# **UNITEDSTATESSECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549**

### **FORM10-K**

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

## **For the year ended December 31, 2006**

**Commission File Number 0-25882**

**EZENIA! INC.*******(Exact name of registrantas specified in its charter)*

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

##  

## **14 Celina Ave, Suite 17-18, Nashua, NewHampshire 03063***(Address of principal executive offices,including zip code)*

**(781) 505-2100***(Registrant’s telephonenumber, including area code)*

*___________________________________*

Securities RegisteredPursuant to Section 12(b) of the Act:**None**

Securities Registered Pursuantto Section 12(g) of the Act:**Common Stock $.01 par value**

Indicate by checkmark if the Registrant is a well-known seasoned issuer, as defined in Rule 405of the Securities Act  Yes  o  No  x

Indicate by checkmark if the Registrant is not required to file reports pursuant to Section 13or 15(d) of the Act  Yes  o** ** No  x

Indicate by checkmark whether the Registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the Registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.  Yes  x  No   o

Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-Kis not contained 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 Form10-K.  Yes  o  No  x

**Indicate by check mark whether theRegistrant is a large accelerated filer, an accelerated filer or anon-accelerated filer.  See definition of“accelerate filer” and “large accelerated filer” in Rule 12b-2 of the ExchangeAct).**

**LargeAccelerated Filer  Yes  **o  No  x          Accelerated Filer  Yes  o  No   x     Non-Accelerated Filer  Yes  x  No   o

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

**Theaggregate market value of the voting and non-voting common stock held bynon-affiliates of the Registrant was $38,810,556 (computed by reference to theprice at which the Registrant’s common stock was last sold on the OTC BulletinBoard on June 30, 2006).**

**The numberof shares outstanding of the Registrant’s common stock as of March 28, 2007 was14,653,472**.

**DOCUMENTS INCORPORATED BYREFERENCE**

Portions of the definitive Proxy Statement to be delivered toShareholders in connection with the Annual Meeting of Shareholders to be heldMay 23, 2007 are incorporated by reference into Part III hereof. With theexception of the portion of such Proxy Statement that is expressly incorporatedherein, such Proxy Statement shall not be deemed filed as part of this AnnualReport on Form 10-K.

 

 

----

**Ezenia! Inc.2006 Form 10-K Annual ReportTable of Contents**

 
|            | ** ** | ** **                                                                                                          | ** ** | **Page**   |
|------------|------------|---------------------------------------------------------------------------------------------------------------------|------------|------------|
| ** ** |       | **PART I**                                                                                                          | ** ** | ** ** |
| Item  1.   |       | Business                                                                                                            |       | 3          |
| Item  1A.  |       | Risk  Factors                                                                                                       |       | 10         |
| Item 1B.   |       | Unresoloved Staff  Comments                                                                                         |       | 12         |
| Item 2.    |       | Description of  Property                                                                                            |       | 12         |
| Item  3.   |       | Legal  Proceedings                                                                                                  |       | 12         |
| Item 4.    |       | Submission of  Matters to Vote of Security Holders                                                                  |       | 12         |
|       |       |                                                                                                                |       |       |
|       |       | **PART II**                                                                                                         |       |       |
|       |       |                                                                                                                |       |       |
| Item 5.    |       | Market for  Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases  of Equity Securities |       | 13         |
| Item 6.    |       | Selected Financial  Data                                                                                            |       | 13         |
| Item 7.    |       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                         |       |       |
| Item 7A.   |       | Quantitative  and Qualitative Disclosures about Market Risk                                                         |       | 24         |
| Item 8.    |       | Financial  Statements and Supplementary Data                                                                        |       | 24         |
| Item 9A.   |       | Controls and  Procedures                                                                                            |       | 42         |
|       |       |                                                                                                                |       |       |
|       |       | **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                    |       | 43         |
| 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                                                                        |       | 45         |
|       |       |                                                                                                                |       |       |
| Signatures |       |                                                                                                                |       | 47         |

 

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

2

----

**PART I**

**ITEM 1.BUSINESS**

Founded in 1991,Ezenia! Inc. (“Ezenia”, “we”, or the “Company”) a Delaware corporation,develops and markets products that enable organizations to provide high-qualitygroup communication and collaboration capabilities to commercial, governmental,consumer and institutional users. Ezenia’s products allow individuals andgroups, regardless of proximity constraints, to interact and share informationin a natural, spontaneous way — voice-to-voice, face-to-face, mouse-to-mouse,keyboard-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.

Ezeniaoffers one of the most comprehensive commercially available lines ofcollaborative products.  Ezenia’sInfoWorkSpace (IWS) software product, combined with its legacyvideoconferencing products, enables voice communication, instant messaging,white boarding, virtual workspaces, and video conferences across a wide rangeof networks including local area networks (LAN), intranets, the Internet, andcircuit-based networks.  Furthermore,because Ezenia products include both software-only solutions and configurablehardware solutions, they can be deployed with relative ease at small sites orin locations with a large number of users.

Ezeniahistorically has sold the legacy videoconferencing products worldwide throughresellers, integrators and marketers of video collaboration, and networkingsolutions, and will continue to do so as long as demand exists.  Most recently, for the IWS product andservices, Ezenia sells to customers in the Federal government, mostly in theDepartment of Defense (DoD) and the intelligence community, either directly, orin many instances, in partnership with the premier defense contractors and/orintegrators.  It is in Ezenia’s interestto leverage these partnerships with well-established contractors and/orintegrators to further expand the deployment and provide the support of IWS inlarge-scale opportunities.

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

In 1991, Ezenia,known at the time as VideoServer, designed, developed, manufactured, and soldMultipoint Control Systems or Units (MCS or MCU) for both the circuit-oriented,Integrated Services Digital Network (ISDN)-based and packet-switched, InternetProtocol (IP)-based videoconferencing applications. Ezenia’s MCS was unique atthe time with its PC-based, flexible hardware design approach and systemconfigurations, leveraging commercial off-the-shelf base operatingsystems.  At that time, traditionalvideoconferencing vendors concentrated mostly on the development of more andmore sophisticated, standard-based endpoints to be used in point-to-pointvideoconferencing.  Ezenia focused itsbusiness, not on the endpoints, but on systems deployed in the infrastructurebackroom, to enable three or more sites or parties involved invideoconferencing to properly communicate among themselves, by switching videosources based on audio processing of current and immediately precedingspeakers. Ezenia’s technical advantages were derived by masking andcompensating for incompatibilities between endpoints from different manufacturers,algorithmic transcoding, compensation for different bandwidth requirements, andsimultaneous multi-windowed video arrangements on the monitor known as “HollywoodSquares”, just to name a few.

For thecircuit-switched market segment, Ezenia offered the Series 2000 MCS which canscale up to forty eight (48) ports or sites with a variety of networkcapabilities including but not limited to V.35, T1and E1 interfaces,Asynchronous Transfer Mode (ATM) and Frame Relay.  Multiple Series 2000 MCS can be cascadedtogether to allow for large-scale videoconferences. Ezenia still produces,ships, and provides support for the Series 2000 MCS.

For thepacket-switched market segment, Ezenia offered a low-end, software-onlysolution NetServer 1000 which provides a cost-effective solution fordepartmental applications.  Forcomparable deployments to its ISDN counterparts, Ezenia offered the NetServer3000 MCS, which can also scale up to forty eight (48) ports or sites.  

3

----

Similarly,multiple NetServer 3000 MCS can be cascaded together to support large-scalevideo conferences.  Ezenia also offeredthe NetGate which, with its associated gatekeeper software, controls, monitors,polices, and facilitates communications traffic between the ISDN and IPenvironments.  Ezenia still produces,ships, and provides support for the NetServer and NetGate MCS.

In the late 90’s,Ezenia fully realized the limitations and narrow applications of itsvideoconferencing products which, among many deficiencies, are monolithic,require highly specialized support and services, stand apart from the normaloffice environment that most information workers are accustomed to, and do notprovide a solution to the need to truly collaborate and disseminate informationin real time.  Contrary to how mostvideoconferencing vendors would like to indoctrinate potential customers, video— in particular talking heads as in the case of most video conferences — wasand is, now more than ever, far from being the “piece de resistance” of true,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,Ezenia completed the first phase of its transformation with the acquisition ofthe IWS business from General Dynamics. As an application solution and technology built on top of Placeware’s(see Third Party Technology note below) web conferencing technology, IWS:

·                  Allowsusers to be aware of the online presence of colleagues, enables true multimediacollaboration sessions starting with the simplest instant messaging(keyboard-to-keyboard) and expanding to the most complex all-encompassing(mouse-to-mouse) sharing and dissemination of mission critical informationsimultaneously with in-session, super-imposed audio conferencing and/or videostreaming;

·                  Leveragescommercially off-the-shelf base operating systems such as the Windows andSolaris platforms; and

·                  Fitsinto the virtual office environment that most information workers are familiarwith.

The use and growth ofreal-time collaborative technologies within commercial or governmentalenterprises, while still early in its adoption curve, are beginning toaccelerate.  The investment in informationand collaborative technologies helps customers flatten their organizations,improve enterprise wide communication, shorten the decision-making process, andfacilitate real-time reactions to critical issues.  Rather than just providing access to inertdata stored on a server, the goal today is to find ways to enable informationworkers to collaborate and share their expertise to derive knowledge fromdatabases 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.

**Products**

Ezenia’s expertise is indeveloping products that deliver highly secure and flexible support forinformational collaboration, in-session audio conferencing, and video streamingcapabilities across a wide range of platforms. The Company’s products have been designed with a scaleable, modulararchitecture to give customers the flexibility to add capacity, processingpower, and conferencing features as the customer network and applicationrequirements grow. Using a common set of hardware and software building blocks,customers can choose from a wide range of product configurations that differ incapacity, price, network connectivity and features, all of which share the sameoperating software user interface. Products may be configured for use incustomer premises environments or may be configured with specialized packagingfor use in a telephone carrier’s central office setting.  The Company believes a key differentiator forits products is the built-in robust security features, allowing them to beinstalled in some of the highest clearance and security sites in the market.

4

----

***InfoWorkSpace***

IWS is acomprehensive suite of collaboration applications designed to allow anyorganization to more efficiently communicate, particularly when attempting towork as, and within, a group.  From anoverall perspective, IWS, when used effectively can reduce or even eliminatedependency on travel, traditional video conferencing, traditional audioconferencing and the phone, and even e-mail and file servers.  Essentially, IWS is like a corporate campusor enterprise whose resources can be accessed by an information worker throughhis or her own desktop or laptop PC. Users can browse through the virtual campus, facility, or building tolocate the room to be used for a meeting, or just pick the needed contact(s)and initiate the meeting with the click of the mouse.

Our customers,including the U.S. intelligence community, the U.S. Joint Forces Command, andvarious branches of the U.S. Armed Forces including the Marines, Navy, AirForce and Army, have leveraged the flexibility of IWS to aid in a myriad ofmissions.  From daily mission briefs tomedivac procedures in Afghanistan to operational support in Fallujah, IWS hasincreasingly become a vital part of the U.S. defense network.  The stability, scalability and security ofIWS allow our customers to depend on our software to complete mission-criticalassignments and save lives in some of the world’s most dangerous areas.

At a basic level,IWS is a cross-platform solution in a box, supporting both UNIX and Windowsbase operating systems.  A standardsoftware suite comes complete with our server software package, database,application server, and user directory along with a number of ancillaryadd-ons.  This suite provides aself-sufficient workgroup environment for a user base of up to several hundredusers.  However, with a few simple systemconfigurations, IWS servers can be federated in such a way that multipleservers can trust one another in order to support collaboration across anenterprise with thousands of participants.

IWS securityinfrastructure is built upon the best practices that have been in use inoperating systems for decades.  Much likea UNIX administrator can limit access to a directory or even a file to alimited set of users, IWS administrators can lock rooms down to restrict usersfrom seeing sensitive data that is outside their area of responsibility.  Permission-based access allows administratorsto finely 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.  All data within the application can beaudited and searched for specific words or patterns of words.  IWS provides a high level of securitycapabilities as well as a safety net to capture any breaches that may arisefrom human errors.

The stability,scalability, flexibility and security capabilities of IWS are criticallyimportant for our customers, but the true power of IWS is in its collaborationapplications.  Users can participate inan interactive conference 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.  With IWS, no longeris a heavy piece of hardware required at each terminal point of collaboration.  No longer is it necessary to schedule aconference with a bridge operator, and no longer is a whole new networkinfrastructure required to support an interactive conferencing capability.  Information workers, once logged in to IWS,can initiate a conference by going to a virtual room and inviting theparticipants as needed.  Rooms are eitherpre-defined or created on demand as needs dictate.  Once inside a room, either by joining orbeing invited into a session, participants can have an audio conference straightfrom the software.  No set up isrequired. No additional cost is incurred. Participants even can be in multiple rooms at the same time, offering amore productive virtual environment than in the physical world.  Participants can share and work on documentsfrom the file cabinet associated with a room. Users can have an interactive white board session and save theresults.  Users also can manage theircalendar and participate in message boards and save that information to theserver where they can access it any time from any place.

