revision to our forfeiture rate estimates based onactual historical activity, and resulting adjustment to share-basedcompensation expense in 2009. An additional increase of approximately 

 

19

----

Table of Contents

 

$130,000 is the result of market gains recorded as deferredcompensation expense along with increases in headcount-related expenses offsetby decreases in relocation, consulting, and legal and professional expenses.

 

**Occupancy and other facilities-related expenses**

 

Occupancy and other facilities-related expenses decreased 18% toapproximately $259,000 in the year ended December 31, 2009, fromapproximately $317,000 in 2008. These costs include rent expense and otheroperating costs associated with our headquarters in Nashua, New Hampshire, andour sales offices in Sterling, Virginia. This decrease is primarily due to areduction in telecommunications charges and software licenses due to vendorchanges and insurance expense.

 

**Restructuring charge**

 

We recorded a $215,000 charge to operationsin 2007 in recognition of our consolidation of our Colorado Springs and Nashuafacilities in Nashua, New Hampshire, which was completed in December 2007.An additional restructuring charge of $219,000 was recorded in 2008, as weexperienced delays in finding a subtenant for the Colorado facility. The chargerepresents the estimated future costs of the lease pertaining to the ColoradoSprings facility, net of estimated sublease proceeds.

 

**Interest income**

 

Interest income consists of interest on cash and cash equivalents.  Interest income decreased to approximately$45,000 in 2009 from approximately $155,000 in 2008. The decrease in 2009 wasprimarily related to a decrease in the interest rates and a reduced cashbalance.

 

**Other income**

** **

**Other income consists of gains and losses related toshort-term mutual fund investments. In 2009, we recorded a gain ofapproximately $46,000 due to the increase in the market value of our short-terminvestments, while we recorded a loss due to a decline in the market value ofapproximately $98,000 in 2008.**

** **

**Income tax benefit**

** **

**Due to the uncertainty of future taxable income, we havenot recorded an income tax benefit for the losses incurred in 2009 and 2008.**

** **

**Liquidity and Capital Resources**

 

**At December 31, 2009, we had cash and cash equivalents ofapproximately $4.4 million. **We incurred a loss from operations of approximately $3.5 million for theyear ended December 31, 2009, and a net loss for the year of approximately$3.4 million, as compared with an operating loss in 2008 of approximately $3.1million, and a net loss of approximately $3.1 million in 2008.

** **

**We usedcash for operations of $2.3 million in fiscal year 2009 compared to expendingcash of $2.6 million in 2008. Cash expended for operating activities in 2009was primarily the result of a net loss and a decline in deferred revenue,offset by a decrease in accounts receivable and non-cash items such asdepreciation, and share-based compensation. Cash used by operating activitiesin 2008 was primarily the result of a net loss and a decline in deferredrevenue offset by decreases in accounts receivable and prepaid softwarelicenses, and non-cash items such as depreciation, amortization of capitalizedsoftware and share-based compensation.**

** **

**Weinvested approximately $43,000 in property and equipment in fiscal 2009compared to $45,000 in fiscal 2008. We generated cash from financing activitiesof $13,000 in 2008 primarily from proceeds of sales of our common stockpursuant to our various stock plans, and no cash from financing activities in2009.**

 

20

----

Table of Contents

 

We lease our primary facility in Nashua, New Hampshire, under anoperating lease, which expires in August 2010. In July 2007, wesigned an additional lease for 6,000 square feet adjacent to our existing rentedspace in Nashua, New Hampshire.  Thislease will expire in August 2010. We also have leased office space,located in Sterling, Virginia which was recently extended to June 2013.  Future minimum lease obligations at December 31,2009, under all of these non-cancelable operating leases are $84,000 in 2010,$98,000 in 2011, $35,000 in 2012 and $18,000 in 2013.

 

In September 2007, we announced our plan to consolidate ourColorado Springs and Nashua facilities in Nashua, New Hampshire by the end of2007.  We recorded a restructuring chargeof $215,000 to cover the expected lease payments of the Colorado Springsfacility, net of expected sublease proceeds. In 2008, we reassessed ourexposure in consideration of the current real estate market and interest in thespace to date by potential subtenants. Based on the resulting conclusions, we recorded an additionalrestructuring charge of $219,000 in 2008. The space is leased by us through November 2011and is currently available for subleasing. We estimate that we will have to pay$228,000, net of estimated sublease proceeds, over the remaining lease term.Our gross remaining obligation on the lease, including estimated operatingexpenses, is approximately $394,000.

 

In April 2007, we entered into a newagreement with Microsoft to extend an existing software distribution licenseagreement through December 2008. Under the agreement, we are required to purchase a minimum of $1.7million and $2.75 million of licenses during 2007 and 2008 respectively, pluspurchase an additional $0.5 million over the life of the two year agreement.During 2007, we reviewed our forecast for license sales over the balance of theagreement and recorded a charge of $1.45 million to reserve for an excesspurchase commitment.  The charge was recordedas a component of cost of product revenue during the year ended December 31,2007.

 

In December 2008, the Microsoftagreement was amended to extend the term through June 2011 and reduce theremaining purchase commitment to $2.75 million, $154,000 of which was satisfiedduring 2008 and $840,000 in 2009.  Theamended agreement requires that we make additional payments of $1.1 million and$0.7 million during 2010 and 2011, respectively.  In addition to the remaining $1.8 millionlicense purchase commitment, we have approximately $1.1 million of prepaidlicenses on hand that have yet to be deployed to customers.  During 2009, we continued to experience adecline in the volume of our customer license renewals and a lengthening of thesales cycle for new license sales.  As ofDecember 31, 2009, we reviewed our forecast for license sales through theamended term (June 2011) and believe that the $1.45 million reserveremains the appropriate reserve for the excess purchase commitment.   The computation of the excess purchasecommitment reserve requires management to make certain assumptions regardingfuture license renewals and sales growth. Actual results may differ materially from management’s estimates.

 

Weinclude standard intellectual property indemnification provisions in ourlicensing agreements in the ordinary course of business. Pursuant to ourproduct license agreements, we will indemnify, hold harmless, and agree toreimburse the indemnified party for losses suffered or incurred by theindemnified party, generally business partners or customers, in connection withcertain patent, copyright or other intellectual property infringement claims bythird parties with respect to our products. Other agreements with our customersprovide indemnification for claims relating to property damage or personalinjury resulting from the performance of services by us or our subcontractors.Historically, our costs to defend lawsuits or settle claims relating to suchindemnity agreements have been insignificant. Accordingly, the estimated fairvalue of these indemnification provisions is immaterial.

 

**In May 2003, after failing tocomply with certain continued listing standards for the NASDAQ SmallCap Market,including maintaining a minimum bid price of at least $1.00 per share, or therequirement to have a minimum of $2.5 million in stockholders equity, wereceived a delisting notification from NASDAQ. After exercising our right for an appeal of this determination to aNASDAQ Listing Qualifications Panel, the Panel determined to delist oursecurities from The NASDAQ Stock Market in August 2003. Since then, ourcommon stock has been quoted on the OTC Bulletin Board.  The market value and liquidity of our commonstock, as well as our ability to raise additional capital, has been and maycontinue to be materially adversely affected by this delisting decision.**

** **

**Operating costs are continually underreview and adjusted accordingly. With the decline in revenue in 2009, we**

 

21

----

Table of Contents

 

**took the necessary steps to reducespending to the appropriate levels.  Weintend to continue to make the necessary improvements to our infrastructure in2010 by adding resources where and when required which we believe is necessaryin order to compete successfully in the ever-increasingly competitivecollaborative software market.**

** **

**Order bookings, which are purchaseorders placed by customers, are not recorded as revenue or recognized asrevenue until all requirements of that order are satisfied, although the cashflow received from these orders may more closely follow the receipt date of theorder.  Based upon our current bookingsforecast, expense structure and commitments, management believes that itsexisting cash resources will be sufficient to fund its anticipated workingcapital and capital expenditure needs for at least the next twelve months.**

** **

The following table summarizes our outstanding contractual obligations:

 
| **(in  thousands)**           | ** ** | **2010** | ** ** | **2011** | ** ** | **2012** | ** ** | **2013** | ** ** | **Total** | ** ** |
|-------------------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|-----------|------------|
| Operating leases              |       | $        | 84         |     | $          | 98       |       | $        | 35         |      | $          | 18 |   | $ | 171 |   |
|                          |       |     |       |     |       |     |       |     |       |      |       |
| Microsoft License Agreement   |       | 1,080    |       | 676      |       |     |       |     |       | 1,756     |       |
|                          |       |     |       |     |       |     |       |     |       |      |       |
| Total contractual obligations |       | $        | 1,164      |     | $          | 710      |       | $        | 35         |      | $          | 18 |   | $ | 1,927 |   |

 

**RecentAccounting pronouncements**

 

In June 2009, the Financial Accounting Standards Board (the “FASB”)  issued Statement No. 168, *The FASB Accounting Standards CodificationTM and the Hierarchy ofGenerally Accepted Accounting Principles*.  This statement establishes the FASBAccounting Standards CodificationTM (the “Codification”) as the source ofauthoritative accounting principles recognized by the FASB to be applied bynongovernmental entities in the preparation of financial statements inconformity with U.S. generally accepted accounting principles (“GAAP”).  The purpose of the Codification is tosimplify GAAP, without change, by consolidating the numerous accounting rules intologically organized topics.  TheCodification affects the way companies reference GAAP in financial statementsand in their accounting policies. This Statement is effective for financialstatements issued for periods ending after September 15, 2009.  Effective July 1, 2009, changes to thesource of authoritative GAAP, the Codification, are communicated through anAccounting Standards Update (“ASU”). ASUs will be published for all authoritative GAAP promulgated by theFASB, regardless of the form in which such guidance may have been issued priorto release of the Codification.  In June 2009,the FASB issued ASU No. 2009-01, *The FASB AccountingStandards CodificationTM and the Hierarchy of Generally Accepted AccountingPrinciples*, which amended the Codification for the issuance ofStatement No. 168.  The ASU includesStatement No. 168 in its entirety.

 

**ITEM 7A. QUANTITATIVE ANDQUALITATIVE DISCLOSURES ABOUT MARKET RISK**

** **

Todate, we have not utilized derivative financial instruments or derivativecommodity instruments. We invest cash in highly liquid investments, consistingof highly rated U.S. and state government securities, commercial paper,short-term money market funds and mutual funds. These investments are subjectto general credit and market risk and we have no debt other than ourcontractual lease obligations. A 10% change in interest rates would not have amaterial impact on our financial position, operating results or cash flows. Wehave closed our foreign offices, and sales to foreign customers from the UnitedStates are in U.S. dollars.  Therefore,we have no significant foreign currency risk.

 

22

----

Table ofContents

 

**ITEM 8. FINANCIALSTATEMENTS AND SUPPLEMENTARY DATA**

** **

**INDEX**

** **
| ** **                                                                                                 | **Page** |
|------------------------------------------------------------------------------------------------------------|----------|
| Report  of Independent Registered Public Accounting Firm                                                   | 24       |
|                                                                                                       |     |
| Consolidated  Balance Sheets as of December 31, 2009 and 2008                                         | 25       |
|                                                                                                       |     |
| Consolidated  Statements of Operations for the years ended December 31, 2009 and 2008                 | 26       |
|                                                                                                       |     |
| Consolidated  Statements of Stockholders’ Equity for the years ended December 31, 2009  and 2008 | 27       |
|                                                                                                       |     |
| Consolidated  Statements of Cash Flows for the years ended December 31, 2009 and 2008                 | 28       |
|                                                                                                       |     |
| Notes  to the Consolidated Financial Statements                                                            | 29       |

 

23

----

Table of Contents

 

**REPORT OF INDEPENDENT****REGISTERED PUBLIC ACCOUNTING FIRM**

 

The Board ofDirectors and Stockholders of

Ezenia! Inc.:

 

We have auditedthe accompanying consolidated balance sheets of Ezenia! Inc. and subsidiariesas of December 31, 2009 and 2008 and the related consolidated statementsof operations, stockholders’ equity and cash flows for the years thenended.    These financial statements arethe responsibility of the Company’s management. Our responsibility is toexpress an opinion on these financial statements based on our audits.