A high-levelsummary of IWS features and functions is listed below:

·                  Text chat, in a one-to-onearrangement, in a conference environment, or in multiple combinations ofone-on-one and/or conference environments;

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

5

----

·                  Interactive whiteboard which allusers can see and modify in real time;

·                  Application sharing allowing thescreen view of any application on any desktop or laptop PC of any informationworker to be broadcasted to all other participants;

·                  Secured file cabinet, from whichpermission-based access allows for documents to be stored, retrieved, andmonitored at any time from any place;

·                  EZ-in FORM, a forms manager designedfor an agency to document a task order where multiple sites and people aredeployed on a mission that requires rapid updates to critical events;

·                  EZinCMD, a unit commander canconsolidate views and people into a critical command and control battlefieldsituation for rapid response;

·                  Multi-Level security allows users ofone security level to have real-time collaboration sessions with users atanother security level;

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

·                  Full system auditing, which allowsall data and actions to be audited and searchable;

·                  Instant messaging, a lightweightapplication that provides all interactive capabilities; and

·                  Virtual meeting area, a more robustapplication that provides both real-time collaborative capabilities as well asstatic functions like file cabinet, message board, and calendaring.

***EncounterMCS Family***

The Encounterproduct line includes:

·                  Encounter 3000NetServer: real-time collaboration server designed to support large enterpriseand service provider customers;

·                  Encounter 3000NetGate: gateway solution that allows traditional videoconferencing systems toparticipate in IP-based collaboration sessions; and

·                  Encounter 1000NetServer: real-time collaboration server geared towards smaller, departmentalworkgroups or more distributed organizations

***Series2000 MCS***

The Series 2000MCS product line, designed for switched digital circuit networks, includes anumber of platform configurations which can be expanded through customerselection of optional processing modules and software applications. Thefollowing table lists the configurations offered by the Company:

| MODEL  | ** ** | ** ** | ** ** | **CAPACITY**                                                             | ** ** | **TARGET MARKET/APPLICATION** |
|--------|------------|------------|------------|--------------------------------------------------------------------------|------------|------------------------------------|
|   |       |       |       |                                                                     |
| 2007   |       | 8 users    |       | Mid-range CPE for  distributed network environments                      |
| 2020   |       | 48 users   |       | Large CPE/central  office network with extensive multimedia applications |
| CO     |       | 48 users   |       | High availability central office server                                  |

######  

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

Ezeniamarkets its IWS products and related services to customers within the USfederal government, primarily to the US DoD and to the US intelligencecommunity worldwide.  Ezenia alsoprovides these products and services to the defense and intelligenceorganizations of foreign allies of the United States government.

IWSproducts and services are licensed on an annual subscription and renewal basis,during which software updates and basic technical support are included as partof base offerings. Enhanced service offerings are also offered in asubscription model. Training, installation, and customization are sold on anincidental basis.

Theworldwide government marketplace is best understood as a matrix of customers,sales vehicles (contracts), and sales channels. Ezenia employs a sales model which is an analog to this governmentmarket matrix. IWS 

6

----

productsand related services are available to specific segments of the government,using various vehicles, including Ezenia’s own GSA Schedule, and multiplechannels both directly, with the Company’s own sales force, andindirectly.  For indirect channels,Ezenia partners with General Dynamics, SAIC, and Northrop Grumman among others.

Infiscal year 2006, approximately 34% of our sales of IWS products and relatedservices were through our indirect channels. Ezenia’s top three end-user customers for IWS products and relatedservices in 2006 were Defense Intelligence Agency, US Joint Forces Command, andthe US Air Force.

Meanwhile,our legacy MCS sales are primarily to international customers and endusers.   In 2006, Ezenia delivered theseproducts through distributors, dealers, vertical market resellers, and systemsintegrators, as well as directly to end-users. Revenue from international markets accounted forapproximately 2%, 3%, and 2% of our revenue for the years ended December 31,2006, 2005, and 2004, respectively.

Ezenia conducts its salesand marketing activities from its principal offices in Nashua, New Hampshire,as well as from two other sales locations in the United States.

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

Ezenia believesthat its future success depends on its ability to continue to enhance andexpand its existing enterprise collaboration products and to develop newproducts that maintain its technology leadership. Ezenia has invested and willcontinue to invest in the development of products and core technologies whilealso leveraging the integration of “best-of-breed” software components throughstrategic partnerships. Extensive product development input is obtained viadirect feedback from end users and suggested improvements from strategicpartners and resellers.  We carefullymonitor the migration of industry standards and remain committed to developingproducts utilizing such standards.  Thisincludes the development of interoperable collaboration products to meet eitherindustry needs and/or DoD-driven interoperability criteria, while maintaining akeen focus on the security aspects of enterprise collaboration, includingsolutions in the web conferencing arena.

As of December 31,2006, Ezenia’s research and development staff consisted primarily of softwareengineers augmented with US-based and US-citizen software contractors. Many ofour software engineers carry either secret or top-secret levels of securityclearance. The Company’s research and development expenditures wereapproximately $1.7 million, $1.2 million, and $1.1 million in 2006, 2005 and2004, respectively, representing approximately 13%, 9%, and 10% of revenue,respectively.

We account for research and development costs in accordancewith several accounting pronouncements, including SFAS No. 2, *“Accounting forResearch and Development Costs”*, and SFAS No. 86, *“Accounting for theCosts of Computer Software to be Sold, Leased, or Otherwise Marketed”*.  SFAS No. 86 specifies that costsincurred internally in researching and developing a computer software productshould be charged to expense until technological feasibility has beenestablished for the product. Once technological feasibility is established, allsoftware costs should be capitalized until the product is available for generalrelease to customers.  During the quarterended March 31, 2006, we released Version 3.0 of our InfoWorkSpace softwareproduct.  In connection with thisdevelopment effort, a total of $140 thousand of costs were capitalized and willbe amortized on a straight-line method over the remaining estimated economiclife of the product, which we have determined to be two years.

Judgment is required in determining when technological feasibilityof a product is established. In most cases, we have determined thattechnological feasibility for our software products/updates is reached shortlybefore the products are released to manufacturing. Costs incurred aftertechnological feasibility is established have historically not been material,and accordingly, were expensed when incurred in these instances.  Researchand development costs associated with product development work are deferreduntil such time as that work can be properly recognized as revenue.

7

----

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

Ezenia provides technicalsupport and services to its resellers and direct customers. A high level ofcontinuing service and support is critical to our objective of developinglong-lasting relationships with customers and partners. Ezenia’s partners andresellers offer a broad range of support including installation, maintenanceand on-site and headquarters-level technical support of products to theirend-user customers. Ezenia provides 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.

Ezenia offers a technicalsupport hotline to its resellers and customers, which is staffed by our networkengineers who generally provide either immediate or same-day responses to mostquestions. As our products have built-in remote diagnostic capabilities, mostproblems can be diagnosed without incurring travel or on-site visits. Whennecessary, however, support engineers are dispatched to the customer’s facilityfor critical situations. All of our support engineers carry various levels ofsecurity clearance.

With respect tothe Series 2000 and Encounter MCS, Ezenia warranties related software andhardware products for 90 days. We also offer post-warranty support programsranging from services on a time-and-material basis to full-service contracts ona 24-hour, 7-day-a-week basis as well as training courses.

**ThirdParty Technology**

Ezenia licensestechnology from third parties, including software which is integrated withinternally developed software, and used in our products to perform keyfunctions.  There can be no assurancethat functionally similar technology will continue to be available oncommercially reasonable terms in the future, or at all.  In particular, in February 2005 we enteredinto a new agreement with Microsoft Corporation, with an effective date ofJanuary 1, 2005, to extend an existing software distribution license agreementthrough December 2007. The software distribution license agreement allows us tointegrate Microsoft’s Live Communication software into our IWS product line.

****Competition****

The market for multimediacollaboration is an emerging segment with a variety of either new vendorsentering the competitive landscape or old vendors from existing industries,such as legacy videoconferencing, attempting to claim a new turf. Furthermore,multimedia collaboration can also be grouped into two main groups: real-timesynchronous solutions versus asynchronous products such as antiquated LotusNotes.  While most vendors adopt theclient-server architecture, a very few insist on the merit of peer-to-peer.Still yet, large vendors offer both types of products. From anotherperspective, vendors could be classified into two classes of providers.  The first group provides customer-premisesolutions while the second implements a hosted environment.

Even though Ezenia’sbusiness 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.  From the legacy videoconferencingindustry, Polycom, RADvision and Tandberg are legitimate contenders.Established industry giants such as AOL, Cisco, EMC, Google, IBM, Microsoft,Oracle, and, more recently, Adobe with its acquisition of Macromedia, amongothers, offer a wide variety of solutions ranging from simple instant messagingto complete offerings. In addition, a multitude of smaller and well respectedcompanies such as WebEx, Raindance, Saba, Jabber, Interwise, and othersconstitutes a new breed of emerging contenders in this intensely contestedmarket segment.

Many of these companies,as well as other current and potential competitors, have substantially greaterfinancial, technical, and sales and marketing resources than Ezenia. If we areunable to retain our existing customers in the US government, or are unable toconvince a sufficient number of new companies or customers with an interest incollaborative technologies to adopt our IWS collaborative software product overalternative technologies marketed by our competitors, our financial resultswill suffer, through price reductions and loss of market share.

8

----

The principal competitivefactors in the market for multimedia collaboration are, and should continue tobe, breadth of capabilities, security, scalability, reliability, price,performance, network management capabilities, customer support andinteroperability. We plan to compete by offering the best-of-breed enterprisesolutions encompassing all of these factors. However, we cannot be certain that potential customers will be attractedto our products, especially if our competitors invest substantially more moneyinto their products and technology.

###### **ProprietaryRights**

Ezenia relies on acombination of contractual rights, trade secrets and copyright laws toestablish and protect its intellectual property rights. We believe that,because of the rapid pace of technological change in the data communicationsand telecommunications industries, intellectual property protection for itsproducts is only one factor in our success, complementing the knowledge,abilities and experience of our employees, the frequency of our productenhancements, our relationships with our partners, our relationships with ourcustomers and their satisfaction with the performance of IWS, the effectivenessof our marketing activities, and the responsiveness and quality of ourservices.

In October 2002, Ezeniasold all patents and pending applications related to its videoconferencingproducts to Tandberg Telecom AS.  Ezenia granted Tandberg a fully paid,non-exclusive, non-transferable license under the patents and pendingapplications relating to our videoconferencing technology (the video patentportfolio).  Additionally, we retained afully paid, non-exclusive, non-transferable license for our use in connectionwith its videoconferencing and enterprise collaboration products.

In June 2000,Ezenia settled its patent infringement suit against Accord Networks Ltd.(Accord) in the United States District Court for the District ofMassachusetts.  The settlement agreementprovided, among other things, that Ezenia receive $6.5 million, which theCompany received net of foreign tax withholding of $975 thousand, pending aresolution of certain tax matters related to the settlement with the taxauthorities in Israel. In April 2004, Ezenia reached a settlement agreementwith the Israeli Tax Commission (ITC), resulting in the receipt by the Companyof cash proceeds related to the disputed amount, net of interest earned andassociated fees, of approximately $706 thousand.

###### **Employees**

At December 31,2006, Ezenia employed 47 people, including 18 in research and development, 9 incustomer support, 10 in sales and marketing, and 10 in finance andadministration. None of our employees are represented by a labor organization.

Ezenia’s success depends, to a significant degree, upon the continuingcontributions of its key management, sales, marketing and research anddevelopment personnel, many of whom would be difficult to replace, includingKhoa Nguyen, the Company’s 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 thanMr. Nguyen. We believe that our future success will depend in large part uponour ability to attract additional key employees and retain our key employees.

**Availabilityof Filings**

You may access, free of charge, through our website atwww.ezenia.com, our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q,Current Reports on Form 8-K and any amendments to such reports, all filedpursuant to Section 13(a) and 15(d) of the Securities Exchange Act of 1934, asamended. The information contained on our web site is not incorporated byreference into this document and should not be considered a part of thisreport.  Our web site address is includedin this document as an inactive textual reference only.

9

----

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

Therisks and uncertainties described below are not the only ones that we face.Additional risks and uncertainties that we are unaware of, or that we currentlydeem immaterial, also may become important factors that affect our company inthe future. If any of these risks were to occur, our business, financialcondition, or results of operations could be materially and adversely affected.This section includes or refers to certain forward-looking statements; youshould read the explanation of the qualifications and limitations on suchforward-looking statements found in the section captioned “Management’sDiscussion and Analysis of Financial Condition and Results of Operations.”

***Liquidity and history of losses***.  As further described under “Management’s Discussion and Analysis of FinancialCondition and Results of Operations”, management believes due to the growth andacceptance of our IWS product, the expected growth of Internet-basedcollaboration products in general, and our successive quarters of profitabilityand continued vigilance on cost control, that our cash and available resourceswill enable us to continue as a viable entity.****However, we can provide noassurances that we will achieve our goal of consistent quarterly revenue andprofit growth, both of which are largely dependent on whether we can meet ourfuture new order bookings targets.

***Dependence on major customers****.*** **While we are focusing efforts on broadeningour customer base, sales to a relatively small number of customers within theUS government, specifically within the DoD and the intelligence community, haveaccounted for a significant portion of revenue. This concentration of customers may cause revenues and operating resultsto fluctuate from quarter-to-quarter based on major customers’ requirements,and the timing of their orders and shipments. Our agreements with customersgenerally do not include minimum purchase commitments or exclusivityarrangements.  Our operating resultscould be materially and adversely affected if any present or future majorcustomer were to choose to reduce its level of orders, were to change toanother vendor for purchases of a similar product, were to realize a reductionin approved funding for collaborative technologies, or were to delay paying orfail to pay amounts due to us.

***Third PartyTechnology***.  Ezenia utilizescertain technology which it licenses from third parties, including softwarewhich is integrated with internally developed software, and used in the Company’sproducts to perform key functions.  Therecan be no assurance that functionally similar technology will continue to beavailable on commercially reasonable terms in the future, or at all.  In particular, in February 2005 Ezeniaentered into a new agreement with Microsoft Corporation to extend an existingsoftware distribution license agreement through December 2007.  The software distribution license agreementallows Ezenia to integrate Microsoft’s Live Communication software with ourproprietary software, to create IWS.

***Reduced demand for traditionalvideoconferencing products****.*  The demand for traditional videoconferencingtechnology has experienced a rapid decline. Ezenia’s videoconferencing product and related services revenue declinedto approximately $87 thousand in 2006, from approximately $495 thousand in 2005and approximately $633 thousand in 2004. We expect that sales of this legacy hardware technology will continue todecline in 2007.

***Evolving markets*****.**** **Sales of real-time collaborationproducts account for a significant and increasing portion of Ezenia’s revenue.Our success depends, to a significant extent, on the acceptance and the rate ofadoption of Internet-based collaboration products, in general, and the IWSproduct, in particular.  We can provideno assurance that any of the markets for our products will develop to theextent, in the manner, or at the rate anticipated by us.  In addition, future prices that we are ableto obtain for our products may decrease as a result of new productintroductions by others, price competition, technological change or otherfactors.

***Rapid technological change****.* Themarket for our products is characterized by rapidly changing technology,evolving industry standards, emerging network architectures and frequent newproduct introductions.  The adoption rateof new technologies and products may adversely impact near-term growth of theconferencing market as users evaluate the alternatives. We have invested, andfor 2007 plan to continue to invest, in product development and productsincorporating certain of these new technologies.  Many other companies are also 

10

----

developingproducts incorporating these new technologies that are competitive with ourcurrent and future offerings. Ezenia’s success will depend, in part, upon ourability through continued investments to maintain technological leadership, toenhance and expand our existing product offerings, and to select and develop ina timely manner new products that achieve market acceptance.

***Competition****.* Themarket for multimedia collaboration products is highly competitive. Ezeniaexpects competition to increase significantly in the future, as the market forsimilar products is expected to significantly expand.  A number of companies have introducedproducts that could be competitive with Ezenia’s products, and the rapidlyevolving nature of the markets in which Ezenia competes may attract other newentrants, as they perceive opportunities. Some of Ezenia’s current andpotential competitors have longer operating histories and greater financial,technical, sales, and marketing resources. If we are unable to retain our existing customers in the US government,or were unable to convince a sufficient number of new companies or customerswith an interest in collaborative technologies to adopt the IWS collaborativesoftware product over alternative technologies marketed by our competitors, ourfinancial results would suffer.

The principal competitive factors in the market for multimediacollaboration are, and should continue to be, breadth of capabilities,demonstrated interoperability, price, performance, network managementcapabilities, reliability, scalability, customer support and security.  Ezenia plans to compete by offeringcollaboration and enterprise products with a broad range of capabilities andhigh performance.  However, we cannot becertain that potential customers will be attracted to our products, especiallyif competitors were to invest substantially more money into their products and technology.

***Acceptance of IWS in the commercial market.**** * In 2001, Ezenia purchased the operating assetsand intellectual property of the IWS business unit of General DynamicsElectronic Systems.  We entered into thepurchase agreement with the expectation that the transaction would result in certainbenefits including, among other things, benefits relating to expanded andcomplementary product offerings, enhanced revenues, increased marketopportunity, new technology, the addition of engineering personnel, and theexpectation that we would be successful in expanding the market for IWSproducts, both within certain organizations of the US government, including theDoD and the intelligence community, but also commercially.  There can be no assurance of success in thecommercial market for IWS or other products that we may introduce, in 2007 orbeyond.

***Protection of proprietary technology****.*** **Ezenia’s success depends, to a large extent,on its ability to protect its proprietary technology.  Ezenia relies primarily on a combination ofcontractual rights, trade secrets and copyrights to protect its intellectualproperty rights, including the fully-paid, non-exclusive, non-transferablelicense granted by Tandberg to Ezenia for use in connection with itsvideoconferencing and enterprise collaboration products.

***Retention of key employees.******* **Ezenia’s success depends, to a significantdegree, upon the continuing contributions of its key management, sales,marketing, and research and development personnel, many of whom would bedifficult to replace, including Khoa Nguyen, Ezenia’s Chief Executive Officerand President.  Ezenia does not carry a key-man lifeinsurance on any of its employees, including Mr. Nguyen.  Ezeniadoes not have employment contracts with its key personnel other than Mr.Nguyen. Ezenia believes that its future success will depend in large part uponits ability to attract and retain such key employees.

***Stock pricevolatility. *** Themarket price of Ezenia’s common stock, like that of other technology companies,is highly volatile and is subject to wide fluctuations in response to quarterlyvariations in operating results, announcements of technological innovations ornew products by Ezenia or its competitors, changes in financial estimates bysecurities analysts or other events or factors. Ezenia’s stock price may alsobe affected by broader market trends unrelated to Ezenia’s performance.

***Market for Company’s common equity***.  The shares of the Ezenia’s 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 the securities due to low trading volume or obtain accurate quotations as 

11

----

to the market value of the securities. In addition, Ezenia is subject to Rule 15c2-11 promulgated by the SEC. If Ezenia fails 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 the Rule 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, the Rule may have a material adverse effect on the ability of broker-dealers to sell Ezenia’s securities, which may materially affect the ability of shareholders to sell the securities in the secondary market. The delisting could make trading Ezenia’s shares more difficult for investors, potentially leading to further declines in the share price. It would also make it more difficult for Ezenia to raise additional capital. Due to the delisting, Ezenia would also incur additional costs under state blue-sky laws if Ezenia were to sell equity.

***Board of director recruitment*****.** Currently we have seven directors on our Board, six of whom meet thestandards for independence as specified by the SEC and the national stockexchanges.  Historically, we have strivedto have an audit committee comprised of at least three independent directors,as required by the national stock exchanges. Currently we have four directors serving on our audit committee, all ofwhom meet the standards for independence as specified by the SEC.  One of our directors, Gerald P. Carmen, hasthe necessary financial expertise to serve as chairman of our auditcommittee.  We are continuing in ourattempts to identify additional qualified individuals to serve as independentdirectors of Ezenia.  However, the marketfor highly qualified individuals available and willing to serve as directors tocompanies similar to ours is intense, and there can be no assurance that wewill be able to identify, recruit and ultimately secure the services of suchindividuals in a timely manner or at all.

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

###### There are nounresolved staff comments as of the date of this report.

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

Ezenia’s corporate officeand principal research, development and manufacturing facility is located inNashua, New Hampshire, in an approximately 6,000 square foot facility.  Ezenia also has a sales and service officelocated in Sterling, Virginia and a research, development and service officelocated in Colorado Springs, Colorado. As of December 31, 2003, Ezenia had closed all foreign offices, andtherefore, no longer has any leases outside of the United States.

###### **ITEM3. LEGAL PROCEEDINGS**

None

###### **ITEM4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS**

Therewere no matters submitted during the fourth quarter of the year ended December31, 2006 to a vote of security holders through solicitation of proxies orotherwise.

 

12

----

**PART II**

**ITEM 5.**                    MARKET FORREGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OFEQUITY SECURITIES

Since2003, Ezenia’s common stock has been quoted on the OTC Bulletin Board, underthe symbol “EZEN.OB”.  The followingtable sets forth, for the periods indicated, the high and low bid or saleprices per share of our common stock as reported on the OTC Bulletin Board.
| ** **                     | ** ** | **Quarter ended** | ** ** |
|--------------------------------|------------|------------------------|------------|
| ** **                     | ** ** | **March 31**      | ** ** | **June 30** | ** ** | **September 30** | ** ** | **December 31** | ** ** |
| 2006                           | ** ** | ** **             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Common stock price — high |       | $                      | 3.73       |   | $ | 3.50 |   | $ | 3.10 |   | $ | 2.06 |   |
| Common stock price — low  |       | $                      | 2.30       |   | $ | 2.60 |   | $ | 1.35 |   | $ | 1.51 |   |
|                           | ** ** | ** **             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| 2005                           | ** ** | ** **             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Common stock price — high |       | $                      | 2.34       |   | $ | 2.95 |   | $ | 2.87 |   | $ | 2.91 |   |
| Common stock  price — low |       | $                      | .72        |   | $ | 1.70 |   | $ | 1.98 |   | $ | 2.27 |   |

 

As of March 28, 2007,Ezenia had approximately 112 shareholders of record. This does not reflectpersons or entities that hold their stock in nominee or “street” name throughvarious brokerage firms. Ezenia has not paid dividends on its common stock.Ezenia anticipates it will reinvest future earnings, if any, and therefore,does not intend to pay dividends in the foreseeable future.

See Part III, Item 12 forinformation regarding securities authorized for issuance under Ezenia’s equitycompensation plans.

**StockPerformance Graph**

Thefollowing graph compares the change in the shareholder return on the Company’scommon stock against the return for the Nasdaq Stock Market Index, and theNasdaq Computer and Data Processing Index (SIC Code 737), as calculated by theCenter for Research in Security Prices at the University of Chicago, for theperiod beginning December 31, 2001 and ending December 31, 2006.  For purposes of this graph, it is assumedthat the value of the investment in our common stock and in each index was $100on December 31, 2000 and that all dividends were reinvested.

**Comparison of Five-Year Cumulative Total ReturnsPerformance Graph forEZENIA, INC.**

 

13

----

**ITEM 6.**                    SELECTEDFINANCIAL DATA

Theselected consolidated financial data should be read in conjunction with “Management’sDiscussion and Analysis of Financial Condition and Results of Operations” andour audited consolidated financial statements.

(In thousands, except per share amounts)
| ** **                                                                           | ** ** | **Year ended December 31** | ** ** |
|--------------------------------------------------------------------------------------|------------|----------------------------|------------|
| ** **                                                                           | ** ** | **2006 (1)**          | ** ** | **2005 (2)** | ** ** | **2004 (3)** | ** ** | **2003 (4)** | ** ** | **2002(5)** | ** ** |
| **OPERATING DATA**                                                                   |       |                       |       |   |   |   |   |   |   |   |   |
| Revenue                                                                              |       | $                          | 13,192     |   | $ | 13,175 |   | $ | 10,391 |   | $ | 8,217 |   | $ | 11,373 |   |
|                                                                                 |       |                       |       |   |   |   |   |   |   |   |   |
| Operating income (loss)                                                              |       | 2,899                      |       | 3,511 |   | 1,807 |   | (1,117 | ) | (15,094 | ) |
|                                                                                 |       |                       |       |   |   |   |   |   |   |   |   |
| Income (loss) before  cumulative effect of change in accounting principle            |       | 3,405                      |       | 3,712 |   | 1,757 |   | (1,095 | ) | (10,799 | ) |
|                                                                                 |       |                       |       |   |   |   |   |   |   |   |   |
| Cumulative effect of change in  accounting principle                                 |       | —                     |       | — |   | — |   | — |   | (10,667 | ) |
| Net income (loss)                                                                    |       | 3,918                      |       | 3,803 |   | 3,184 |   | (828 | ) | (18,565 | ) |
| Income (loss) per share before  cumulative effect of change in accounting principle: |       |                       |       |   |   |   |   |   |   |   |   |
| Basic                                                                                |       | .27                        |       | 0.26 |   | 0.23 |   | (0.06 | ) | (0.58 | ) |
| Diluted                                                                              |       | .26                        |       | 0.25 |   | 0.22 |   | (0.06 | ) | (0.58 | ) |
| Net income (loss) per share:                                                         |       |                       |       |   |   |   |   |   |   |   |   |
| Basic                                                                                |       | .27                        |       | 0.26 |   | 0.23 |   | (0.06 | ) | (1.36 | ) |
| Diluted                                                                              |       | .26                        |       | 0.25 |   | 0.22 |   | (0.06 | ) | (1.36 | ) |
| **BALANCE SHEET DATA**                                                               |       |                       |       |   |   |   |   |   |   |   |   |
| Cash and cash equivalents                                                            |       | $                          | 12,059     |   | $ | 9,405 |   | $ | 5,520 |   | $ | 2,316 |   | $ | 2,403 |   |
| Total current assets                                                                 |       | 20,058                     |       | 16,864 |   | 11,921 |   | 7,082 |   | 5,564 |   |
| Common stock subject to put                                                          |       | —                     |       | — |   | — |   | — |   | 2,875 |   |
| Stockholders’ equity (deficit)                                                  |       | 11,901                     |       | 7,932 |   | 3,838 |   | 552 |   | (1,504 | ) |

----

(1) 2006 amounts includea tax benefit of $513 thousand related to a reduction in the valuationallowance associated with deferred tax assets of approximately $579 thousandoffset by approximately $66 thousand of current federal and state tax expense.