 

We conducted ouraudits in accordance with the auditing standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that weplan and perform the audits to obtain reasonable assurance about whether thefinancial statements are free of material misstatement. The Company is notrequired to have, nor were we engaged to perform, an audit of its internalcontrols over financial reporting.  Ouraudits included consideration of internal control over financial reporting as abasis for designing audit procedures that are appropriate in the circumstances,but not for the purpose of expressing an opinion on the effectiveness of theCompany’s internal control over financial reporting.  Accordingly, we express no such opinion.  An audit also includes examining, on a testbasis, evidence supporting the amounts and disclosures in the financialstatements, assessing the accounting principles used and significant estimatesmade by management, as well as evaluating the overall financial statementpresentation. We believe that our audits provide a reasonable basis for ouropinion.

 

In our opinion,the consolidated financial statements referred to above present fairly, in allmaterial respects, the consolidated financial position of Ezenia! Inc. andsubsidiaries as of December 31, 2009 and 2008 and the consolidated resultsof their operations and their cash flows for the years then ended in conformitywith accounting principles generally accepted in the United States of America.

 

 
| /s/ CATURANO AND  COMPANY, P.C. |
|---------------------------------|
|                            |
| Boston,  Massachusetts          |
| March 30,  2010            |

 

24

----

Table of Contents

 

**Consolidated Balance Sheets**

(In thousands, except forshare and per share related data)

 
| ** **                                                                                                                    | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                    | ** ** | **2009**              | ** ** | **2008** | ** ** |
| **Assets**                                                                                                                    |       |                  |       |   |   |
| Current assets                                                                                                                |       |                  |       |   |   |
| Cash and cash equivalents                                                                                                     | ** ** | **$**                 | **4,383**  | ** ** | **$** | **6,774** | ** ** |
| Accounts receivable, less allowance of $28 at  December 31, 2009 and 2008                                                | ** ** | **129**               | ** ** | **771** | ** ** |
| Prepaid software licenses                                                                                                     | ** ** | **1,239**             | ** ** | **1,125** | ** ** |
| Prepaid expenses and other current assets                                                                                     | ** ** | **169**               | ** ** | **186** | ** ** |
| Total current assets                                                                                                          | ** ** | **5,920**             | ** ** | **8,856** | ** ** |
| Deposits                                                                                                                      | ** ** | **15**                | ** ** | **15** | ** ** |
| Equipment and improvements, net                                                                                               | ** ** | **133**               | ** ** | **243** | ** ** |
| Total assets                                                                                                                  | ** ** | **$**                 | **6,068**  | ** ** | **$** | **9,114** | ** ** |
|                                                                                                                          | ** ** | ** **            |       |   |   |
| **Liabilities and stockholders’ equity**                                                                                 | ** ** | ** **            |       |   |   |
| Current liabilities                                                                                                           | ** ** | ** **            |       |   |   |
| Accounts payable                                                                                                              | ** ** | **$**                 | **273**    | ** ** | **$** | **257** | ** ** |
| Accrued expenses                                                                                                              | ** ** | **1,627**             | ** ** | **1,674** | ** ** |
| Employee compensation and benefits                                                                                            | ** ** | **195**               | ** ** | **150** | ** ** |
| Accrued restructuring charges                                                                                                 | ** ** | **228**               | ** ** | **287** | ** ** |
| Deferred revenue                                                                                                              | ** ** | **876**               | ** ** | **1,326** | ** ** |
| Total current liabilities                                                                                                     | ** ** | **3,199**             | ** ** | **3,694** | ** ** |
| Deferred revenue, net of current portion                                                                                      | ** ** | **3**                 | ** ** | **—** | ** ** |
|                                                                                                                          | ** ** | ** **            |       |   |   |
| Commitments and contingencies (Note 5)                                                                                        | ** ** | ** **            |       |   |   |
|                                                                                                                          | ** ** | ** **            |       |   |   |
| Stockholders’ equity:                                                                                                    | ** ** | ** **            |       |   |   |
| Preferred stock, $.01 par value; 2,000,000 shares  authorized; none issued and outstanding                                    | ** ** | **—**            | ** ** | **—** | ** ** |
| Common stock, $.01 par value; 40,000,000 shares  authorized; 15,417,754 issued and 14,658,217 outstanding in 2009 and in 2008 | ** ** | **154**               | ** ** | **154** | ** ** |
| Capital in excess of par value                                                                                                | ** ** | **66,459**            | ** ** | **65,586** | ** ** |
| Accumulated deficit                                                                                                           | ** ** | **(60,802**           | **)**      | **(57,375** | **)** |
| Treasury stock; 759,537 shares at cost in 2009 and  2008                                                                      | ** ** | **(2,945**            | **)**      | **(2,945** | **)** |
|                                                                                                                          | ** ** | **2,866**             | ** ** | **5,420** | ** ** |
| **Total liabilities and stockholders’ equity**                                                                           | ** ** | **$**                 | **6,068**  | ** ** | **$** | **9,114** | ** ** |

 

*See accompanying notes.*

 

25

----

Table of Contents

 

**Consolidated Statements of Operations**

 

(In thousands, except for share and per share related data)

 
| ** **                                       | ** ** | **Year ended December 31,** | ** ** |
|--------------------------------------------------|------------|----------------------------------|------------|
| ** **                                       | ** ** | **2009**                         | ** ** | **2008** | ** ** |
| **Revenue**                                      |       |                             |       |   |   |
| Product revenue                                  | ** ** | **$**                            | **3,471**  | ** ** | **$** | **6,570** | ** ** |
| Product development revenue                      | ** ** | **61**                           | ** ** | **113** | ** ** |
|                                             | ** ** | **3,532**                        | ** ** | **6,683** | ** ** |
| **Costs of revenue**                             | ** ** | ** **                       |       |   |   |
| Cost of product revenue                          | ** ** | **1,322**                        | ** ** | **2,556** | ** ** |
| Cost of product development  revenue             | ** ** | **25**                           | ** ** | **19** | ** ** |
|                                             | ** ** | **1,347**                        | ** ** | **2,575** | ** ** |
| **Gross profit**                                 | ** ** | **2,185**                        | ** ** | **4,108** | ** ** |
| ** **                                       | ** ** | ** **                       |       |   |   |
| **Operating expenses**                           | ** ** | ** **                       |       |   |   |
| Research and development                         | ** ** | **1,711**                        | ** ** | **2,084** | ** ** |
| Sales and marketing                              | ** ** | **1,033**                        | ** ** | **2,024** | ** ** |
| General and administrative                       | ** ** | **2,547**                        | ** ** | **2,408** | ** ** |
| Depreciation                                     | ** ** | **153**                          | ** ** | **182** | ** ** |
| Occupancy and other  facilities-related expenses | ** ** | **259**                          | ** ** | **317** | ** ** |
| Restructuring charge                             | ** ** | **—**                       | ** ** | **219** | ** ** |
| Total operating expenses                         | ** ** | **5,703**                        | ** ** | **7,234** | ** ** |
| **Loss from operations**                         | ** ** | **(3,518**                       | **)**      | **(3,126** | **)** |
|                                             | ** ** | ** **                       |       |   |   |
| Other income (expense)                           | ** ** | ** **                       |       |   |   |
| Interest income                                  | ** ** | **45**                           | ** ** | **155** | ** ** |
| Other                                            | ** ** | **46**                           | ** ** | **(98** | **)** |
|                                             | ** ** | **91**                           | ** ** | **57** | ** ** |
| Loss before income taxes                         | ** ** | **(3,427**                       | **)**      | **(3,069** | **)** |
| Provision for income taxes                       | ** ** | **—**                       | ** ** | **—** | ** ** |
| **Net loss**                                     | ** ** | **$**                            | **(3,427** | **)** | **$** | **(3,069** | **)** |
| **Basic and diluted loss per  share:**           | ** ** | ** **                       |       |   |   |
| Basic                                            | ** ** | **$**                            | **(0.23**  | **)** | **$** | **(0.21** | **)** |
| Diluted                                          | ** ** | **$**                            | **(0.23**  | **)** | **$** | **(0.21** | **)** |
| **Weighted average common shares:**              | ** ** | ** **                       |       |   |   |
| Basic                                            | ** ** | **14,658,217**                   | ** ** | **14,646,006** | ** ** |
| Diluted                                          | ** ** | **14,658,217**                   | ** ** | **14,646,006** | ** ** |

 

*See accompanying notes.*

 

26

----

Table of Contents

 

**Consolidated Statements of Stockholders’ Equity**

(Inthousands, except for share related data)

 
| ** **                                | ** ** | ** **       | ** ** | ** **       | ** ** | **Capital**     | ** ** | ** **   | ** ** | ** **             | ** **  | **Total**  | ** ** |
|-------------------------------------------|------------|------------------|------------|------------------|------------|-----------------|------------|--------------|------------|------------------------|-------------|------------|------------|
| ** **                                | ** ** | **Common Stock** | ** ** | **in Excess of** | ** ** | **Accumulated** | ** ** | **Treasury** | ** ** | **Stockholders’** | ** **  |
| ** **                                | ** ** | **Shares**       | ** ** | **Par Value**    | ** ** | **Par Value**   | ** ** | **Deficit**  | ** ** | **Stock**              | ** **  | **Equity** | ** ** |
| ** **                                |       |             |       |             |       |            |       |         |       |                   |        |       |       |
| **BALANCES AS OF DECEMBER  31, 2007**     |       | 14,601,092       |       | $                | 154        |            | $          | 64,870       |       | $                      | (54,306     | )          | $          | (2,945 | ) | $ | 7,773 |   |
| ** **                                |       |             |       |             |       |            |       |         |       |                   |        |       |       |
| Stock issued under employee benefit plans |       | 57,125           |       | —           |       | 13              |       | —       |       | —                 |        | 13         |       |
| Share-based compensation expense          |       | —           |       | —           |       | 703             |       | —       |       | —                 |        | 703        |       |
| Net loss                                  |       | —           |       | —           |       | —          |       | (3,069       | )          | —                 |        | (3,069     | )          |
|                                      |       |             |       |             |       |            |       |         |       |                   |        |       |       |
| **BALANCES AS OF DECEMBER 31, 2008**      |       | 14,658,217       |       | 154              |       | 65,586          |       | (57,375      | )          | (2,945                 | )           | 5,420      |       |
| ** **                                |       |             |       |             |       |            |       |         |       |                   |        |       |       |
| Share-based compensation expense          |       | —           |       | —           |       | 873             |       | —       |       | —                 |        | 873        |       |
| Net loss                                  |       | —           |       | —           |       | —          |       | (3,427       | )          | —                 |        | (3,427     | )          |
|                                      |       |             |       |             |       |            |       |         |       |                   |        |       |       |
| **BALANCES AS OF DECEMBER 31, 2009**      | ** ** | **14,658,217**   | ** ** | **$**            | **154**    | ** **      | **$**      | **66,459**   | ** ** | **$**                  | **(60,802** | **)**      | **$**      | **(2,945** | **)** | **$** | **2,866** | ** ** |

 

*See accompanying notes.*

 

27

----

Table of Contents

 

**Consolidated Statements of CashFlows**

(In thousands)

 
| ** **                                                                                         | ** ** | **Year ended December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                                         | ** ** | **2009**                         | ** ** | **2008** | ** ** |
| **Operating activities**                                                                           |       |                             |       |   |   |
| Net loss                                                                                           | ** ** | **$**                            | **(3,427** | **)** | **$** | **(3,069** | **)** |
| Adjustments to reconcile net loss to net cash used  for operating activities:                      | ** ** | ** **                       |       |   |   |
|                                                                                               | ** ** | ** **                       |       |   |   |
| Depreciation                                                                                       | ** ** | **153**                          | ** ** | **182** | ** ** |
| Amortization of capitalized software                                                               | ** ** | **—**                       | ** ** | **18** | ** ** |
| Share-based compensation                                                                           | ** ** | **873**                          | ** ** | **703** | ** ** |
| Changes in operating assets and liabilities:                                                       | ** ** | ** **                       |       |   |   |
| Accounts receivable                                                                                | ** ** | **642**                          | ** ** | **1,708** | ** ** |
| Prepaid software licenses                                                                          | ** ** | **(114**                         | **)**      | **461** | ** ** |
| Prepaid expenses and other current assets                                                          | ** ** | **17**                           | ** ** | **106** | ** ** |
| Accounts payable, accrued expenses, employee and  compensation benefits, and accrued restructuring | ** ** | **(45**                          | **)**      | **(495** | **)** |
| Deferred revenue                                                                                   | ** ** | **(447**                         | **)**      | **(2,203** | **)** |
| Net cash used for operating activities                                                             | ** ** | **(2,348**                       | **)**      | **(2,589** | **)** |
|                                                                                               | ** ** | ** **                       |       |   |   |
| **Investing activities**                                                                           | ** ** | ** **                       |       |   |   |
| Purchases of equipment and improvements                                                            | ** ** | **(43**                          | **)**      | **(45** | **)** |
| Net cash used for investing activities                                                             | ** ** | **(43**                          | **)**      | **(45** | **)** |
|                                                                                               | ** ** | ** **                       |       |   |   |
| **Financing activities**                                                                           | ** ** | ** **                       |       |   |   |
| Proceeds from stock issued under employee benefit  plans                                           | ** ** | **—**                       | ** ** | **13** | ** ** |
| Net cash provided by financing activities                                                          | ** ** | **—**                       | ** ** | **13** | ** ** |
|                                                                                               | ** ** | ** **                       |       |   |   |
| Change in cash and cash equivalents                                                                | ** ** | **(2,391**                       | **)**      | **(2,621** | **)** |
| Cash and cash equivalents at beginning of year                                                     | ** ** | **6,774**                        | ** ** | **9,395** | ** ** |
| Cash and cash equivalents at end of year                                                           | ** ** | **$**                            | **4,383**  | ** ** | **$** | **6,774** | ** ** |
| Supplementary disclosure of cash flow information:                                                 | ** ** | ** **                       |       |   |   |
| Interest paid                                                                                      | ** ** | **$**                            | **1**      | ** ** | **$** | **1** | ** ** |
| Income taxes refunded                                                                              | ** ** | **$**                            | **—** | ** ** | **$** | **(17** | **)** |

 

*Seeaccompanying notes.*

 

28

----

Table of Contents

 

**Notes to the Consolidated Financial Statements**

 

**1.  Natureof Business and Basis of Presentation**

 

Ezenia! Inc. (“Ezenia”,“we”, or the “Company”) operates in one business segment, which is the design,development, production, marketing and sale of real-time group collaborationand communication solutions for corporate and governmental networks andeBusiness.   Founded in 1991, we developand market products that enable organizations to provide high-quality groupcommunication and collaboration capabilities to commercial, governmental,consumer and institutional users. Our products allow individuals and groups,regardless of proximity constraints, to interact and share information in anatural, spontaneous way — voice-to-voice, face-to-face, mouse-to-mouse, orkeyboard-to-keyboard, flexibly, securely and in real time. Using our products,individuals can interact through a natural meeting experience, allowing groupsto work together effectively and disseminate vital information quickly in asecure environment.

 

The consolidated financial statementsinclude the accounts of Ezenia and its wholly owned subsidiaries, EzeniaInternational, Inc. and Ezenia Latin America, Inc.  Allsignificant inter-company transactions and balances have been eliminated. All assets and liabilities of our foreign subsidiaries are translated at therate of exchange at the end of the year, while sales and expense are translatedat the average rate in effect during the year.  The net effect of thesetranslation adjustments was immaterial for all periods presented.

 

**2.  Summaryof Significant Accounting Policies**

 

**Use ofEstimates**

The preparation ofthe financial statements in conformity with accounting principles generally acceptedin the United States requires management to make estimates and assumptions thataffect the reported amounts of assets and liabilities, and disclosure ofcontingent assets and liabilities, if any, at the date of the financialstatements and the reported amounts of revenue and expenses during thereporting period.  Actual results coulddiffer from these estimates.

 

###### **Revenue Recognition**

****Product revenue consists of sales of****InfoWorkSpace****software licenses and maintenance agreements,****InfoWorkSpace****product related training and consulting. Revenuefrom sales of****InfoWorkSpace****software license andmaintenance agreements is recognized ratably over the subscription softwarelicense contract periods, which are generally one year. Revenue from****InfoWorkSpace****training, installation, and consulting services isrecognized as the services are performed provided there is vendor specificobjective evidence of fair value, which is the price charged when the servicesare sold separately.****

 

****Product development revenue relates to contractsinvolving customization of the****InfoWorkSpace****product according to a customer’s specifications.When reliable estimates are available for the costs and efforts necessary tocomplete the product development and the contract does not include contractualmilestones or other acceptance criteria, product development revenue isrecognized under the percentage-of-completion contract method based upon inputmeasures, such as hours.  When suchestimates are not available, we defer all revenue recognition until we havecompleted the contract and have no further obligations to the customer.  Revenue associated with contracts for productdevelopment revenue with milestone-based deliverables requiring a customer’sacceptance is recognized upon the customer’s acceptance in accordance with theterms of the contract.  The associatedcost recognition with these deliverables or milestones is deferred until theterms of acceptance are satisfied and revenue is recognized. Certain of ourproduct development contracts are subject to government audit and retroactiveadjustment of the direct and indirect costs used to determine the contractbillings.  Product development revenueand accounts receivable reported in the financial statements are recorded atthe amount expected to be received. Product development revenue is adjusted to actual upon final audit andretroactive adjustment.  Estimatedcontractual allowances are provided based on management’s evaluation of currentcontract terms. During 2008, the government completed a review of the 2004-2007development contracts. Based upon these reviews, we recorded $67,000 of revenuewhich had initially been deferred pending the completion of the reviews.****

 

29

----

Table of Contents

 

****Products and software licenses are sold without anycontractual right of return by the customer. Deferred revenue represents amounts received from customers undersubscription software licenses, maintenance agreements, or for product sales inadvance of revenue recognition. Judgments are required in evaluating the creditworthiness of ourcustomers.  In all instances, revenue isnot recognized until we have evidence of an arrangement, the fee is fixed anddeterminable and collectability is reasonably assured.  Amounts billed to customers related toshipping and handling charges are recorded as revenue upon shipment and therelated costs are included in cost of goods sold.****

 

###### **Third-Party Technology**

###### ** **

Our InfoWorkSpace product incorporates third-party technology in theform of software licenses, which we purchase from other software vendors.  Software licenses purchased from vendors arereported as prepaid licenses and, when deployed, amortized to cost of revenueover the subscription period, which is generally one year.

 

###### **Advertising**

###### ** **

Advertising costsare included in sales and marketing expense. We use our website as our main form of advertising along withparticipating in various industry-related trade shows. Advertising costs areexpensed as incurred. Advertising expense was approximately $16,000 and $17,000in fiscal years 2009 and 2008, respectively.

 

###### **Cash Equivalents**

###### ** **

We consider allhighly liquid investments with a maturity of 90 days or less at the date ofpurchase, or investments that can be converted to cash quickly such as mutualfunds, to be cash equivalents.

 

###### **Financial Instruments and Concentrations of CreditRisk**

###### ** **

Our financialinstruments consist primarily of cash and cash equivalents, trade receivables,accounts payable and accrued expenses. The carrying value of these financial instruments approximates fairvalue due to their short term to maturity. Financial instruments, which potentially subject us to concentrations ofcredit risk, are cash equivalents and accounts receivable.

 

Major financialinstitutions maintain all of our cash equivalents. At times, balances mayexceed federally insured limits. We have not experienced anylosses in such accounts, and believe we are not exposed to any significantcredit risk on cash and cash equivalents. Concentrationof credit risk with respect to accounts receivable is limited to certaincustomers to whom we make substantial sales. To reduce risk, we routinely assess the financial strength of ourcustomers.  We maintain an allowance fordoubtful accounts based on accounts past due according to contractual terms andhistorical collection experience.  Actuallosses when incurred are charged to the allowance.

 

Revenue from onecustomer accounted for approximately 56% of total revenue in 2009 and 35% oftotal revenue in 2008.  Accountsreceivable from this customer accounted for approximately 76% and 29% of thebalances at December 31, 2009 and 2008, respectively. A second customeraccounted for approximately 16% of total revenue in 2009 and 10% of totalrevenue in 2008.  This customer’saccounts receivable balance accounted for approximately 0% and 10% of thebalance at December 31, 2009 and 2008, respectively.  A third customer accounted for approximately5% of total revenue in 2009 and 28% of total revenue in 2008. This customer’saccounts receivable balance accounted for approximately 0% and 43% of thebalance at December 31, 2009 and 2008, respectively. Revenue frominternational markets was immaterial in both 2009 and 2008.

 

###### **Equipment and Improvements**

###### ** **

Equipment andimprovements are stated at cost and depreciated using the straight-line methodover the following estimated useful lives:

 

30

----

Table of Contents

 
| Computer  software and equipment |   | 3 years                                         |
|----------------------------------|--------|-------------------------------------------------|
| Office equipment                 |   | 5 years                                         |
| Furniture and  fixtures          |   | 5 years                                         |
| Leasehold  improvements          |   | Shorter of lease  term or estimated useful life |

 

Repairs and maintenance costs are expensed as incurred.

 

**Researchand Development Costs**

** **

Costs that are incurredinternally in researching and developing a computer software product arecharged to expense until technological feasibility has been established for theproduct.  Once technological feasibilityis established, all software costs are capitalized until the product isavailable for general release to customers. During 2006, we released version 3.0 of our InfoWorkSpace software product.  In connection with this development effort, atotal of $140,000 of costs were capitalized and amortized on a straight-linebasis over the estimated economic life of the product of 2 years.  The costs were fully amortized during 2008.

 

Judgment is required indetermining when technological feasibility of a product is established as wellas its economic life. In most cases, we have determined that technologicalfeasibility for our software products/updates is reached shortly before theproducts are released to manufacturing. Costs incurred after technologicalfeasibility is established have historically not been material, andaccordingly, were expensed when incurred in these instances.