(2) 2005 amounts includea tax benefit of $91 thousand related to a reduction in the valuation allowanceassociated with deferred tax assets.

(3) 2004 amounts includea tax benefit of $1.4 million, or $0.10 per share, related to a net benefit ofapproximately $819 thousand as a result of the ITC settlement, andapproximately $608 thousand relating to a tax refund for tax years 1996, 1997,and 1998.

(4) 2003 amounts includea tax benefit of $267 thousand or $0.02 per share, related to a change in theestimate for potential liabilities related to federal and state income taxespaid in prior years.

(5) 2002 amounts includea write-down of inventory of $3.7 million, or $0.27 per share, an impairment ofgoodwill of $10.7 million, or $0.78 per share relating to the change inaccounting principle, an impairment of fixed assets of $2.3 million, or $0.17per share, a tax benefit of $2.7 million, or $0.19 per share, related primarilyto a tax refund, and a gain on sale of patents of $4.9 million, or $.36 pershare.

**Quarterlyfinancial information (unaudited)**
| ** **              | ** ** | **Quarter ended** | ** ** |
|-------------------------|------------|------------------------|------------|
| ** **              | ** ** | **March 31**      | ** ** | **June 30** | ** ** | **September 30** | ** ** | **December 31** | ** ** |
| 2006                    |       |                   |       |   |   |   |   |   |   |
| Revenue                 |       | $                 | 3,649      | (1) | $  | 3,569 | (1) | $  | 2,976 | (1) | $ | 2,998 |   |
| Gross profit            |       | 2,458                  | (1)        | 2,412 | (1) | 1,969 | (1) | 1,928 |   |
| Income from  operations |       | 1,034                  | (1)        | 954 | (1) | 467 | (1) | 444 |   |
| Net income              |       | $                 | 1,406      | (1) | $  | 987 | (1) | $  | 510 | (1) | $ | 1,015 |   |
| Net income per  share:  |       |                   |       |   |   |   |   |   |   |
| Basic                   |       | $                 | 0.10       | (1) | $  | 0.07 | (1) | $  | 0.03 | (1) | $ | .07 |   |
| Diluted                 |       | $                      | 0.09       | (1) | $  | 0.07 | (1) | $  | 0.03 | (1) | $ | .07 |   |

 

14

----

 
| 2005                    |   |   |   |   |   |   |   |   |   |
|-------------------------|--------|--------|--------|--------|--------|--------|--------|--------|--------|
| Revenue                 |   | $      | 3,142  |   | $      | 3,273  |   | $      | 3,281  |   | $ | 3,479 |   |
| Gross profit            |   | 2,045  |   | 2,143  |   | 2,199  |   | 2,308  |   |
| Income from  operations |   | 668    |   | 885    |   | 986    |   | 972    |   |
| Net income              |   | $      | 705    |   | $      | 929    |   | $      | 1,042  |   | $ | 1,127 |   |
| Net income per  share:  |   |   |   |   |   |   |   |   |   |
| Basic                   |   | $      | 0.05   |   | $      | 0.06   |   | $      | 0.07   |   | $ | 0.08 |   |
| Diluted                 |   | $      | 0.05   |   | $      | 0.06   |   | $      | 0.07   |   | $ | 0.07 |   |

----

(1)             ReflectsSAB No. 108 adjustment for InfoWorkSpace revenue and related cost amortizationand 2005 tax provision, See Note 2 to our Consolidated FinancialStatements.  The following table detailssuch adjustment by reporting period compared to amounts previously reported.
| ** **              | ** ** | **Quarter ended** | ** ** |
|-------------------------|------------|------------------------|------------|
| ** **              | ** ** | **March 31**      | ** ** | **June 30** | ** ** | **September 30** | ** ** |
| Revenue                 |       | $                      | (22        | ) | $ | 12 |   | $ | 79 |   |
| Gross profit            |       | (19                    | )          | 5 |   | 70 |   |
| Income from  operations |       | (19                    | )          | 5 |   | 70 |   |
| Net income              |       | $                      | 32         |   | $ | 8 |   | $ | 116 |   |
| Net income per  share:  |       |                   |       |   |   |   |   |
| Basic                   |       | $                      | 0.01       |   | $ | — |   | $ | — |   |
| Diluted                 |       | $                      | —     |   | $ | — |   | $ | — |   |

 

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

**Management’sDiscussion and Analysis of Financial Condition and Results of Operations**

**SAFE HARBOR FOR FORWARD LOOKING STATEMENTS**

*Management’s Discussion and Analysis of Financial Conditionand Results of Operations (“MD&A”) should be read in conjunction with theConsolidated Financial Statements and Notes included in Item 8 of this AnnualReport. MD&A contains “forward-looking” statements and information whichinvolve risks and uncertainties. Statements indicating that we “expect,” “estimate,” ‘believe,” “areplanning,” or “plan to,” are forward-looking, as are other statements**concerning our business focus, expansion of our sales,service, engineering and marketing organization, key differentiators in ourmarket, changes in the competitive landscape, future financial results, productdevelopment and offerings, revenues from our legacy videoconference productsand services, our ability to generate cash and to meet our working capitalneeds, and other events that have not yet occurred. These forward-lookingstatements are neither promises nor guarantees, but involve risks anduncertainties that may cause actual results to differ materially from those inthe forward-looking statements. Factors that may cause such differencesinclude, but are not limited to, our ability to maintain or accurately forecastrevenue growth or to anticipate and accurately forecast a decline in revenuefrom any of our products or services, customer acceptance of our InfoWorkSpaceversion 3.0, our ability to compete in an intensely competitive market, ourability to develop and introduce new products or enhancements on schedule andthat respond to customer requirements and rapid technological change, ourdependence on the United States Government as our largest customer, new productintroductions and enhancements by competitors, our ability to select andimplement appropriate business models, plans and strategies and to execute onthem, our ability to identify, hire, train, motivate, and retain highlyqualified management/other key personnel and our ability to manage changes andtransitions in management/other key personnel, the impact of global economicand political conditions on our business, unauthorized use or misappropriationof our intellectual property, as well as the risk factors*

15

----

*discussed in Item 1A of this Annual Reportand in other periodic reports filed with the SEC.  Readers should not place undue reliance onany such forward-looking statements, which speak only as of the date they are made.We disclaim any obligation to publicly update or revise any such statement toreflect any change in our expectations or in events, conditions, orcircumstances on which any such statements may be based, or that may affect thelikelihood that actual results will differ from those contained in theforward-looking statements.*

**Overview**

We continued oursuccessive quarterly profitability as we recorded our thirteenth consecutivequarter for the three month period ending December 31, 2006.  For the year, revenues were flat when comparedto the year ended December 31, 2005, operating income was down approximately17%, while net income was up approximately 3% resulting in earnings per shareof $0.27, up $0.01 per share when compared to the year ended December 31, 2005.  Revenue relating to our InfoWorkSpace productincreased approximately 3% in 2006 over 2005. IWS-related revenue accounted for approximately 99% of total revenues.We continued to see a decline in revenue related to our legacy videoconferencingproduct line as expected in 2006, with total revenue of approximately $87thousand, down 82% from approximately $495 thousand in 2005.  Gross Profit was up slightly as we saw ourgross margin increase to 66.5% from 66.0%. Operating expenses as a percentage of revenue increased to approximately44% for the year ending December 31, 2006, as compared to approximately 39% forthe year ended December 31, 2005. Operating expenses in 2006 included approximately $417 thousand ofequity based compensation while there was none recorded in fiscal 2005.  We saw our other income grow by approximately152% year over year as we saw a significant increase in our interest earned dueto our improved cash position throughout the course of 2006.  Our net tax benefit for the year was upapproximately $422 thousand when compared to 2005 primarily as a result of ourdeferred tax asset which grew to approximately $717 thousand at December 31,2006 from the approximately $138 thousand balance at December 31, 2005.

Our currentbusiness focus is to continue the enhancement of our various collaborativeproduct and service offerings, and to continue the development and ultimatelythe deployment of the next generation products and services, while continuingour investment in expanding our sales, service, engineering, and marketingorganizations.  We will continue to focuson expanding our customer base within the Department of Defense andIntelligence community, while pursuing new opportunities with various agenciesand first responders dealing with the threat of terrorism and naturaldisasters, as well as being opportunistic on potential commercialapplications.   This focus is subject tochange as the driving influence in our future direction will be based on theneeds of our customer base, both current and future.  The market for multi-media collaborationproducts is highly competitive and we expect both, competition and the overallmarket for competitive products to significantly increase in the future.  In addition, some of our current andpotential competitors have longer operating histories and greater financial,technical, sales, and marketing resources. If we are unable to retain our existing customers in the US government,or we are unable to convince a sufficient number of new companies or customerswith an interest in collaborative technologies to adopt the IWS collaborativesoftware product over alternative technologies marketed by our competitors, ourfinancial results would suffer.  Webelieve that the key differentiating factors in the market will continue to bebreadth of capabilities, demonstrated interoperability, price, performance,network management capabilities, reliability, scalability, customer support andsecurity.

We plan tocontinue to enhance our existing products and service offerings based on ourcustomer requirements, as well as to work on developing next generationproducts and services which will expand the opportunities available to us inthe overall collaboration market.  InMarch 2006, we released our newest version of InfoWorkSpace, version 3.0, alongwith announcing a number of new service offerings.  InfoWorkSpace 3.0 adds and or enhancesfeatures which specifically address the key factors above:  interoperability, scalability, multi-levelsecurity, enhancements to the user experience, network management, andreliability.  In addition, we currentlyoffer the following services for our products: IWS User Training, IWS Administrator Training, IWS InstallationTraining, Installation service, and Daily Consulting service.  Extended maintenance service plans are alsoavailable.  In addition, we also providean unprecedented level of support to our customer base with our “Exercise andDeployment Services”, which are targeted to our government customers and allowmilitary or other units or teams preparing for deployment or exercise maneuversto eliminate the need to tear down, transport, and bring up their own systems,prior to and following these activities.