 

**IncomeTaxes**

** **

****Deferred tax assets and liabilities are determinedat the end of each year based on the future tax consequences that can beattributed to net operating loss and credit carryovers as well as thedifferences between the financial statement carrying amounts of existing assetsand liabilities and their respective tax bases. The deferred tax assets are reduced by a valuation allowance if it ismore likely than not that the tax benefits will not be realized.  The realization of deferred tax assets isdependent upon the generation of future taxable income.  In determining the valuation allowance, weconsider past performance, expected future taxable income, and qualitativefactors which we consider to be appropriate to be considered in estimatingfuture taxable income.  Our forecast ofexpected future taxable income is for future periods that can be reasonablyestimated.  Results that differmaterially from our current expectations may cause us to change our judgment onfuture taxable income. These changes, if any, may require us to adjust ourexisting tax valuation allowance higher or lower than the amount we haverecorded.****

 

**ComprehensiveLoss**

** **

###### ****Comprehensive loss represents the change in equityduring a period from transactions and other events and circumstances fromnon-owner sources. Comprehensive loss consists of the net loss for the yearsended December 31, 2009 and 2008, and is reported within the accompanyingconsolidated statements of changes in stockholders’ equity.****

###### ** **

###### **Net Loss Per Share**

###### ** **

Shares used incomputing basic and diluted net loss per share are as follows:

 
| ** **                                               | ** ** | **2009**   | ** ** | **2008**   | ** ** |
|----------------------------------------------------------|------------|------------|------------|------------|------------|
| Basic                                                    |       | 14,658,217 |       | 14,646,006 |       |
| Effect of assumed exercise of  stock options             |       | —     |       | —     |       |
| Diluted                                                  |       | 14,658,217 |       | 14,646,006 |       |
| Outstanding options excluded  as impact is anti-dilutive |       | 3,499,725  |       | 3,239,157  |       |

 

31

----

Table of Contents

 

###### **Accounting for Share-Based Compensation**

###### ** **

Share-based compensation expense for allstock-based payment awards made to employees and directors is measured based onthe grant-date fair value of the award. Share-based compensation expense for awards granted to non-employees isdetermined using the fair value of the consideration received or the fair valueof the equity instruments issued, whichever is more reliably measured.  The fair value of options and restrictedstock awards granted to non-employees is periodically remeasured as theunderlying options or awards vest. We estimate the fair valueof each share-based award using the Black-Scholes option valuation model. TheBlack-Scholes option valuation model incorporates assumptions as to stock pricevolatility, the expected life of options, a risk-free interest rate anddividend yield. We recognize share-based compensation expense on astraight-line basis over the requisite service period of the award, which isgenerally four years.

 

For the years ended December 31, 2009 and 2008, we recordedshare-based compensation expense in the consolidated statements of operationsas follows:

 

**(**in****thousands**)**

 
| ** **                 | ** ** | **Year Ended**             | ** ** | **Year Ended**             | ** ** |
|----------------------------|------------|----------------------------|------------|----------------------------|------------|
| ** **                 | ** ** | **December 31, 2009** | ** ** | **December 31, 2008** | ** ** |
| Cost of revenue            |       | $                          | 35         |                       | $          | 23 |   |
| Research and development   |       | 64                         |       | 63                         |       |
| Sales and marketing        |       | 103                        |       | 79                         |       |
| General and administrative |       | 671                        |       | 538                        |       |
|                       |       | $                          | 873        |                       | $          | 703 |   |

 

We estimate the fair value of each option award issued under the planson the date of grant using a Black-Scholes based option-pricing model that usesthe assumptions noted in the following table. Expected volatilities are based on historical volatility of our commonstock.  We base the expected term of theoptions on our historical option exercise data with a minimum life expectedequal to the vesting period of the option. We base the risk-free interest rate on the U.S. Treasury yield in effectat the time of the grant for a term closest to the expected life of theoptions.

 
| ** **              | ** ** | **Year ended December 31,** | ** ** |
|-------------------------|------------|----------------------------------|------------|
| ** **              | ** ** | **2009**                         | ** ** | **2008** | ** ** |
| Expected volatility     |       | 111%-126%                        |       | 69.33%-92.39% |   |
| Risk-free interest rate |       | 1.28%-1.76%                      |       | 1.52%-3.35% |   |
| Expected life in years  |       | 4.0                              |       | 4.0 |   |
| Expected dividend yield |       | None                             |       | None |   |

** **

**Based on the above assumptions, the weighted averageestimated fair value of options granted in fiscal years 2009 and 2008 was $0.08and $0.37 per share, respectively.  Weestimated forfeitures related to option grants at an annual rate of 29% peryear in 2008. During 2009, we reviewed our recent unvested option forfeiturehistory and revised our estimated forfeitures to an annual rate of 15% andrecorded an additional $143,000 in compensation expense based upon the revisedrate.**

** **

**Other reasonable assumptions about these factors couldprovide different estimates of fair value. Future changes in stock price volatility, life of options, interestrates, forfeitures and dividend practices, if any, may require changes in ourassumptions, which could materially affect the calculation of fair value.**

** **

**Total unrecognized share-based compensation expense relatedto unvested stock options, expected to be recognized over a weighted averageperiod of 1.30 years, amounted to $697,000 at December 31, 2009.**

 

32

----

Table ofContents

 

**There were no stock option exercises in 2009 and theweighted average exercise price of stock options exercised for the year ended December 31,2008 was $0.23.  The total intrinsicvalue of stock options exercised for the year ended December 31, 2008 was$20,000**.

** **

**RecentAccounting Pronouncements**

 

In June 2009, the Financial Accounting Standards Board (“FASB”)issued Statement No. 168, *The FASB AccountingStandards CodificationTM and the Hierarchy of Generally Accepted AccountingPrinciples*.  This Statementestablishes the FASB Accounting Standards CodificationTM (the “Codification”) asthe source of authoritative accounting principles recognized by the FASB to beapplied by nongovernmental entities in the preparation of financial statementsin conformity with U.S. generally accepted accounting principles (“GAAP”).  The purpose of the Codification is tosimplify GAAP, without change, by consolidating the numerous accounting rules intologically organized topics.  TheCodification affects the way companies reference GAAP in financial statementsand in their accounting policies. This statement is effective for financialstatements issued for periods ending after September 15, 2009.  Effective July 1, 2009, changes to thesource of authoritative GAAP, the Codification, are communicated through anAccounting Standards Update (“ASU”). ASUs will be published for all authoritative GAAP promulgated by theFASB, regardless of the form in which such guidance may have been issued priorto release of the FASB Codification.  In June 2009,the FASB issued ASU No. 2009-01, *The FASB AccountingStandards CodificationTM and the Hierarchy of Generally Accepted AccountingPrinciples*, which amended the Codification for the issuance ofStatement No. 168.  The ASU includesStatement No. 168 in its entirety. The Company has adopted the provisions of ASU No. 2009-01 by referencingthe Codification in these notes to the consolidated financial statements,rather than previous accounting standards.

 

**SubsequentEvents**

 

The Company has evaluated all events or transactions through the dateof this filing.  During this period, we did not have any materialsubsequent events that impacted our consolidated financial statements.

 

**3.**                                      Equipment andImprovements

** **

Property and equipment are recorded at cost less accumulateddepreciation and amortization. Depreciation is calculated using the straight-line method over theuseful lives of the respective assets. Leasehold improvements are amortized over the shorter of the estimateduseful lives of the improvements or the remaining lease term. For the yearsended December 31, 2009 and 2008, equipment and improvements consisted ofthe following:

 
| **(in thousands)**                        | ** ** | **2009** | ** ** | **2008** | ** ** |
|-------------------------------------------|------------|----------|------------|----------|------------|
| Computer equipment and purchased software |       | $        | 321        |     | $          | 441 |   |
| Office equipment                          |       | 27       |       | 34       |       |
| Furniture and fixtures                    |       | 51       |       | 51       |       |
| Leasehold improvements                    |       | 192      |       | 192      |       |
| Total equipment and improvements          |       | $        | 591        |     | $          | 718 |   |
| Less: accumulated depreciation            |       | (458     | )          | (475     | )          |
| Total equipment and improvements, net     |       | $        | 133        |     | $          | 243 |   |

 

Depreciation expense for the years ended December 31, 2009 and2008 was $153,000 and $182,000 respectively.

 

**4.****                                     ****Income Taxes**

 

**Due tothe uncertainty of future taxable income, we have not recorded an income taxbenefit for the losses incurred in 2009 and 2008.**

 

33

----

Table of Contents

 

Our deferred tax assets consist of the following:

 
| ** **                                 | ** ** | **December 31, 2009** | ** ** | **December 31, 2008** | ** ** |
|--------------------------------------------|------------|----------------------------|------------|----------------------------|------------|
| Deferred Tax Assets:                       |       |                       |       |                       |       |
| (in thousands)                             |       |                       |       |                       |       |
| Net Operating Loss Carryforwards           |       | $                          | 24,117     |                       | $          | 22,432 |   |
| Purchased intangibles                      |       | 2,731                      |       | 3,243                      |       |
| Tax Credit Carryforwards                   |       | 176                        |       | 2,546                      |       |
| Reserves, accruals and allowances          |       | 98                         |       | 147                        |       |
| Capitalized Research and Development Costs |       | —                     |       | 75                         |       |
| Deferred Revenue                           |       | 1                          |       | 1                          |       |
| Depreciation and Amortization              |       | 72                         |       | 78                         |       |
| Other                                      |       | 950                        |       | 618                        |       |
| Total Gross Deferred Tax Asset             |       | 28,145                     |       | 29,140                     |       |
| Valuation Allowance                        |       | (28,145                    | )          | (29,140                    | )          |
| Net Deferred Tax Asset                     |       | $                          | —     |                       | $          | — |   |

 

At December 31, 2009, we had domestic federal net operating loss (“NOL”)carryforwards of approximately $68.7 million available to reduce future taxableincome, which expire at various dates beginning in 2020 through 2029. Wehave state NOL carryforwards of approximately $20.4 million available to reducefuture state taxable income, which expire at various dates beginning in 2010through 2029.

 

As described below under the provisions of the Code,certain substantial changes in our ownership may result in a limitation on theamount of NOL carryforwards which may be utilized annually to offset futuretaxable income and taxes payable.

 

We have evaluatedthe positive and negative evidence bearing upon the realizability of ourdeferred tax assets, which are comprised principally of NOL carryforwards, andhave determined at this time that it is more likely than not that we will notrecognize the benefits of our federal and state deferred tax assets and, as aresult, a valuation allowance of approximately $28.1 million was established atDecember 31, 2009 and approximately $29.1 million at December 31,2008.

 

A reconciliationof the expected income tax (benefit) computed using the federal statutoryincome tax rate to our effective income tax rate is as follows for the yearsended December 31, 2009 and 2008.

 
| **(in thousands)**                                | ** ** | **December 31, 2009** | ** ** | **December 31, 2008** | ** ** |
|---------------------------------------------------|------------|----------------------------|------------|----------------------------|------------|
|                                              |       |                       |       |                       |       |
| Income tax computed at federal statutory tax rate |       | $                          | (1,165     | )                          | $          | (1,044 | ) |
|                                              |       |                       |       |                       |       |
| State taxes, net of federal benefit               |       | (195                       | )          | (200                       | )          |
|                                              |       |                       |       |                       |       |
| Change in valuation allowance                     |       | (995                       | )          | 1,232                      |       |
|                                              |       |                       |       |                       |       |
| R&D and other credits                         |       | (21                        | )          | (31                        | )          |
|                                              |       |                       |       |                       |       |
| Write off of tax credit carryforwards             |       | 2,393                      |       |                       |       |
|                                              |       |                       |       |                       |       |
| Permanent differences and other                   |       | (17                        | )          | 43                         |       |
|                                              |       |                       |       |                       |       |
| Total                                             |       | $                          | —     |                       | $          | — |   |

 

FASB ASC 740 (“ASC 740”), *Income Taxes,*prescribes a recognition threshold of more-likely-than-not to be sustained uponexamination. ASC 740 also provides guidance on de-recognition, classification,interest and 

 

34

----

Table of Contents

 

penalties, accounting in interim periods, disclosures andtransition. We have determined that the realization of $2.4 million infederal tax credits is in doubt. As a result, we would have recognized a $2.4million increase in the liability for unrecognized tax benefits had werecognized any benefit associated with the credits in prior periods. However, dueto past net operating losses, no benefit has been recognized; accordingly, noliability has been recognized. During 2009 this asset and its associatedvaluation allowance were derecognized in accordance with ASC 740.

 

At December 31, 2009, we had federal and state NOL carryforwardsof $68.7 million and $20.4 million, expiring at various dates through 2029.Utilization of the NOL carryforwards may be subject to a substantial annuallimitation due to ownership change limitations that have occurred previously orthat could occur in the future provided by Section 382 of the InternalRevenue Code of 1986, as amended, (the “Code”) as well as similar stateprovisions. These ownership changes may limit the amount of NOL that can beutilized annually to offset future taxable income and tax, respectively. Ingeneral, an ownership change, as defined by Section 382, results fromtransactions increasing the ownership of certain stockholders or public groupsin the stock of a corporation by more than 50 percentage points over athree-year period. Since our formation, we have raised capital through theissuance of capital stock on several occasions which, combined with thepurchasing stockholders’ subsequent disposition of those shares, may haveresulted in a change of control, as defined by Section 382, or couldresult in a change of control in the future uponsubsequent disposition. We have not currentlycompleted a study to assess whether a change of control has occurred or whetherthere have been multiple changes of control since our formation due to thesignificant complexity and cost associated with such study and due to thepossibility of additional changes in control in the future. If we haveexperienced a change of control at any time since our formation, utilization ofour NOL carryforwards would be subject to an annual limitation under Section 382.Further, until a study is completed and any limitation known, no amounts arebeing presented as an uncertain tax position under ASC 740.

 

We recognize interest and penalties related to uncertain tax positionsin income tax expense.  As of December 31,2009 and 2008, we had no accrued interest or penalties related to uncertain taxpositions.

 

We are subject to U.S. Federal and New Hampshire state income tax.  The tax years 2000 through 2009 remain opento examination by the major state taxing jurisdictions to which we aresubject.  The Internal Revenue Servicecompleted an audit of our consolidated federal income tax return for the 2005tax year with no adjustments.

 

***5.******                                     *****Commitments and Contingencies**

 

We lease our primary facility in Nashua, New Hampshire, under anoperating lease, which expires in March 2010. In July 2007, we signedan additional lease for 6,000 square feet adjacent to our existing rented spacein Nashua, New Hampshire.  This leasewill expire in August 2010. We also have leased office space, located inSterling, Virginia, for our sales force, which was recently extended to June 2013.  Future minimum lease obligations at December 31,2009, under all of these non-cancelable operating leases are $84,000 in 2010,$98,000 in 2011, $35,000 in 2012 and $18,000 in 2013.

 

In December 2007, we completed the closure of our Colorado Springsfacility.  We recorded a restructuringcharge of $215,000 to cover the expected lease payments of this facility, netof expected proceeds. In 2008, we reassessed our exposure in consideration ofthe current real estate market and interest in the space to-date by potentialsubtenants. Based on the resulting conclusions, we recorded an additionalrestructuring charge of $219,000 during the year. A portion of the space isleased through November 2011 and the remaining portion is currentlyavailable for subleasing. We estimate that we will have to pay $228,000, net ofexpected sublease rental, over the remaining lease term. Our gross remainingobligation on the lease, including estimated operating expenses, isapproximately $394,000.

 

The adjustments to the accrued restructuring liability related to theshutdown of the Colorado facility for the period ended December 31, 2009were as follows (in thousands):

 
| Restructuring balance as of December 31, 2008 |   | $   | 287 |   |
|----------------------------------------------------|--------|-----|-----|--------|
| Cash payments                                      |   | (59 | )   |
| Restructuring liability at December 31, 2009  |   | $   | 228 |   |

 

35

----

Table of Contents

 

In April 2007, we entered into a newagreement with Microsoft to extend an existing software distribution licenseagreement through December 2008. Under the agreement, we were required to purchase a minimum of $1.7million and $2.75 million of licenses during 2007 and 2008 respectively, pluspurchase an additional $0.5 million over the life of the two year agreement.During 2007 we reviewed our forecast for license sales over the balance of theagreement and recorded a charge of $1.45 million to reserve for an excesspurchase commitment.  The charge wasrecorded as a component of cost of product revenue during the year ended December 31,2007.

 

In December 2008, the Microsoftagreement was amended to extend the term through June 2011 and reduce theremaining purchase commitment to $2.75 million, $154,000 of which was satisfiedduring 2008 and $840,000 in 2009.  Theamended agreement requires that we make additional payments of $1.1 million and$0.7 million during 2010 and 2011, respectively.  In addition to the remaining $1.8 millionlicense purchase commitment, we have approximately $1.1 million of prepaidlicenses on hand that have yet to be deployed to customers.  During 2009, we continued to experience adecline in the volume of our customer license renewals and a lengthening of thesales cycle for new licenses. As of December 31, 2009, we reviewed ourforecast for license sales through the amended term (June 2011) and believethat the $1.45 million reserve remains the appropriate reserve for the excesspurchase commitment. The computation of the excess purchase commitment reserverequires management to make certain assumptions regarding future licenserenewals and sales growth.  Actualresults may differ materially from management’s estimates.

 

The Company is subjectto various legal proceedings and claims that arise in the ordinary course ofbusiness. We believe that the outcomes of these matters will not materially andadversely affect our business, financial position or financial results.

 

**6.****                                     ****Stockholders’ Equity**

 

We have authorized2,000,000 shares of preferred stock, 50,000 shares of which are designated as Series DJunior Participating Preferred Stock (Note 9), and the reminder of which areundesignated. Each series of preferred stock shall have such rights,preferences, privileges and restrictions, including voting rights, dividendrights, conversion rights, redemption privileges and liquidation preferences asdetermined by our  Board of Directors(the “Board”).

 

**Share Repurchase Program**

 

In October 2007, the Board authorized the repurchase up to $1.0million of common stock.  This authoritywas exercised from time to time through November 2008. As of December 31,2008, we had purchased $84,000 of our common stock under this program. Theauthorization period has expired.

 

**7.****                                     ****BenefitPlans**

 

###### **Stock Option Plans**

###### ** **

Our Amended andRestated 1991 Stock Incentive Plan (the “1991 Plan”) provided for the sale oraward of common stock, or the grant of incentive stock options or nonqualifiedstock options for the purchase of common stock, up to 6,090,541 shares to ourofficers, employees and consultants.  The1991 Plan terminated on March 31, 2001, and no further options have been grantedunder the 1991 Plan subsequent to that date. At December 31, 2009, there were 253,500 shares of common stockreserved for issuance upon exercise of outstanding options granted under the1991 Plan.

 

Our 2001 StockIncentive Plan was approved and adopted by the Board on April 11, 2001(the “2001 Plan”). The 2001 Plan provided for the sale or award of commonstock, or the grant of non-qualified stock options for the purchase of commonstock, up to 5,000,000 shares to our officers, directors, employees andconsultants.  Vesting 

 

36

----

Table of Contents

 

of options grantedunder the 2001 Plan accelerates upon a change of control or acquisition asdefined in the 2001 Plan. The 2001 Plan terminated on December 31, 2004and no further options have been granted under the 2001 Plan subsequent to thatdate.  At December 31, 2009, therewere 14,250 shares of common stock reserved for issuance upon exercise ofoutstanding options granted under the 2001 Plan.

 

Our 2004 StockIncentive Plan was approved and adopted by the Board on December 31, 2004(the “2004 Plan”). The 2004 Plan provides for the sale or award of common stockor the grant of non-qualified stock options for the purchase of common stock,up to 7,500,000 shares to our officers, directors, employees and consultants.The Board administers the 2004 Plan, and the terms of grants and awards madepursuant to the 2004 Plan.  Vesting ofoptions granted under the 2004 Plan accelerates upon a change of control oracquisition as defined in the 2004 Plan. The 2004 Plan will terminate on December 31,2014.  At December 31, 2009, therewere 3,197,975 shares of common stock reserved for issuance upon exercise ofoutstanding options granted under the 2004 Plan.

 

In April 1995, the Board and stockholders approved our Non-EmployeeDirector Stock Option Plan (the “Director Plan”), which was amended by theBoard on June 5, 2002. The Director Plan provided that the Board, at itsdiscretion, was permitted to grant options to non-employee directors, subjectto terms and conditions as determined by the Board.  The Director Plan terminated on November 9, 2004,and no further options have been granted under the Director Plan subsequent tothat date.  At December 31, 2009,there were 34,000 shares of common stock reserved for issuance upon exercise ofoutstanding options granted under the Director Plan.

 

A summary of option activity under the 2004 Plan, 2001 Plan, the 1991Plan and the Director Plan is as follows:

 
| ** **                            | ** ** | **Shares** | ** ** | **Weighted  Average  Exercise  Price** | ** ** |
|---------------------------------------|------------|------------|------------|----------------------------------------|------------|
| Outstanding at December 31, 2007 |       | 2,747,066  |       | $                                      | 3.40       |   |
| Granted                               |       | 1,364,600  |       | 0.63                                   |       |
| Terminated                            |       | (815,384   | )          | 2.48                                   |       |
| Exercised                             |       | (57,125    | )          | 0.23                                   |       |
|                                  |       |       |       |                                   |       |
| Outstanding at December 31, 2008 |       | 3,239,157  |       | 2.52                                   |       |
| Granted                               |       | 1,061,050  |       | 0.10                                   |       |
| Terminated                            |       | (800,482   | )          | 3.29                                   |       |
| Exercised                             |       | —     |       | —                                 |       |
|                                  |       |       |       |                                   |       |
| Outstanding at December 31, 2009 |       | 3,499,725  |       | $                                      | 1.61       |   |

 

The weighted average remaining contractual term and the aggregateintrinsic value for options outstanding at December 31, 2009 were 7.00years and $8,000 respectively.  Theweighted average remaining contractual term and the aggregate intrinsic valuefor options exercisable at December 31, 2009 was 6.77 years and $0,respectively.  The weighted averageintrinsic value of options outstanding and options vested or expected to vestis $0.