16

----

**Critical Accounting Policies**

****Thediscussion and analysis of our financial condition and results of operationsare based upon our consolidated financial statements, which have been preparedin accordance with accounting principles generally accepted in the UnitedStates of America. The preparation of these financial statements requires us tomake estimates and judgments that affect the reported amounts of assets,liabilities, revenues and expenses and related disclosure of contingent assetsand liabilities. On an on-going basis, we evaluate our estimates, includingthose related to revenue recognition, bad debts, inventories, income taxes andwarranty obligations. We base our estimates on historical experience and onvarious other assumptions that we believe to be reasonable under thecircumstances, the results of which form the basis for making judgments aboutthe carrying value of assets and liabilities that are not readily apparent fromother sources. Actual results may differ from these estimates under differentassumptions or conditions. We believe the following critical accounting policiesand the related judgments and estimates affect the preparation of ourconsolidated financial statements.****

****RevenueRecognition****

****Productrevenue consists of sales of IWS software licenses and maintenance agreements,IWS product related training, installation, and consulting, and videoproducts.  Revenue from sales of IWSsoftware license and maintenance agreements is recognized ratably over thesubscription software license contract periods, which are generally one year, pursuant to the guidance providedby Statement of Position 97-2, *“Software RevenueRecognition”* (SOP 97-2), issued by the American Institute ofCertified Public Accountants (“AICPA”). Revenue from IWS training, installation, and consulting services arerecognized as the services are performed provided there is vendor specificobjective evidence (“VSOE”) of fair value which is the price charged when theservices are sold separately.****

****Revenuefrom video product sales is recognized upon shipment to the customer and thefulfillment of all contractual terms and conditions, pursuant to the guidanceprovided by Staff Accounting Bulletin No. 104, *“RevenueRecognition in Financial Statements”* (SAB 104), issued by theSecurities and Exchange Commission.****

****Productdevelopment revenue relates to contracts involving customization of the IWSproduct according to customer specifications. We account for product development revenue in conformity with theguidance provided by SOP 81-1, *“Accounting ForPerformance of Construction Type and Certain Production Type Contracts”*issued by the AICPA.  When reliableestimates are available for the costs and efforts necessary to complete theproduct development and the contract does not include contractual milestones orother acceptance criteria, product development revenue is recognized under thepercentage of completion contract method based upon input measures, such ashours.  When such estimates are notavailable, we defer all revenue recognition until we have completed the contractand have no further obligations to the customer.  Revenue associated with contracts for productdevelopment revenue with milestone-based deliverables requiring a customers’acceptance is recognized upon the customer’s acceptance in accordance withterms of the contract.  The associatedcost recognition associated with these deliverables or milestones is deferreduntil the terms of acceptance are satisfied and revenue is recognized. Certainof our product development contracts are subject to government audit andretroactive adjustment of the direct and indirect costs used to determine thecontract billings. Product development revenues and accounts receivablereported in the financial statements are recorded at the amount expected to bereceived. Product development revenues are adjusted to actual upon final auditand retroactive adjustment. Estimated contractual allowances are provided basedon management’s evaluation of current contract terms.****

****Servicerevenue represents sales of service contracts related to the maintenance of theCompany’s legacy video product line. Maintenance revenue is deferred and recognized ratably over the term ofthe applicable agreement.****

****Productsand software licenses are sold without any contractual right of return by thecustomer.  Deferred revenue representsamounts received from customers under subscription software licenses,maintenance agreements, or for product sales in advance of revenuerecognition.  Judgments are required inevaluating the creditworthiness of our customers.  In all instances, revenue is not recognizeduntil we have determined, at the outset of the arrangement that collectibilityis reasonably assured.  Amounts billed tocustomers related to shipping and handling charges are recorded upon shipmentand the related costs are included in cost of goods sold.****

17

----

****Allowancefor Doubtful Accounts****

****Ourpolicy is to maintain allowances for estimated losses resulting from theinability of our customers to make required payments. Credit limits areestablished through a process of reviewing the financial history and stabilityof each customer. Where appropriate, we obtain credit rating reports andfinancial statements of the customer when determining or modifying their creditlimits. We regularly evaluate the collectibility of our trade receivablebalances based on a combination of factors. When a customer’s account balancebecomes past due, we initiate dialogue with the customer to determine thecause. If it is determined that the customer will be unable to meet itsfinancial obligation to us, such as in the case of a bankruptcy filing,deterioration in the customer’s operating results or financial position, orother material events impacting the customer’s business, we record a specificallowance to reduce the related receivable to the amount we expect to recovergiven all information presently available.****

****AtDecember 31, 2006, our accounts receivable balance of approximately $3.6million is reported net of allowances of approximately $412 thousand.  We believe our reported allowances areadequate.  If the financial conditions ofour customers were to deteriorate, however, resulting in their inability tomake payments, we may need to record additional allowances, which would resultin additional expenses being recorded for the period in which suchdetermination was made.****

****IncomeTaxes****

****Thecalculation of tax assets and liabilities involves significant judgment inestimating the impact of uncertainties in the application of complex taxlaws.  Deferred tax assets andliabilities are determined at the end of each year based on the future taxconsequences that can be attributed to net operating loss and credit carryoversas well as the differences between the financial statement carrying amounts ofexisting assets and liabilities and their respective tax bases.  The deferred tax assets are reduced by avaluation allowance if it is more likely than not that the tax benefits willnot be realized.  The realization ofdeferred tax assets is dependant upon the generation of future taxable income.  In determining the valuation allowance, Ezeniaconsiders past performance, expected future taxable income, and qualitativefactors which Ezenia considers to be appropriate to be considered in estimatingfuture taxable income.  Ezenia’s forecastof expected future taxable income is for future periods that can be reasonablyestimated.  Changes in results thatdiffer materially from our current expectations may cause us to change ourjudgment on future taxable income. These changes, if any, may require us toadjust our existing tax valuation allowance higher or lower than the amount wehave previously recorded.****

****During2006, as a result of our assessment of current and future taxable income, aswell as our analysis of the future tax consequences attributable to netoperating loss and credit carryovers, we released approximately $579 thousandof valuation allowance against deferred tax assets resulting in a net taxbenefit of approximately $513 thousand. In fiscal year 2005, we releasedapproximately $138 thousand of valuation allowance against deferred tax assetswhich resulted in a net tax benefit of approximately $91 thousand for the year.****

****VideoProduct Warranties****

****Ourproducts are sold with warranty provisions that require us to remedydeficiencies in quality or performance of our products over a period of 90days, at no cost to our customers. Our policy is to establish warranty reservesat the time of sale when our estimate of the costs that will be incurred tofulfill those warranty requirements becomes material. As of December 31, 2006,we believed that our future cost of materials, labor and overhead for theservicing of our products sold through that date were not material and noreserve was warranted. If actual product failures or material or servicedelivery costs differ from our estimates, our warranty liability would need tobe revised accordingly.****

18

----

**Results of operations**

Asdisclosed in Note 2 of the Notes to the Consolidated Financial Statements, the2006 financial results include a cumulative effect adjustment for adjustmentspreviously deemed immaterial in our revenue and cost of sales amortization forour InfoWorkSpace product line and a non-material correction of the 2005 incometax provision.  The cumulative effectadjustment results from applying the provisions of Securities and Exchange CommissionStaff Accounting Bulletin No. 108, *Considering the Effects ofPrior Year Misstatements When Quantfying Misstatements in Current YearFinancial Statements* (“SAB No. 108”).  We have adopted SAB No. 108 at December 31,2006 and for the year then ended. Historically, the amortization of the InfoWorkSpace deferred revenue andthe related cost of sales was done using the Full Month Convention ofamortization, whereby a full month of revenue and prepaid license cost wasamortized in the month of license shipment, regardless of what day of the monththe product was shipped on.  This had theeffect of accelerating revenue and cost recognition.  Prior to the adoption of SAB No. 108, we usedthe “rollover” method described therein in evaluating the materiality offinancial statements’ adjustments related to the license revenue and prepaidlicense cost amortization.  We determinedthe impact from the adjustment to be immaterial to current and prior periods’financial results under the “rollover” method. However, we have evaluated the adjustment using the dual approach methoddescribed in SAB No. 108 and accordingly, as of January 1, 2006, we recorded acumulative effect adjustment to increase the deferred revenue balance by $358thousand and increase the prepaid software license cost by $70 thousand, with acorresponding net charge to retained earnings of $288 thousand.  During 2006 we also identified a $100thousand error in its 2005 tax provision related primarily to incomeapportionments for state taxes.  We believethat this adjustment is immaterial to both 2005 and 2006.  In accordance with SAB No. 108, this errorwas corrected as of January 1, 2006 by recording an adjustment to increase theincome tax accrual by $100 thousand, with a corresponding charge to retainedearnings of $100 thousand.  In accordancewith SAB No. 108, reported results for periods prior to January 1, 2006 havenot been adjusted.

The2006 financial statements were affected by these adjustments through a $149thousand increase in product revenue, with a corresponding increase of $25thousand in cost of product revenue and a $99 thousand increase in the incometax benefit.  Of these amounts,approximately $69 thousand of the increase in product revenue, $13 thousand ofthe increase in cost of product revenue, and $99 thousand of the increase inthe income tax benefit was applicable to previously reported 2006 periodsthrough September 30, 2006.  All amountsbelow reflect the impact of the adjustments for 2006.

## **Revenue**Revenue was flat at approximately$13.2 million in 2006 when compared to 2005. Product revenue related to IWSincreased approximately $426 thousand or 3.3%, while product developmentrevenue declined approximately $90 thousand. Product development revenue is revenue related to product customizationwork performed for customers seeking enhancements to our current product.   The decline in product development revenuewas primarily driven by the milestone-based deliverable schedule of the underlyingcontracts.  Our legacy videoconferencingproducts and related service revenues continued to decline to approximately $87thousand (less than 1% of total revenues) in 2006 from approximately $495thousand (4% of total revenues) in 2005. We expect to see a continued decline in videoconferencing-relatedproducts and services revenue.

Revenue increased to approximately $13.2 million in2005 from approximately $10.4 million in 2004. The increase in revenue wasprincipally related to a 30% increase in sales related to our IWS productline.  Our legacy videoconferencing products andrelated service revenues continued to decline to approximately $495 thousand(4% of total revenues) in 2005 from approximately $633 thousand (6% of totalrevenues) in 2004.

## **Grossprofit**Cost of revenuesincludes material costs, costs of third-party software licenses, assembly laborand overhead, customer support costs, and engineering and development costsassociated with product development revenue. Gross profit as a percentage ofrevenues increased in 2006, to 66.5%, from 66.0% in 2005 and 65.5% in2004.  The increase in gross profit isprimarily attributed to reduced IWS licensing costs as well as a slightincrease in margin related to product development work recognized from 55.6% in2005 to 57.8% in 2006 as the result of the addition of a higher margindevelopment contract in 2006.  Grossmargin related to product development revenue declined in 2005 from 73.3% in2004.

19

----

**Researchand development**Research anddevelopment expenses include payroll, employee benefits, other headcountrelated costs, and miscellaneous costs associated with product development.Research and development expenses increased to approximately $1.7 million inthe year ended December 31, 2006, from approximately $1.2 million in 2005, andapproximately $1.1 million in 2004.  Theincrease in spending in 2006 when compared to 2005 is primarily related to anincrease in personnel related costs as we continued to build ourinfrastructure, travel and the adoption of SFAS 123R which added approximately$69 thousand in additional compensation expense. The increase in spending in 2005 as compared with 2004 is primarilydue to an increase in personnel related costs offset by a decrease inconsultant costs as we made a concerted effort to replace outsourced engineeringpersonnel with permanent employees.

**Salesand marketing**Sales and marketingexpenses include payroll, employee benefits, and other headcount related costsassociated with sales and marketing personnel and advertising, tradeshows,seminars, and other marketing-related programs. Sales and marketing expenses decreased to approximately $1.4 million inthe year ended December 31, 2006, from approximately $1.5 million in 2005, andwas consistent with the approximately $1.4 million in 2004.  Thedecrease is primarily related to reduced commission and consultant costs offsetby an increase in travel and recruiting costs, and the adoption of SFAS 123Rwhich added approximately $75 thousand in additional compensation expense forthe year ended December 31, 2006. The increased spending in 2005as compared with 2004 was primarily related to higher personnel related costsand trade show costs, offset by lower commission and consultant costs.    

**Generaland administrative**General andadministrative costs include payroll, employee benefits, and otherheadcount-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 increasedto approximately $2.2 million in the year ended December 31, 2006, fromapproximately $1.8 million in 2005.   Theincrease is primarily related to increases in personnel-related costs, travelcosts, accounting fees, director fees, legal costs, reduced bad debtrecoveries, information technology fees, and the adoption of SFAS 123R whichadded approximately $273 thousand of additional compensation expense offset bydecreases in consultant and public company related costs.  General and administrative expenses decreasedto approximately $1.8 million for the year ended December 31, 2005 fromapproximately $1.9 million for the year ended December 31, 2004.  The decreased spending was primarily due todecreases seen in legal, professional fees, and insurance costs partiallyoffset by increases in compensation related costs, consultant costs related toSarbanes Oxley compliance work, and bad debt recoveries.

**Occupancyand other facilities-related expenses**Occupancy and other facilities-relatedexpenses decreased to approximately $413 thousand in the year ended December31, 2006, from approximately $621 thousand in 2005, and decreased fromapproximately $579 thousand in 2004. These costs include rent expense and other operating costs associatedwith our headquarters in Nashua, New Hampshire, in 2005 and 2004 our formerheadquarters facility in Burlington, Massachusetts, and two other sales anddevelopment offices in the United States, in Colorado and in Virginia. Thedecrease is primarily due to a $170 thousand lease termination fee recognizedin 2005 associated with the Company’s decision not to renew the lease on itsprevious headquarters facility located in Burlington, Massachusetts anddecreases in current year rental costs associated with its new headquartersfacility in Nashua, New Hampshire partially offset by increased costsassociated with the current year expansion of the Company’s Colorado facility. Theincreased spending in 2005 when compared to 2004 is primarily attributed to the$170 thousand lease termination fee offset by reduced rental costs.

20

----

**Interestincome, net**Interest income, net,consists of interest on cash and cash equivalents.  Interest income increased to approximately$491 thousand in 2006 from approximately $191 thousand in 2005 andapproximately $122 thousand in 2004.  Theincrease in 2006 was primarily related to an increase in the amount of cashavailable for investment during the year as compared to 2005 and 2004.  The amount in 2004 included approximately $66thousand of interest received in connection with our settlement reached inApril 2004 with the ITC, and approximately $30 thousand of interest received asa result of an income tax refund of approximately $608 thousand received inDecember 2004.

**Settlement fees and other income**Other income consistsprimarily of gains related to short term mutual fund investments, sales ofpreviously written off assets, and other miscellaneous non-operatingincome.  The settlement fees reported forthe year ended December 31, 2004 are one-time legal and professional feesrelated to our settlement reached in April 2004 with the ITC concerning taxmatters associated with its patent infringement suit against Accord, which wassettled in June 2000.

**Income tax benefit**The amount reported as current income tax benefit in2006 is comprised of approximately $66 thousand, in both estimated federalalternative minimum tax expense and estimated state income tax arising fromstates where the company conducts business and files a return, offset by adeferred tax benefit of approximately $579 thousand associated with the releaseof a portion of the Company’s valuation allowance.  Theamount reported as current income tax benefit in 2005 is comprised of currentincome tax expense of approximately $47 thousand, in both estimated federalalternative minimum tax expense and state income tax expense. In addition, theamount includes a deferred tax benefit of approximately $138 thousandassociated with the release of a portion of our valuation allowance based onour conclusion that a portion of the deferred tax asset would be realized.  The income tax benefit reported in the yearended December 31, 2004 of approximately $1.4 million related to our settlementwith the ITC resulting in the receipt in April 2004 of $975 thousand, net ofapproximately $156 thousand of withholding tax on the gross settlementamount.  The income tax benefit in 2004also included an approximately $608 thousand refund of prior year taxesrelating to the carry back of the net operating losses incurred in 2001 toprior years.

**Liquidity and Capital Resources**

**At December31, 2006, we had cash and cash equivalents of approximately $12.1 million. **Wegenerated profits from operations of approximately $2.9 million for the yearended December 31, 2006, and a net profit for the year of approximately $3.9million, as compared with an operating profit in the year ended December 31,2005 of $3.5 million, and a net profit of approximately $3.8 million in 2005.

**We generated cash from operationsof $2.9 million in fiscal 2006 compared to $3.8 million in 2005 and $3.2million in 2004.  Cash provided byoperating activities in 2006 were primarily the result of an increase in netincome, a decrease in accounts receivable, and increases in accounts payable,accrued expenses, and share-based compensation offset by uses of workingcapital attributable to an increase in prepaid software licenses and deferredtaxes and a decrease in deferred revenue. Increases in cash provided by operating activities in 2005 wereprimarily the result of increases in net income and increases in accountspayable, accrued expenses, and deferred revenue offset by increased uses forworking capital attributable to an increase in accounts receivable.  In 2004, increases in cash provided byoperating activities were primarily the result of increases in net income andincreases in deferred revenue offset by increased uses for working capitalattributable to increases in accounts receivable and prepaid software licenses.**

**The Company investedapproximately $162 thousand in property and equipment in fiscal 2006 comparedto $206 thousand in fiscal 2005 and 93 thousand in fiscal 2004.  The Company has generated cash from financingactivities of $18 thousand, $291 thousand, and $102 thousand in 2006, 2005, and2004 respectively, primarily from proceeds of sales of the Company’s commonstock pursuant to the Company’s various stock plans.**

21

----

Ourcontractual obligations relate primarily to our facilities leases.  We lease our primary facility in Nashua, NewHampshire, under an operating lease, which expires in June 2010. We also havetwo other leases for office space in the United States, located in ColoradoSprings, Colorado, and Sterling, Virginia for sales, development and technicalsupport operations.  These leases expireat various dates through November 2011. Future minimum lease obligations at December 31, 2006 under all of thesenon-cancelable operating leases are approximately $178 thousand in 2007, $179thousand in 2008, $180 thousand in 2009, $126 thousand in 2010, and $98thousand in 2011.

InFebruary 2005 we entered into a new agreement with Microsoft to extend anexisting software distribution license agreement.  During fiscal year 2006, under the agreement,we were required to, and did, purchase a minimum of approximately $2.8 millionof product.  We have not settled on aminimum purchase quantity for fiscal year 2007. We expect to have this settled sometime during the second quarter of2007.

We include standard intellectualproperty indemnification provisions in our licensing agreements in the ordinarycourse of business. Pursuant to our product license agreements, we willindemnify, hold harmless, and agree to reimburse the indemnified party forlosses suffered or incurred by the indemnified party, generally businesspartners or customers, in connection with certain patent, copyright or otherintellectual property infringement claims by third parties with respect to ourproducts. Other agreements with our customers provide indemnification forclaims relating to property damage or personal injury resulting from theperformance of services by Ezenia or its subcontractors. Historically, ourcosts to defend lawsuits or settle claims relating to such indemnity agreementshave been insignificant. Accordingly, the estimated fair value of theseindemnification provisions is immaterial.

**In October 2002, Ezenia sold all patents and pendingapplications related to its videoconferencing products to Tandberg Telecom AS.Ezenia granted Tandberg a fully paid, non-exclusive, non-transferable licenseunder the patents and pending applications relating to Ezenia’svideoconferencing technology (the video patent portfolio).  Additionally, Ezenia retained a fully paid,non-exclusive, non-transferable license for Ezenia’s use in connection with itsvideoconferencing and enterprise collaboration products.**

**In May 2003, after failing to comply with certain continuedlisting standards for the NASDAQ SmallCap Market, including maintaining a minimumbid price of at least $1.00 per share, or the requirement for Ezenia to have aminimum $2.5 million in stockholders equity, Ezenia received a delistingnotification from NASDAQ.  Afterexercising its right for an appeal of this determination to a NASDAQ ListingQualifications Panel, the Panel determined to delist Ezenia’s securities fromThe NASDAQ Stock Market in August 2003. Since then, Ezenia’s common stock hasbeen quoted on the OTC Bulletin Board. The market value and liquidity of Ezenia’s common stock, as well asEzenia’s ability to raise additional capital, has been and may continue to bematerially adversely affected by this delisting decision.**

**Operating costs were in line with our expectations for theyear ended December 31, 2006 as we began making the necessary investments inbuilding and expanding our infrastructure. We are committed to continue making the necessary improvements to ourinfrastructure in 2007 which we believe is necessary in order to competesuccessfully in the ever increasing competitive collaborative market.**

**Ezenia’s success in achieving its goal of showingconsistent quarterly top line and bottom line growth is largely dependent onwhether it can continue to grow its future order bookings and related revenuetargets.  Order bookings, which arepurchase orders placed by customers, are properly not recorded as revenue orrecognized as revenue until all requirements of that order are satisfied,although the cash flow received from these orders may more closely follow thereceipt date of the order.  Accordingly,largely as a result of our thirteen consecutive quarters of profitability,management believes that its existing cash resources will be sufficient to fundits anticipated working capital and capital expenditure needs for at least thenext twelve months.  We anticipate thatwe will continue to generate positive cash flow from operations for 2007 andthat existing cash reserves will therefore be sufficient to meet our workingand capital requirement needs during this period.**

22

----

The following table summarizes our outstanding contractual obligations:
| **(in thousands)**        | ** ** | **2007** | ** ** | **2008-2010** | ** ** | **2011** | ** ** | **Total** | ** ** |
|--------------------------------|------------|----------|------------|---------------|------------|----------|------------|-----------|------------|
| Operating leases               |       | $        | 178        |          | $          | 485      |       | $         | 98         |   | $ | 761 |   |
| Total contractual  obligations |       | $        | 178        |          | $          | 485      |       | $         | 98         |   | $ | 761 |   |

 

**Recent Accounting pronouncements**

In December 2004, theFinancial Accounting Standards Board issued SFAS No. 123R, *“Share-BasedPayment”*(SFAS 123R).  ThisStatement is a revision of SFAS 123, *“Accounting forStock-Based Compensation*” (SFAS 123), and supersedes AccountingPrinciples Board Opinion No. 25, *“Accounting for StockIssued to Employees”* (APB 25), and its related implementationguidance. SFAS 123R establishes standards for transactions in which an entityexchanges its equity instruments for goods or services.  This standard requires a public entity tomeasure the cost of employee services received in exchange for an award ofequity instruments based on the grant date fair value of the award andrecognize that cost over the period that such services are performed. Prior toadopting SFAS 123R, we accounted for stock-based compensation under APB 25, aspermitted by SFAS 123.  The Companyadopted SFAS 123R on January 1, 2006 under the modified-prospective transitionmethod and recorded $422 thousand of share based compensation expense in 2006.

In March 2005, the Staff of the SEC issuedStaff Accounting Bulletin (“SAB”) 107, *“Share-based Payment”*(“SAB107”), which expresses the view of the SEC regarding the interaction betweenSFAS No. 123R and certain SEC rules and regulations concerning thevaluation of share-based payment arrangements for public companies. In particular,SAB 107 provides guidance related to share-based payment transactions withnon-employees, the transition from nonpublic to public entity status, valuationmethods (including assumptions such as expected volatility and expected term),the accounting for certain redeemable financial instrument issues undershares-based payment arrangements, the classification of compensation expense,non-GAAP financial measures, first-time adoption of SFAS No. 123R in aninterim period, capitalization of compensation costs related to share-basedpayment arrangements, the accounting for income tax effects of share-basedpayment arrangements, the accounting for income tax effects of share-basedpayment arrangements upon adoption of SFAS No. 123R, the modification ofemployee share options prior to adoption of SFAS No. 123R, and disclosuresin Management’s Discussion and Analysis of Financial Condition and Results ofOperations subsequent to adoption of SFAS No. 123R. The Company hasaccounted for its stock option grants in compliance with SAB 107.

In June 2006, the FASB issued FASB Interpretation No. 48*“Accountingfor Uncertainty in Income Taxes — an interpretation of FASB StatementNo. 109”* (“FIN No. 48”),which is effective for fiscal years beginning after December 15, 2006 withearlier adoption encouraged.  Thisinterpretation waqs issued to clarify the accounting for uncertainty in incometaxes recognized in an enterprise’s financial statements in accordance withFASB Statement No. 109, *“Accounting for Income Taxes”*. The interpretation prescribes arecognition threshold and measurement attribute for the financial statementrecognition and measurement of a tax position taken or expected to be taken ina tax return. FIN No. 48 requires recognition of tax benefits that satisfya greater than 50% probability threshold. FIN No. 48 also providesguidance on derecognition, classification, interest and penalties, accountingin interim periods, disclosure, and transition. FIN No. 48 is effectivefor us beginning July 1, 2007. We are assessing the potential impact thatthe adoption of FIN No. 48 will have on our financial statements.

In September 2006, the Staff of the SEC issued SAB No. 108, *“Considering the Effects of Prior Year Misstatements when QuantifyingMisstatements in Current Year Financial Statements”* (“SAB No.108”).  SAB No. 108 provides guidance on theconsideration of the effects of prior year misstatements in quantifying currentyear misstatements for the purpose of determining whether the current year’sfinancial statements are materially misstated. SAB No. 108 is effective for fiscal years ending after November 15,2006.  We adopted SAB No. 108 as ofDecember 31, 2006.  The impact ofadoption at December 31, 2006 is discussed in Note 2 to the ConsolidatedFinancial Statements.

23

----

In September 2006, the FASBissued SFAS No. 157, *“Fair Value Measurements”*(“SFAS No. 157”).  Among otherrequirements, SFAS No. 157 defines fair value and establishes a framework formeasuring fair value and also expands disclosure about the use of fair value tomeasure assets and liabilities.  SFAS No.157 is effective beginning the first fiscal year that begins after November 15,2007.  We are required to adopt SFAS No.157 on January 1, 2008.  We are currentlyevaluating the potential impact of this statement.

**ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURESABOUT MARKET RISK**

To date, Ezenia has not utilized derivative financialinstruments or derivative commodity instruments. Ezenia invests cash in highlyliquid investments, consisting of highly rated U.S. and state governmentsecurities, commercial paper and short-term money market funds. Theseinvestments are subject to minimal credit and market risk and Ezenia has nodebt other than its contractual lease obligations. A 10% change in interestrates would not have a material impact on Ezenia’s financial position,operating results or cash flows. We have closed our foreign offices, and salesto foreign customers from the United States are in U.S. dollars.  Therefore, Ezenia has no significant foreigncurrency risk.

**ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA**

**INDEX**
|                                                                                                             | ** ** | **Page**   | ** ** |
|-------------------------------------------------------------------------------------------------------------|------------|------------|------------|
|                                                                                                        | ** ** | ** ** | ** ** |
| Report of Independent  Registered Public Accounting Firms                                                   |       | 25         |       |
| Consolidated Balance Sheets as of  December 31, 2006 and 2005                                               |       | 27         |       |
| Consolidated  Statements of Operations for the years ended December 31, 2006, 2005 and  2004.               |       | 28         |       |
| Consolidated  Statements of Stockholders’ Equity for the years ended December 31, 2006,  2005 and 2004 |       | 29         |       |
| Consolidated  Statements of Cash Flows for the years ended December 31, 2006, 2005 and 2004                 |       | 30         |       |
| Notes  to the Consolidated Financial Statements                                                             |       | 31         |       |

 

24

----

**REPORT OF INDEPENDENT****REGISTERED PUBLIC ACCOUNTINGFIRM**

The Board of Directorsand Stockholders ofEzenia! Inc.:

We have audited theaccompanying consolidated balance sheet of Ezenia! Inc. and subsidiaries as ofDecember 31, 2006 and the related consolidated statements of operations,stockholders’ equity and comprehensive income, and cash flows for the year thenended.  Our audit also included thefinancial statement schedule listed in the accompanying index at Item 15.  These financial statements and schedule arethe responsibility of the Company’s management. Our responsibility is toexpress an opinion on these financial statements and schedule based on ouraudit.

We conducted our audit inaccordance with the auditing standards of the Public Company AccountingOversight Board (United States). Those standards require that we plan andperform the audit to obtain reasonable assurance about whether the financialstatements are free of material misstatement. The Company is not required tohave, nor were we engaged to perform, an audit of its internal controls overfinancial reporting.  Our audit includedconsideration of internal control over financial reporting as a basis fordesigning audit procedures that are appropriate in the circumstances, but notfor the purpose of expressing an opinion on the effectiveness of the Company’sinternal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements, assessing theaccounting principles used and significant estimates made by management, aswell as evaluating the overall financial statement presentation. We believethat our audit provides a reasonable basis for our opinion.

In our opinion, suchconsolidated financial statements referred to above present fairly, in allmaterial respects, the consolidated financial position of Ezenia! Inc. andsubsidiaries at December 31, 2006 and the consolidated results of theiroperations and their cash flows for the year then ended in conformity withaccounting principles generally accepted in the United States of America.  Also, in our opinion, the related financialstatement schedule, when considered in relation to the basic financialstatements taken as a whole, presents fairly in all material respects theinformation set forth therein.

Asdiscussed in Note 2 to the consolidated financial statements, the Companyrecorded a cumulative effect adjustment as of January 1, 2006, inconnection with the adoption of Securities and Exchange Commission StaffAccounting Bulletin No. 108, “Considering the Effects of Prior YearMisstatements when Quantifying Misstatements in Current Year FinancialStatements”.  Also, as discussed inNote 2 to the consolidated financial statements, the Company changed itsmethod of accounting for share-based compensation effective January 1,2006 in connection with the adoption of Statement of Financial AccountingStandards No. 123 (revised 2004), “Shared-Based Payment”.

/s/ VITALE, CATURANO & COMPANY, Ltd.

Boston, MassachusettsMarch 21, 2007

25

----

**Reportof Independent Registered Public Accounting Firm**

The Board of Directorsand StockholdersEzenia! Inc.

We have audited theaccompanying consolidated balance sheets of Ezenia! Inc. and subsidiaries as ofDecember 31, 2005 and 2004 and the related consolidated statements ofoperations, stockholders’ equity, and cash flows for the three year periodended December 31, 2005. Our audits also included the financial statementschedule listed in the Index at Item 15(a). These financial statements andschedule are the responsibility of the Company’s management. Our responsibilityis to express an opinion on these financial statements and schedule based onour audits.

We conducted our auditsin accordance with the auditing standards of the Public Company AccountingOversight Board (United States). These standards require that we plan andperform the audit to obtain reasonable assurance about whether the financialstatements are free of material misstatement. The Company is not required tohave, nor were we engaged to perform, an audit of its internal controls overfinancial reporting. Our audits included consideration of internal control overfinancial reporting as a basis for designing audit procedures that areappropriate in the circumstances, but not for the purpose of expressing anopinion on the effectiveness of the Company’s internal control over financialreporting. Accordingly, we express no such opinion. An audit also includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements, assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overallfinancial statement presentation. We believe that our audits provide areasonable basis for our opinion.

In our opinion, suchconsolidated financial statements referred to above present fairly, in allmaterial respects, the consolidated financial position of Ezenia! Inc. andsubsidiaries at December 31, 2005 and 2004 and the consolidated results oftheir operations and their cash flows for each of the three years in the periodended December 31, 2005, in conformity with accounting principlesgenerally accepted in the United States of America. Also, in our opinion, therelated financial statement schedule, when considered in relation to the basicfinancial statements taken as a whole, presents fairly in all material respectsthe informationset forth therein.

See Note 4 for adiscussion regarding restatement of previously filed disclosures regarding thecomponents of the Company’s deferred tax assets. The restatement has no effecton the consolidated financial position, results of operations or cash flows ofthe Company.

 

/s/ BROWN & BROWN, LLP

Boston, MassachusettsMarch 28, 2006

26

----

**ConsolidatedBalance Sheets**
| **(In thousands, except for share related data)**                                                                                          | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                               | ** ** | **2006**              | ** ** | **2005** | ** ** |
| **Assets**                                                                                                                                                               |       |                  |       |   |   |
| Current assets                                                                                                                                                           |       |                  |       |   |   |
| Cash and cash equivalents                                                                                                                                                | ** ** | **$**                 | **12,059** |   | $ | 9,405 |   |
| Accounts receivable, less allowances of $412 and  $339 in 2006 and 2005, respectively                                                                                    | ** ** | **3,580**             |       | 4,533 |   |
| Prepaid software licenses                                                                                                                                                | ** ** | **3,346**             |       | 2,477 |   |
| Prepaid expenses and other current assets                                                                                                                                | ** ** | **356**               |       | 311 |   |
| Deferred tax assets                                                                                                                                                      | ** ** | **717**               |       | 138 |   |
| Total current  assets                                                                                                                                                    | ** ** | **20,058**            |       | 16,864 |   |
|                                                                                                                                                                     | ** ** | ** **            | ** ** | ** ** | ** ** |
| Capitalized  software, net                                                                                                                                               | ** ** | **87**                |       | **—** |   |
| Equipment and  improvements, net                                                                                                                                         | ** ** | **304**               |       | 247 |   |
| Total assets                                                                                                                                                             | ** ** | **$**                 | **20,449** |   | $ | 17,111 |   |
|                                                                                                                                                                     | ** ** | ** **            |       |   |   |
| **Liabilities  and stockholders’ equity**                                                                                                                           | ** ** | ** **            |       |   |   |
| Current  liabilities                                                                                                                                                     | ** ** | ** **            |       |   |   |
| Accounts payable                                                                                                                                                         | ** ** | **$**                 | **1,917**  |   | $ | 1,593 |   |
| Accrued expenses                                                                                                                                                         | ** ** | **535**               |       | 415 |   |
| Employee compensation and benefits                                                                                                                                       | ** ** | **229**               |       | 46 |   |
| Deferred revenue                                                                                                                                                         | ** ** | **5,867**             |       | 7,125 |   |
| Total current  liabilities                                                                                                                                               | ** ** | **8,548**             |       | 9,179 |   |
|                                                                                                                                                                     | ** ** | ** **            |       |   |   |
| Commitments and  contingencies (Note 6)                                                                                                                                  | ** ** | ** **            |       |   |   |
| Stockholders’  equity:                                                                                                                                              | ** ** | ** **            |       |   |   |
| Preferred stock, $.01 par value; 2,000,000 shares  authorized; none issued and outstanding                                                                               | ** ** | **—**            |       | **—** |   |
| Common stock, $.01 par value; 40,000,000 shares  authorized; 15,311,174 issued and 14,650,737 outstanding in 2006; 15,248,386  issued and 14,587,949 outstanding in 2005 | ** ** | **153**               |       | 152 |   |
| Capital in excess of par value                                                                                                                                           | ** ** | **64,368**            |       | 63,930 |   |
|  Accumulated  deficit                                                                                                                                               | ** ** | **(49,759**           | **)**      | (53,289 | ) |
| Treasury stock; 660,437 shares at cost                                                                                                                                   | ** ** | **(2,861**            | **)**      | (2,861 | ) |
|                                                                                                                                                                     | ** ** | **11,901**            |       | 7,932 |   |
| **Total liabilities and  stockholders’ equity**                                                                                                                     | ** ** | **$**                 | **20,449** |   | $ | 17,111 |   |

 

*See accompanying notes.*

27

----

**ConsolidatedStatements of Operations**
|                                                                                                              | ** ** | **Year ended December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| **(In thousands, except for share and per share related data)** | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Revenues**                                                                                                 |       |                                       |       |   |   |   |   |
| Product revenue                                                                                              | ** ** | **$**                                      | **11,856** |   | $ | 11,726 |   | $ | 8,565 |   |
| Product development revenue                                                                                  | ** ** | **1,268**                                  |       | 1,178 |   | 1,455 |   |
| Service revenue                                                                                              | ** ** | **68**                                     |       | 271 |   | 371 |   |
|                                                                                                         | ** ** | **13,192**                                 |       | 13,175 |   | 10,391 |   |
| **Costs of  revenues**                                                                                       | ** ** | ** **                                 |       |   |   |   |   |
| Cost of product revenue                                                                                      | ** ** | **3,870**                                  |       | 3,898 |   | 3,107 |   |
| Cost of product development revenue                                                                          | ** ** | **535**                                    |       | 523 |   | 388 |   |
| Cost of service revenue                                                                                      | ** ** | **20**                                     |       | 59 |   | 86 |   |
|                                                                                                         | ** ** | **4,425**                                  |       | 4,480 |   | 3,581 |   |
| **Gross  profit**                                                                                            | ** ** | **8,767**                                  |       | 8,695 |   | 6,810 |   |
| ** **                                                                                                   | ** ** | ** **                                 |       |   |   |   |   |
| **Operating  expenses**                                                                                      | ** ** | ** **                                 |       |   |   |   |   |
| Research and development                                                                                     | ** ** | **1,723**                                  |       | 1,158 |   | 1,087 |   |
| Sales and marketing                                                                                          | ** ** | **1,411**                                  |       | 1,535 |   | 1,370 |   |
| General and administrative                                                                                   | ** ** | **2,216**                                  |       | 1,826 |   | 1,959 |   |
| Depreciation                                                                                                 | ** ** | **105**                                    |       | 44 |   | 8 |   |
| Occupancy and other facilities related expenses                                                              | ** ** | **413**                                    |       | 621 |   | 579 |   |
| Total  operating expenses                                                                                    | ** ** | **5,868**                                  |       | 5,184 |   | 5,003 |   |
| **Income  from operations**                                                                                  | ** ** | **2,899**                                  |       | 3,511 |   | 1,807 |   |
|                                                                                                         | ** ** | ** **                                 |       |   |   |   |   |
| Other  income (expense)                                                                                      | ** ** | ** **                                 |       |   |   |   |   |
| Interest income, net                                                                                         | ** ** | **491**                                    |       | 191 |   | 122 |   |
| Settlement fees                                                                                              | ** ** | **—**                                 |       | **—** |   | (179 | ) |
| Other                                                                                                        | ** ** | **15**                                     |       | 10 |   | 7 |   |
|                                                                                                         | ** ** | **506**                                    |       | 201 |   | (50 | ) |
| Income  before income taxes                                                                                  | ** ** | **3,405**                                  |       | 3,712 |   | 1,757 |   |
| Income  tax benefit                                                                                          | ** ** | **(513**                                   | **)**      | (91 | ) | (1,427 | ) |
| **Net  income**                                                                                              | ** ** | **$**                                      | **3,918**  |   | $ | 3,803 |   | $ | 3,184 |   |
| **Basic and  diluted earnings per share:**                                                                   | ** ** | ** **                                 |       |   |   |   |   |
| Basic                                                                                                        | ** ** | **$**                                      | **.27**    |   | $ | 0.26 |   | $ | 0.23 |   |
| Diluted                                                                                                      | ** ** | **$**                                      | **.26**    |   | $ | 0.25 |   | $ | 0.22 |   |
| **Weighted average common shares:**                                                                          | ** ** | ** **                                 |       |   |   |   |   |
| Basic                                                                                                        | ** ** | **14,638,488**                             |       | 14,483,399 |   | 14,070,034 |   |
| Diluted                                                                                                      | ** ** | **15,048,132**                             |       | 15,127,639 |   | 14,537,594 |   |

*See accompanying notes.*

 