 

Related information for options outstanding and exercisable as of December 31,2009 under these option plans is as follows:

 
| **Range of exercise prices** | ** ** | **Outstanding  Options** | ** ** | **Weighted  Average  Remaining  Contractual Life** | ** ** | **Weighted  Average  Exercise Price** | ** ** | **Exercisable  Options** | ** ** | **Weighted  Average  Remaining  Contractual  Life** | ** ** | **Weighted  Average  Exercise Price** | ** ** |
|---------------------------------------------|------------|--------------------------|------------|---------------------------------------------------------|------------|--------------------------------------------|------------|--------------------------|------------|-----------------------------------------------------|------------|--------------------------------------------|------------|
| $                                           | 0.09  | -                        | $          | 0.97                                                    |       |                                       | 2,363,700  |                     | 7.85       |                                                | $          | 0.49                                       |       | 906,490 |   | 6.13 |   | $ | 0.83 |   |
| 1.01                                   | -          |                     | 3.14       |                                                    |       | 547,275                                    |       | 6.99                     |       | 2.00                                                |       | 392,992                                    |       | 6.88 |   | 2.01 |   |
| 3.30                                   | –     |                     | 3.30       |                                                    |       | 333,250                                    |       | 6.16                     |       | 3.30                                                |       | 308,204                                    |       | 6.16 |   | 3.30 |   |
| 3.50                                   | -          |                     | 7.87       |                                                    |       | 5,500                                      |       | 4.25                     |       | 3.55                                                |       | 5,281                                      |       | 4.17 |   | 3.55 |   |
| 9.13                                   | –     |                     | 9.13       |                                                    |       | 250,000                                    |       | .14                      |       | 9.13                                                |       | 250,000                                    |       | .14 |   | 9.13 |   |
|                                        |       |                     |       |                                                    |       |                                       |       |                     |       |                                                |       |                                       |       |   |   |   |   |
|                                        |       |                     |       |                                                    |       | 3,499,725                                  |       | 7.00                     |       | $                                                   | 1.61       |                                       | 1,862,967  |   | 5.48 |   | $ | 2.61 |   |
|                                        |       |                     |       |                                                    |       |                                       |       |                     |       |                                                |       |                                       |       |   |   |   |   |
| Options vested or expected to vest          |       | 2,959,413                |       | 6.38                                                    |       | $                                          | 1.84       |                     | 1,862,967  |                                                |       |                                       | $          | 2.61 |   |

 

37

----

Table of Contents

 

In July 2009, we granted options for an aggregate of 64,000 sharesto the non-employee members of our Advisory Panel.  The Board of Advisors (BOA) was formed toassist the Company and its management team in the execution of sales, marketing, business development, and operationalmatters to ensure the success of the Company.These options vest as set forth in the 2004 Plan, with 25% of theshares vesting on the first anniversary of the grant date and 6.25% of theshares vesting every quarter thereafter, as long as a member remains active inthe Advisory Panel. The expense related to these options is immaterial, and wasincluded in general and administrative expense on the accompanying consolidatedstatements of operations.

 

**SavingsPlan**

 

We sponsor a savings plan for our employees,which has been qualified under Section 401(k) of the Internal RevenueCode.  Eligible employees are permittedto contribute to the 401(k) plan through payroll deductions within statutoryand plan limits.  At the discretion ofthe Board, we contributed approximately $39,000 and $47,000 to the 401(k) planin 2009 and 2008, respectively.

 

**Deferred Compensation Plan**

 

Effective March 31, 2006, we adopted the Ezenia DeferredCompensation Plan (the “Plan”). Under this Plan, eligible employees may electto defer up to 100% of their base and incentive compensation into the Plan. Weare under no obligation to establish a fund or reserve in order to pay thebenefits under the Plan except in the event of a change in control.  If funded, the plan Trustee makes allinvestment decisions for the Trust on behalf of the participants. We have notguaranteed a return on investment for the participants, however, all earningsand losses on the Plan assets are borne by the participant.  All contributions and earnings are fullyvested to the participant when made but are subject to our creditors in theevent of bankruptcy.  As a result, theassets held in the Plan have been recorded as cash equivalents in theconsolidated balance sheet with a corresponding liability being recorded asdeferred compensation, which is included in employee compensation and benefitsin the accompanying consolidated balance sheet. Interest earned on the Plan assets is recorded as interest income in theconsolidated statement of operations. A corresponding entry to deferredcompensation is made to increase (decrease) the amounts due the participantresulting from the changes in the asset value with an offsetting charge orcredit to general and administrative expense. Investment income (loss) andcompensation expense was approximately $47,000 and ($98,000) in the years endedDecember 31, 2009 and 2008, respectively.

 

**8.             FairValue Measurements**

 

We measure certain financial assets and liabilities at fair value basedon valuation techniques using the best information available, which may includequoted market prices, market comparables, and discounted cash flowprojections.  We measure fair value usingthe framework established by the FASB accounting guidance for fair valuemeasurements and disclosures.  Thisframework requires fair value to be determined based on the exchange price thatwould be received for an asset or paid to transfer a liability (an exit price)in the principal or most advantageous market for the asset or liability in anorderly transaction between market participants.

 

The valuation techniques are based upon observable and unobservableinputs.  Observable or market inputsreflect market data obtained from independent sources.  Unobservable inputs require management tomake certain assumptions and judgments based on the best informationavailable.  Observable inputs are thepreferred source of values.  These twotypes of inputs create the following fair value hierarchy:

 

·                 Level1:  valuations consist of unadjusted quoted prices in active markets foridentical assets and liabilities and has the highest priority;

 

38

----

Table of Contents

 

·                 Level2:  valuations rely on quoted prices in markets that are not active orobservable inputs over the full term of the asset or liability;

 

·                 Level3:  valuations are based on prices or third-party or internal valuationmodels that require inputs that are significant to the fair value measurementand are less observable and thus have the lowest priority.

 

The only financial instruments reported at fair value are our cashequivalents, which include short-term mutual funds classified as tradingsecurities, and are reported at fair value using Level 1 inputs. The fair valueof the short-term mutual funds was $180,000 and $133,000 at December 31,2009 and 2008, and the unrealized gain (loss) related thereto amounts to$46,000 and ($98,000), and is recorded in cash and cash equivalents, and otherincome (expense) for the years ended December 31, 2009 and 2008,respectively.

 

**9.  Shareholder Rights Agreement**

 

On April 15, 2008, we adopted a Shareholder RightsAgreement.  Pursuant to the terms of the Rights Agreement, the Boarddeclared a dividend distribution of one Preferred Stock Purchase Right (a “Right”)for each outstanding share of our common stock to shareholders of record as ofthe close of business on April 16, 2008 (the “Record Date”).  Inaddition, one Right will automatically attach to each share of common stockissued between the Record Date and the Distribution Date (as defined in theagreement).  Each Right entitles the registered holder thereof to purchasefrom us a unit consisting of one ten-thousandth of a share (a “Unit”) of our Series DJunior Participating Cumulative Preferred Stock, par value $0.01 per share, ata cash exercise price of $3.00 per Unit, subject to adjustment under certainconditions specified in the Rights Agreement.

 

Initially, the Rights are not exercisable and are attached to and tradewith all shares of common stock outstanding as of, and issued subsequent to,the Record Date.  The Rights will separate from the common stock and willbecome exercisable upon the occurrence of the earlier of several circumstances,as defined in the agreement.

 

In the event that a Stock Acquisition Date (as defined in theagreement) occurs, proper provision will be made so that each holder of a Right(other than an Acquiring Person, as defined in the agreement, or its associatesor affiliates, whose Rights shall become null and void) will thereafter havethe right to receive upon exercise, in lieu of a number of Units of PreferredStock, that number of shares of our common stock (or, in certain circumstances,including if there are insufficient shares of common stock to permit theexercise in full of the Rights, Units of Preferred Stock, other securities,cash or property, or any combination of the foregoing) having a market value oftwo times the exercise price of the Right (such right being referred to as the “SubscriptionRight”).  Upon the occurrence of any of several particular circumstances,as defined in the agreement, following the Stock Acquisition Date, each holderof a Right will thereafter have the right to receive, upon exercise, commonstock of the acquiring company having a market value equal to two times theexercise price of the Right (such right being referred to as the “Merger Right”). The holder of a Right will continue to have the Merger Right whether or notsuch holder has exercised the Subscription Right.  Rights that are or werebeneficially owned by an Acquiring Person may (under certain circumstancesspecified in the Rights Agreement) become null and void.

 

The Rights contain certain redemption rights and provisions, as definedin the agreement. On April 21, 2008, we designated 50,000 of our 2,000,000shares of authorized preferred stock as Series D Junior ParticipatingPreferred Stock.

 

**10.          Related-Party Transactions**

 

During 2007, we engagedthe Carmen Group, Inc. (“Carmen Group”) as consultants to assist in thedevelopment and implementation of a strategy for marketing our products toFederal purchasers within the Department of Defense and appropriate adjacentmarkets. The President of the Carmen Group is the son of a member of our Boardof Directors. We paid the Carmen Group $275,000 during the year ended December 31,2008 for consulting services, and this amount is included in general andadministrative expense on the accompanying consolidated statements ofoperations. We terminated the agreement with the Carmen Group during the fourthquarter of 2008.

 

39

----

Table of Contents

 

The total amount paid tothe Carmen Group in 2007 and 2008 was approximately $465,000.

 

Payments to twocompanies previously owned by our Director Mr. Ronald Breland, SelbreAssociates and EC America, amount to approximately $30,000 per year orapproximately $180,000 since 2005. The two companies provide General ServicesAdministration (GSA) contract management and consulting in the marketing of ourproducts to the Federal government. These two companies were sold to ImmixGroup in 2009.

 

**ITEM 9. CHANGES IN ANDDISAGREEMENTS WITHACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE**

 

None.

 

**ITEM 9A. CONTROLS ANDPROCEDURES**

 

**Evaluation of Disclosure Controls and Procedures**

 

As required by Rule 13a-15 under the Securities Exchange Act of1934, as amended, as of December 31, 2009, our management, under thesupervision and with the participation of both the chief executive officer andthe chief financial officer, carried out an evaluation of the effectiveness ofour disclosure controls and procedures.  Based on this evaluation, ourchief executive officer and chief financial officer concluded that ourdisclosure controls and procedures were effective at the reasonable assurancelevel to ensure that the information required to be disclosed in the reportsfiled or submitted by us under the Securities Exchange Act of 1934 as amended,was recorded, processed, summarized, and reported within the requisite timeperiods, including ensuring that such material information is accumulated andcommunicated to our management to allow timely decisions regarding requireddisclosure.

 

**Changes in Internal Control Over Financial Reporting**

 

There were no changes in  ourinternal control over financial reporting that occurred during the quarterended December 31, 2009 that materially affected, or are reasonably likelyto materially affect, our internal control over financial reporting.

 

**Management’s Report on Internal Control Over FinancialReporting**

 

Management is responsible for establishing and maintaining adequateinternal control over financial reporting as defined in Rule 13a-15(f) ofthe Securities Exchange Act of 1934 as amended. Our internal control overfinancial reporting is a process designed to provide reasonable assuranceregarding the reliability of financial reporting and the preparation offinancial statements for external purposes in accordance with generallyaccepted accounting principles. Our internal control over financial reportingincludes those policies and procedures that (i) pertain to the maintenanceof records that, in reasonable detail, accurately and fairly reflect thetransactions and dispositions of our assets; (ii) provide reasonableassurance that transactions are recorded as necessary to permit preparation offinancial statements in accordance with generally accepted accountingprinciples, and that our receipts and expenditures are being made only inaccordance with authorizations of our management and directors; and (iii) providereasonable assurance regarding prevention or timely detection of unauthorizedacquisition, use, or disposition of our assets that could have a materialeffect on the financial statements.

 

Because of its inherent limitations, internal control over financialreporting may not prevent or detect misstatements. Also, projections of anyevaluation of effectiveness to future periods are subject to the risk thatcontrols may become inadequate because of changes in conditions, or that thedegree of compliance with the policies or procedures may deteriorate.

 

Management has assessed our internal control over financial reportingin relation to criteria described in *InternalControl — Integrated Framework,*issued by the Committee of SponsoringOrganizations of the Treadway 

 

40

----

Table of Contents

 

Commission. Based on this assessment using those criteria, we concludedthat, as of December 31, 2009, our internal control over financialreporting was effective.

 

This annual report does not include an attestation report of ourindependent registered public accounting firm regarding internal control overfinancial reporting.  Management’s report was not subject toattestation by our independent registered public accounting firm pursuant tothe rules of the Securities and Exchange Commission that permit us toprovide only management’s report in this annual report.

 

**ITEM 9B.OTHER INFORMATION**

 

None.

 

41

----

Table of Contents

 

**PART III**

 

**ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THEREGISTRANT**

 

The information required by Item 10 will be included in our definitiveProxy Statement to be delivered to stockholders in connection with the 2010Annual Meeting of Stockholders. Such information is hereby incorporated hereinby reference.

 

We have adopted a Code of Business Conductand Ethics (the “Code”) that applies to all of our employees, including ourexecutive officers and directors. The Code is available on our website atwww.ezenia.com.  We intend to discloseany amendments to or waivers of the Code on behalf of our Chief ExecutiveOfficer, Chief Financial Officer, Controller, and persons performing similarfunctions on our website. We shall also provide to any person without charge,upon request, a copy of the Code.  Anysuch request must be made in writing to Ezenia! Inc., c/o Investor Relations,14 Celina Ave, Suite 17-18, Nashua, New Hampshire 03063.

 

**ITEM11.  EXECUTIVE COMPENSATION**

** **

The information required by Item 11 will be included in our definitiveProxy Statement to be delivered to stockholders in connection with the 2010Annual Meeting of Stockholders. Such information is hereby incorporated hereinby reference.

 

**ITEM12.  SECURITY OWNERSHIP OF CERTAINBENEFICIAL OWNERS ANDMANAGEMENT AND RELATED STOCKHOLDER MATTERS**

** **

The information required by Item 12 will be included in our definitiveProxy Statement to be delivered to stockholders in connection with the 2010Annual Meeting of Stockholders.  Suchinformation is hereby incorporated herein by reference.

 

**Equity Compensation Plan Information**

 

The following table sets forth information as of December 31, 2009regarding our equity compensation plans under which shares of our common stockare authorized for issuance.

 
| **Plan Category**                                     | ** ** | **Number of securities to be  issued upon exercise  of outstanding options,  warrants and rights** | ** ** | **Weighted-average  exercise price of  outstanding options,********warrants and rights** | ** ** | **Number of securities  remaining available for  future issuance under equity  compensation plans  (excluding securities********reflected in column (a))** | ** ** |
|------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                                 | ** ** | **(a)**                                                                                                                                              | ** ** | **(b)**                                                                                                           | ** ** | **(c)**                                                                                                                                                                                                                | ** ** |
|                                                       |       |                                                                                                                                                 |       |                                                                                                              |       |                                                                                                                                                                                                                   |       |
| Equity compensation plans  approved by securityholders     |       | 3,485,475                                                                                                                                            | (1)        | $                                                                                                                 | 1.62       |                                                                                                                                                                                                                   | 4,283,946  | (2) |
|                                                       |       |                                                                                                                                                 |       |                                                                                                              |       |                                                                                                                                                                                                                   |       |
| Equity compensation plans  not approved by securityholders |       | 14,250                                                                                                                                               | (3)        | $                                                                                                                 | 0.42       |                                                                                                                                                                                                                   | —     |   |
|                                                       |       |                                                                                                                                                 |       |                                                                                                              |       |                                                                                                                                                                                                                   |       |
| Total                                                      |       | 3,499,725                                                                                                                                            |       | $                                                                                                                 | 1.61       |                                                                                                                                                                                                                   | 4,283,946  |   |

 

----

| (1) | Includes 253,500 shares of common stock to be issued upon exercise of  outstanding options under the 1991 Plan, 34,000 shares of common stock to be  issued upon exercise of outstanding options under the |
|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

42

----

Table of Contents

 
|    | Director Option Plan, and 3,197,975 shares of common stock to be  issued upon exercise of outstanding options under the 2004 Plan.                                                                                                                                                                          |
|---------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|    |                                                                                                                                                                                                                                                                                                        |
| (2)     | Includes 4,283,946 shares of common stock remaining available for  future issuance under the 2004 Plan. The 1991 Plan terminated on  March 31, 2001, and the 1994 Non-Employee Director Option Plan  terminated on November 9, 2004, and no additional options may be granted  under these plans. |
|    |                                                                                                                                                                                                                                                                                                        |
| **(3)** | **Represents shares of common stock to be issued upon  exercise of outstanding options under the 2001 Plan. The 2001 Plan terminated  on December 31, 2004, and no additional options may be granted under  this plan.**                                                                               |

 

A description of these equity incentive plans is included in Note 7 toour Consolidated Financial Statements set forth herein.

 

**ITEM13.  CERTAIN RELATIONSHIPS AND RELATEDTRANSACTIONS; DIRECTOR INDEPENDENCE**

** **

The information required by Item 13 will beincluded in our definitive Proxy Statement to be delivered to stockholders inconnection with the 2010 Annual Meeting of Stockholders. Such information ishereby incorporated herein by reference.

 

**ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES**

 

Theinformation required by Item 14 will be included in our definitive ProxyStatement to be delivered to stockholders in connection with the 2010 AnnualMeeting of Stockholders. Such information is hereby incorporated herein byreference.

 

43

----

Table ofContents

 

**PART IV**

 

**ITEM 15.  EXHIBITS, AND FINANCIAL STATEMENT SCHEDULES,AND REPORTS ON FORM 8-K**

 

**(a)****     ****DocumentsFiled as Part of Form 10-K**

 

**1.****                                     ****ConsolidatedFinancial Statements.**

 

The following consolidated financialstatements and supplementary data are included in Part II-Item 8 filed aspart of this report:

 

·                  Report ofIndependent Registered Public Accounting Firm

·                  ConsolidatedBalance Sheets as of December 31, 2009 and 2008

·                  ConsolidatedStatements of Operations for the years ended December 31, 2009 and 2008

·                  ConsolidatedStatements of Stockholders’ Equity for the years ended December 31, 2009and 2008

·                  ConsolidatedStatements of Cash Flows for the years ended December 31, 2009 and 2008

·                  Notes toConsolidated Financial Statements

·                  QuarterlyFinancial Information (unaudited)

 

**2.****                                     ****FinancialStatement Schedule.**

 

·                  Schedule II — Valuationand Qualifying Accounts

 

Schedules not listed abovehave been omitted because they are not applicable, not required or theinformation required is shown in the consolidated financial statements or thenotes thereto.

 

**3.****                                     ****List ofExhibits.**

 
| **Exhibit********Number** | ** ** | **Description of Exhibit**                                                                                                                                                                                  |
|---------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                      |       |                                                                                                                                                                                                        |
| 3.1(1)                    |       | Amended and Restated  Certificate of Incorporation of the Registrant.                                                                                                                                       |
| 3.2(11)                   |       | Certificate of  Designations, Preferences and Rights of a Series of Preferred Stock of  the Registrant classifying and designating the Series D Junior  Participating Cumulative Preferred Stock. |
| 3.3(1)                    |       | Amended and Restated By-Laws  of the Registrant.                                                                                                                                                            |
| 4.1(1)                    |       | Specimen Stock  Certificate.                                                                                                                                                                                |
| 4.2(12)                   |       | Shareholder  Rights Agreement, dated as of April 15, 2008, between Ezenia! Inc. and  Computershare Trust Company, N.A., as Rights Agent.                                                               |
| 10.1(1)+                  |       | Amended and Restated 1991  Stock Incentive Plan of the Registrant.                                                                                                                                          |
| 10.2(1)                   |       | Amended and Restated 1994  Non-Employee Director Option Plan of the Registrant.                                                                                                                             |
| 10.3(1)+                  |       | 1995 Employee Stock  Purchase Plan of the Registrant.                                                                                                                                                       |
| 10.4(8)+                  |       | 2004 Stock Incentive Plan  of the Registrant.                                                                                                                                                               |
| 10.5(1)                   |       | License Agreement dated  January 2, 1995 between the Registrant and Datapoint Corporation.                                                                                                             |
| 10.6(1)                   |       | Letter Agreement dated  December 31, 1994 between the Registrant and Fleet Bank of  Massachusetts, N.A.                                                                                                |
| 10.7(2)+                  |       | Employment Agreement dated  as of November 9, 2007 between the Registrant and Khoa D. Nguyen.                                                                                                          |
| 10.8+(13)                 |       | First Amendment to Employment Agreement between the  Registrant and Khoa D. Nguyen, dated December 11, 2008                                                                                            |
| 10.9(3)                   |       | Asset Purchase Agreement  dated as of December 28, 2000 between the Registrant and General  Dynamics Government Systems Corporation, as amended.                                                       |

 

44

----

Table of Contents

 
| 10.10(a)(4) |   | Put Agreement dated as of  March 27, 2001 (as amended to date) by and between the Registrant and  General Dynamics Government Systems Corporation.                           |
|-------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.10(b)(7) |   | Agreement and Release  dated as of December 31, 2002 by and between the Registrant and General  Dynamics Government Systems Corporation.                                     |
| 10.11(5)+   |   | 2001 Stock Incentive Plan  of the Registrant.                                                                                                                                     |
| 10.12(6)    |   | Asset Purchase Agreement  dated as of August 1, 2002 between the Registrant and Tandberg Telecom  AS.                                                                        |
| 10.13(6)    |   | License Agreement dated as  of August 1, 2002 between the Registrant and Telecom AS.                                                                                         |
| 10.14(6)    |   | Promissory Note dated as  of August 1, 2002 made by the Registrant in favor Tandberg Telecom AS.                                                                             |
| 10.15(6)    |   | Security Agreement dated  as of August 1, 2002 between the Registrant and Tandberg Telecom AS.                                                                               |
| 10.16(6)    |   | Ezenia! License Agreement  dated as of October 30, 2002 between the Registrant and Tandberg Telecom  AS.                                                                     |
| 10.17(9)    |   | First Amended and Restated  Software Distribution License Agreement dated January 1, 2005 by and between  Microsoft Corporation and Ezenia! Inc.                                  |
| 10.18(10)   |   | Amendment to First Amended  and Restated Software Distribution License Agreement by and between Microsoft  Corporation and Ezenia! Inc. dated April 2007.                    |
| 10.19(11)   |   | Amendment to First Amended  and Restated Software Distribution License Agreement by and between Microsoft  Corporation and Ezenia! Inc. dated December 2008.                 |
| 10.20+(13)  |   | The Ezenia! Inc. Deferred Compensation Plan, as  amended and restated as of December 11, 2008.                                                                               |
| 10.21(14)   |   | Indemnification Agreement  between the Registrant and each of its directors and executive officers.                                                                               |
| 21.1        |   | Subsidiaries of the  Registrant.                                                                                                                                                  |
| 23.2        |   | Consent of Caturano and  Company, P.C.                                                                                                                                            |
| 31.1        |   | Consent of the Company’s  Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.            |
| 31.2        |   | Consent of the Company’s  Chief Financial Officer pursuant to 18 U. S.C. Section 1350, as adopted  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.           |
| 32.1*       |   | Certification of the  Company’s Chief 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 the  Company’s Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as  adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |

 

Copies of any of these exhibits are availablewithout charge upon written request to Investor Relations, Ezenia! Inc., 14Celina Avenue, Suite 17-18, Nashua, NH 03063.

 

----

| *   | Furnished herewith.                                                                                                                                                      |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| +   | Management contract for  compensatory plan or arrangement required to be filed as an exhibit to this  report pursuant to Item 15(c) of this report.                 |
| (1) | Incorporated by reference  from the Company’s Registration Statement on Form S-1.                                                                              |
| (2) | Incorporated by reference  from the Company’s Form 8-K filed with the Securities and Exchange  Commission on November 14, 2007.                           |
| (3) | Incorporated by reference  from the Company’s Form 10-K filed with the Securities and Exchange  Commission for the year ended December 31, 2000.          |
| (4) | Incorporated by reference  from the Company’s Form 10-Q for the quarter ended September 30,  2001.                                                        |
| (5) | Incorporated by reference  from the Company’s Registration Statement on Form S-8 filed with the  Securities and Exchange Commission on December 21, 2001. |
| (6) | Incorporated by reference  from the Company’s Form 10-Q for the quarter ended September 30,  2002.                                                        |
| (7) | Incorporated by reference  from the Company’s Form 10-K filed with the Securities and                                                                          |

 

45

----

Table of Contents

 
|   | Exchange Commission for  the year ended December 31, 2002.                                                                                                                                         |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (8)    | Incorporated by reference  from the Company’s Form 10-K/A filed with the Securities and Exchange  Commission for the year ended December 31, 2004.                                       |
| (9)    | Incorporated by reference  from the Company’s Form 10-Q for the quarter ended March 31, 2005.                                                                                                 |
| (10)   | Incorporated by reference  from the Company’s Form 10-K filed with the Securities and Exchange  Commission for the year ended December 31, 2007.                                         |
| (11)   | Incorporated by reference  from the Company’s Registration Statement on Form 8-A, filed with the  Securities and Exchange Commission on April 21, 2008 (File  No. 000-25882)).      |
| (12)   | Incorporated herein by  reference to the Company’s Registration Statement on Form 8-A, filed  with the Securities and Exchange Commission on April 21, 2008 (File  No. 000-25882)). |
| (13)   | Incorporated herein by  reference to the Company’s Annual Report on Form 10-K filed with the  Securities and Exchange Commission for the year ended December 31, 2008.                   |
| (14)   | Incorporated herein by  reference to the Company’s Current Report on Form 8-K, filed with the  Securities and Exchange Commission on April 2, 2009.                                      |

 

46

----

Tableof Contents

 

**SIGNATURES**

 

Pursuant to the requirements of Section 13 or 15(d) of theSecurities Exchange Act of 1934, the Registrant has duly caused this report tobe signed on its behalf by the undersigned, thereunto duly authorized.

 
|   | EZENIA! INC.                                      |
|--------|---------------------------------------------------|
|   |                                              |
|   |                                              |
|   | By:                                               | /s/ Khoa D. Nguyen |
|   | Khoa D. Nguyen                                    |
|   | Chairman, Chief Executive  Officer, and President |
|   | (Principal executive  officer)                    |
|   |                                              |
|   | Date: March 30, 2010                         |

 

Pursuant to the requirements of the Securities Exchange Act of 1934,this report has been signed below by the following persons on behalf of theRegistrant and in the capacities and on the dates indicated.

 

| **Signature**         | ** ** | **Title**                                                                       | ** ** | **Date**            |
|-----------------------|------------|---------------------------------------------------------------------------------|------------|---------------------|
|                  |       |                                                                            |       |                |
| /s/ Khoa D. Nguyen    |       | Chairman, Chief Executive Officer,  and President (Principal executive officer) |       | March 30, 2010 |
| Khoa D. Nguyen        |       |                                                                            |       |
|                  |       |                                                                            |       |                |
| /s/ Ronald L. Breland |       | Director                                                                        |       | March 30, 2010 |
| Ronald L. Breland     |       |                                                                            |       |                |
|                  |       |                                                                            |       |                |
| /s/ Gerald P. Carmen  |       | Director                                                                        |       | March 30, 2010 |
| Gerald P. Carmen      |       |                                                                            |       |                |
|                  |       |                                                                            |       |                |
| /s/ John A. McMullen  |       | Director                                                                        |       | March 30, 2010 |
| John A. McMullen      |       |                                                                            |       |                |
|                  |       |                                                                            |       |                |
| /s/ George Q. Stevens |       | Director                                                                        |       | March 30, 2010 |
| George Q. Stevens     |       |                                                                            |       |                |
|                  |       |                                                                            |       |                |
| /s/ Thomas J. McCann  |       | Chief Financial Officer                                                         |       | March 30, 2010 |
| Thomas J. McCann      |       | (Principal financial and accounting officer)                                    |       |                |

 

47

----

Table ofContents

 

**Exhibit Index**

 
| **Exhibit********Number** | ** ** | **Description of Exhibit**                                                                                                                                                                                  |
|---------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                      |       |                                                                                                                                                                                                        |
| 3.1(1)                    |       | Amended and Restated  Certificate of Incorporation of the Registrant.                                                                                                                                       |
| 3.2(11)                   |       | Certificate of  Designations, Preferences and Rights of a Series of Preferred Stock of  the Registrant classifying and designating the Series D Junior  Participating Cumulative Preferred Stock. |
| 3.3(1)                    |       | Amended and Restated  By-Laws of the Registrant.                                                                                                                                                            |
| 4.1(1)                    |       | Specimen Stock  Certificate.                                                                                                                                                                                |
| 4.2(12)                   |       | Shareholder  Rights Agreement, dated as of April 15, 2008, between Ezenia! Inc. and  Computershare Trust Company, N.A., as Rights Agent.                                                               |
| 10.1(1)+                  |       | Amended and Restated 1991  Stock Incentive Plan of the Registrant.                                                                                                                                          |
| 10.2(1)                   |       | Amended and Restated 1994  Non-Employee Director Option Plan of the Registrant.                                                                                                                             |
| 10.3(1)+                  |       | 1995 Employee Stock  Purchase Plan of the Registrant.                                                                                                                                                       |
| 10.4(8)+                  |       | 2004 Stock Incentive Plan  of the Registrant.                                                                                                                                                               |
| 10.5(1)                   |       | License Agreement dated  January 2, 1995 between the Registrant and Datapoint Corporation.                                                                                                             |
| 10.6(1)                   |       | Letter Agreement dated  December 31, 1994 between the Registrant and Fleet Bank of  Massachusetts, N.A.                                                                                                |
| 10.7(2)+                  |       | Employment Agreement dated  as of November 9, 2007 between the Registrant and Khoa D. Nguyen.                                                                                                          |
| 10.8+(13)                 |       | First Amendment to Employment Agreement between the  Registrant and Khoa D. Nguyen, dated December 11, 2008                                                                                            |
| 10.9(3)                   |       | Asset Purchase Agreement  dated as of December 28, 2000 between the Registrant and General  Dynamics Government Systems Corporation, as amended.                                                       |
| 10.10(a)(4)               |       | Put Agreement dated as of  March 27, 2001 (as amended to date) by and between the Registrant and  General Dynamics Government Systems Corporation.                                                     |
| 10.10(b)(7)               |       | Agreement and Release  dated as of December 31, 2002 by and between the Registrant and General  Dynamics Government Systems Corporation.                                                               |
| 10.11(5)+                 |       | 2001 Stock Incentive Plan  of the Registrant.                                                                                                                                                               |
| 10.12(6)                  |       | Asset Purchase Agreement  dated as of August 1, 2002 between the Registrant and Tandberg Telecom  AS.                                                                                                  |
| 10.13(6)                  |       | License Agreement dated as  of August 1, 2002 between the Registrant and Telecom AS.                                                                                                                   |
| 10.14(6)                  |       | Promissory Note dated as  of August 1, 2002 made by the Registrant in favor Tandberg Telecom AS.                                                                                                       |
| 10.15(6)                  |       | Security Agreement dated  as of August 1, 2002 between the Registrant and Tandberg Telecom AS.                                                                                                         |
| 10.16(6)                  |       | Ezenia! License Agreement  dated as of October 30, 2002 between the Registrant Tandberg Telecom AS.                                                                                                    |
| 10.17(9)                  |       | First Amended and Restated  Software Distribution License Agreement dated January 1, 2005 by and between  Microsoft Corporation and Ezenia! Inc.                                                            |
| 10.18(10)                 |       | Amendment to First Amended  and Restated Software Distribution License Agreement by and between Microsoft  Corporation and Ezenia! Inc. dated April 2007.                                              |
| 10.19(11)                 |       | Amendment to First Amended  and Restated Software Distribution License Agreement by and between Microsoft  Corporation and Ezenia! Inc. dated December 2008.                                           |
| 10.20+(13)                |       | The Ezenia! Inc. Deferred Compensation Plan, as  amended and restated as of December 11, 2008.                                                                                                         |
| 10.21(14)                 |       | Indemnification Agreement between the Registrant and  each of its officers and directors.                                                                                                                   |
| 21.1                      |       | Subsidiaries of the  Registrant.                                                                                                                                                                            |
| 23.2                      |       | Consent of Caturano and  Company, P.C.                                                                                                                                                                      |

 

48

----

Table of Contents

 
| 31.1  |   | Consent of the Company’s  Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.            |
|-------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 31.2  |   | Consent of the Company’s  Chief Financial Officer pursuant to 18 U. S.C. Section 1350, as adopted  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.           |
| 32.1* |   | Certification of the  Company’s Chief 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 the  Company’s Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as  adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |

 

----

| *      | Furnished herewith.                                                                                                                                                                                     |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| +      | Management contract for  compensatory plan or arrangement required to be filed as an exhibit to this  report pursuant to Item 15(c) of this report.                                                |
| (1)    | Incorporated by reference  from the Company’s Registration Statement on Form S-1.                                                                                                             |
| (2)    | Incorporated by reference  from the Company’s Form 8-K filed with the Securities and Exchange  Commission on November 14, 2007.                                                          |
| (3)    | Incorporated by reference  from the Company’s Form 10-K filed with the Securities and Exchange  Commission for the year ended December 31, 2000.                                         |
| (4)    | Incorporated by reference  from the Company’s Form 10-Q for the quarter ended September 30,  2001.                                                                                       |
| (5)    | Incorporated by reference  from the Company’s Registration Statement on Form S-8 filed with the  Securities and Exchange Commission on December 21, 2001.                                |
| (6)    | Incorporated by reference  from the Company’s Form 10-Q for the quarter ended September 30,  2002.                                                                                       |
| (7)    | Incorporated by reference  from the Company’s Form 10-K filed with the Securities and                                                                                                         |
|   | Exchange Commission for  the year ended December 31, 2002.                                                                                                                                         |
| (8)    | Incorporated by reference  from the Company’s Form 10-K/A filed with the Securities and Exchange  Commission for the year ended December 31, 2004.                                       |
| (9)    | Incorporated by reference  from the Company’s Form 10-Q for the quarter ended March 31, 2005.                                                                                                 |
| (10)   | Incorporated by reference  from the Company’s Form 10-K filed with the Securities and Exchange  Commission for the year ended December 31, 2007.                                         |
| (11)   | Incorporated by reference  from the Company’s Registration Statement on Form 8-A, filed with the  Securities and Exchange Commission on April 21, 2008 (File  No. 000-25882)).      |
| (12)   | Incorporated herein by  reference to the Company’s Registration Statement on Form 8-A, filed  with the Securities and Exchange Commission on April 21, 2008 (File  No. 000-25882)). |
| (13)   | Incorporated herein by  reference to the Company’s Annual Report on Form 10-K filed with the  Securities and Exchange Commission for the year ended December 31, 2008.                   |
| (14)   | Incorporated herein by  reference to the Company’s Current Report on Form 8-K, filed with the  Securities and Exchange Commission on April 2, 2009.                                      |

 

49

----