28

----

Consolidated Statements ofStockholders’ Equity  and Comprehensive Income(In thousands, except for share related data)

 
| ** **                                 | ** ** | ** **            | ** ** | ** **                 | ** ** | ** **         | ** ** | ** **   | ** ** | ** **             | ** **   | ** **        | ** ** | ** **  | ** ** |
|--------------------------------------------|------------|-----------------------|------------|----------------------------|------------|--------------------|------------|--------------|------------|------------------------|--------------|-------------------|------------|-------------|------------|
| ** **                                 | ** ** | ** **            | ** ** | ** **                 | ** ** | ** **         | ** ** | ** **   | ** ** | ** **             | ** **   | ** **        | ** ** | ** **  | ** ** |
| ** **                                 | ** ** | ** **            | ** ** | ** **                 | ** ** | **Capital**        | ** ** | ** **   | ** ** | ** **             | ** **   | **Total**         | ** ** | ** **  | ** ** |
| ** **                                 | ** ** | **Common Stock** | ** ** | **in Excess of** | ** ** | **Accumulated**    | ** ** | **Treasury** | ** ** | **Stockholders’** | ** **   | **Comprehensive** | ** ** |
| ** **                                 | ** ** | **Shares**            | ** ** | **Par Value**         | ** ** | **Par Value** | ** ** | **Deficit**  | ** ** | **Stock**              | ** **   | **Equity**        | ** ** | **Income**  | ** ** |
| **BALANCES  AS OF DECEMBER 31, 2003** |       | 13,700,380            |       | $                          | 144        |               | $          | 63,545       |       | $                      | (60,726)     |              | $          | (2,861)     |       | $ | 552 |   |   |   |
|                                       |       |                  |       |                       |       |               |       |         |       |                   |         |              |       |        |       |
| Stock issued under employee benefit plans  |       | 485,781               |       | 4                          |       | 98                 |       |         |       |                   |         | 102               |       |        |       |
| **Net income**                             |       |                  |       |                       |       |               |       | 3,184        |       |                   |         | 3,184             |       | 3,184       |       |
| Comprehensive loss                         |       |                  |       |                       |       |               |       |         |       |                   |         |              |       | $           | 3,184      |   |
|                                       |       |                  |       |                       |       |               |       |         |       |                   |         |              |       |        |       |
| ** **                                 |       |                  |       |                       |       |               |       |         |       |                   |         |              |       |        |       |
| **BALANCES  AS OF DECEMBER 31, 2004** |       | 14,186,161            |       | 148                        |       | 63,643             |       | (57,092)     |       | (2,861)                |         | 3,838             |       |        |       |
| Stock issued under employee benefit        |       |                  |       |                       |       |               |       |         |       |                   |         |              |       |        |       |
| Plans                                      |       | 401,788               |       | 4                          |       | 287                |       |         |       |                   |         | 291               |       |        |       |
| **Net income**                             |       |                  |       |                       |       |               |       | 3,803        |       |                   |         | 3,803             |       | 3,803       |       |
| Comprehensive income                       |       |                  |       |                       |       |               |       |         |       |                   |         |              |       | $           | 3,803      |   |
|                                       |       |                  |       |                       |       |               |       |         |       |                   |         |              |       |        |       |
| ** **                                 |       |                  |       |                       |       |               |       |         |       |                   |         |              |       |        |       |
| **BALANCES  AS OF DECEMBER 31, 2005** |       | 14,587,949            |       | 152                        |       | 63,930             |       | (53,289)     |       | (2,861)                |         | 7,932             |       |        |       |
|                                       |       |                  |       |                       |       |               |       |         |       |                   |         |              |       |        |       |
| Cumulative effect adjustment  (see note 2) |       |                  |       |                       |       |               |       | (388)        |       |                   |         | (388)             |       |        |       |
| Stock issued under employee benefit        |       |                  |       |                       |       |               |       |         |       |                   |         |              |       |        |       |
| Plans                                      |       | 62,788                |       | 1                          |       | 16                 |       |         |       |                   |         | 17                |       |        |       |
| **Stock based compensation  expense**      |       |                  |       |                       |       | 422                |       |         |       |                   |         | 422               |       |        |       |
| **Net income**                             |       |                  |       |                       |       |               |       | 3,918        |       |                   |         | 3,918             |       | 3,918       |       |
| Comprehensive income                       |       |                  |       |                       |       |               |       |         |       |                   |         |              |       | $           | 3,918      |   |
|                                       |       |                  |       |                       |       |               |       |         |       |                   |         |              |       |        |       |
| ** **                                 |       |                  |       |                       |       |               |       |         |       |                   |         |              |       |        |       |
| **BALANCES  AS OF DECEMBER 31, 2006** | ** ** | **14,650,737**        | ** ** | **$**                      | **153**    | ** **         | **$**      | **64,368**   | ** ** | **$**                  | **(49,759)** | ** **        | **$**      | **(2,861)** | ** ** | **$** | **11,901** | ** ** | ** ** | ** ** |

 

*See accompanying notes.*

 

29

----

**Consolidated Statements of CashFlows**
| ** **                                                                         | ** ** | **Year ended December 31,** | ** ** |
|------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                         | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                                         | ** ** | **(In thousands)**                    | ** ** |
| **Operating activities**                                                           | ** ** | ** **                                 |       |   |   |   |   |
| Net income                                                                         | ** ** | **$**                                      | **3,918**  |   | $ | 3,803 |   | $ | 3,184 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities: | ** ** | ** **                                 |       |   |   |   |   |
|                                                                               | ** ** | ** **                                 |       |   |   |   |   |
| Depreciation                                                                       | ** ** | **105**                                    |       | 44 |   | 8 |   |
| Amortization of  capitalized software                                              | ** ** | **53**                                     |       | — |   | — |   |
| Share-based  compensation                                                          | ** ** | **422**                                    |       | — |   | — |   |
| Bad debt  (recoveries)                                                             | ** ** | **(16**                                    | **)**      | (50 | ) | (110 | ) |
| Deferred taxes                                                                     | ** ** | **(579**                                   | **)**      | (138 | ) | — |   |
| Changes in  operating assets and liabilities:                                      | ** ** | ** **                                 |       |   |   |   |   |
| Accounts  receivable                                                               | ** ** | **969**                                    |       | (1,018 | ) | (610 | ) |
| Prepaid software  licenses                                                         | ** ** | **(799**                                   | **)**      | 153 |   | (906 | ) |
| Prepaid expenses  and other current assets                                         | ** ** | **(45**                                    | **)**      | (5 | ) | (9 | ) |
| Accounts  payable, accrued expenses, and employee and compensation benefits        | ** ** | **527**                                    |       | 549 |   | 9 |   |
| Deferred revenue                                                                   | ** ** | **(1,616**                                 | **)**      | 462 |   | 1,629 |   |
| Net cash provided by  operating activities                                         | ** ** | **2,939**                                  |       | 3,800 |   | 3,195 |   |
|                                                                               | ** ** | ** **                                 |       |   |   |   |   |
| **Investing activities**                                                           | ** ** | ** **                                 |       |   |   |   |   |
| Purchases of equipment  and improvements                                           | ** ** | **(162**                                   | **)**      | (206 | ) | (93 | ) |
| Capitalized software                                                               | ** ** | **(140**                                   | **)**      | — |   | — |   |
| Net cash used for  investing activities                                            | ** ** | **(302**                                   | **)**      | (206 | ) | (93 | ) |
|                                                                               | ** ** | ** **                                 |       |   |   |   |   |
| **Financing activities**                                                           | ** ** | ** **                                 |       |   |   |   |   |
| Proceeds from stock  issued under employee benefit plans                           | ** ** | **17**                                     |       | 291 |   | 102 |   |
| Net cash provided by  financing activities                                         | ** ** | **17**                                     |       | 291 |   | 102 |   |
|                                                                               | ** ** | ** **                                 |       |   |   |   |   |
| Change in cash and cash  equivalents                                               | ** ** | **2,654**                                  |       | 3,885 |   | 3,204 |   |
| Cash and cash  equivalents at beginning of year                                    | ** ** | **9,405**                                  |       | 5,520 |   | 2,316 |   |
| Cash and cash  equivalents at end of year                                          | ** ** | **$**                                      | **12,059** |   | $ | 9,405 |   | $ | 5,520 |   |
| Supplementary  disclosure of cash flow information:                                | ** ** | ** **                                 |       |   |   |   |   |
| Interest paid                                                                      | ** ** | **$**                                      | **3**      |   | $ | 2 |   | $ | 1 |   |
| Income taxes (refunded)  paid                                                      | ** ** | **$**                                      | **296**    |   | $ | — |   | $ | (1,271 | ) |

 

*See accompanying notes.*

30

----

**Notes tothe Consolidated Financial Statements**

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

Ezenia! Inc. (“Ezenia”,“we”, or the “Company”) operates in one business segment, which is the design,development, manufacturing, marketing and sale of conferencing and real-timecollaboration solutions for corporate and governmental networks andeBusiness.   Founded in 1991, Ezeniadevelops and markets products that enable organizations to provide high-qualitygroup communication and collaboration capabilities to commercial, governmental,consumer and institutional users. Ezenia’s products allow individuals andgroups, regardless of proximity constraints, to interact and share informationin a natural, spontaneous way — voice-to-voice, face-to-face, mouse-to-mouse,keyboard-to-keyboard, flexibly, securely and in real-time.   Using our products, individuals can interactthrough a natural meeting experience, allowing groups to work togethereffectively and disseminate vital information quickly in a secure environment.

Theconsolidated financial statements include the accounts of Ezenia and its whollyowned subsidiaries.  All significantinter-company transactions and balances have been eliminated.  All assets and liabilities of Ezenia’sforeign subsidiaries are translated at the rate of exchange at the end of theyear, while sales and expense are translated at the average rate in effectduring the year.  The net effect of thesetranslation adjustments was immaterial for all periods presented.

**2.  Summary of Significant Accounting Policies**

**Use of Estimates**

The preparation of thefinancial statements in conformity with accounting principles generallyaccepted in the United States of America requires management to make estimatesand assumptions that affect the reported amounts of assets and liabilities, anddisclosure of contingent assets and liabilities, if any, at the date of thefinancial statements and the reported amounts of revenues and expenses duringthe reporting period.  Actual resultscould differ from these estimates.

###### **Revenuerecognition**

****Productrevenue consists of sales of InfoWorkSpace (“IWS”) software licenses andmaintenance agreements, IWS product related training, installation, andconsulting, and video products.  Revenuefrom sales of IWS software licenses and maintenance agreements is recognizedratably over the subscription software license contract periods, which aregenerally one year, pursuant to the guidance provided by Statement of Position(“SOP”) 97-2, *“Software Revenue Recognition”*(SOP 97-2), issued by the American Institute of Certified Public Accountants(AICPA). Revenue from IWS training, installation, and consulting services arerecognized as the services are performed because the Company believes we haveestablished vendor specific objective evidence (VSOE) of fair value based onthe price charged when the services are sold separately.****

****Revenuefrom video product sales is recognized upon shipment to the customer and thefulfillment of all contractual terms and conditions, pursuant to the guidanceprovided by Staff Accounting Bulletin No. 104, *“RevenueRecognition in Financial Statements”* (SAB 104), issued by theSecurities and Exchange Commission.****

Product development revenue relates to contractsinvolving customization of the IWS product according to customerspecifications.  We account for productdevelopment revenue in conformity with the guidance provided by SOP 81-1, “AccountingFor Performance of Construction Type and Certain Production Type Contracts”issued by the AICPA.  When reliable estimatesare available for the costs and efforts necessary to complete the productdevelopment and the contract does not include contractual milestones or otheracceptance criteria, product development revenue is recognized under thepercentage of completion contract method based upon input measures, such ashours.  When such estimates are notavailable, we defer all revenue recognition until we have completed thecontract and have no further obligations to the customer.  Revenue associated with contracts for productdevelopment revenue with milestone-based deliverables requiring a customers’acceptance is recognized upon the customer’s acceptance in accordance withterms of the contract.  The associatedcost recognition with

31

----

these deliverables or milestones is deferred until theterms of acceptance are satisfied and revenue is recognized.  As of December 31, 2006 we had no unbilledreceivables or deferred costs related to milestone contracts.  As of December 31, 2005 we had approximately$492 thousand of unbilled receivables and approximately $120 thousand ofincurred deferred costs related to milestone contracts.  Certain of our product development contractsare subject to government audit and retroactive adjustment of the direct andindirect costs used to determine the contract billings. Certain of our productdevelopment contracts are subject to government audit and retroactiveadjustment of the direct and indirect costs used to determine the contractbillings. Product development revenues and accounts receivable reported in thefinancial statements are recorded at the amount expected to be received.Product development revenues are adjusted to actual upon final audit andretroactive adjustment. Estimated contractural allowances are provided based onmanagement’s evaluation of current contract terms.

****Servicerevenue represents sales of service contracts related to the maintenance ofvideo products.  Maintenance revenue isdeferred and recognized ratably over the term of the applicable agreement.****

****Productsand software licenses are sold without any contractual right of return by thecustomer.  Deferred revenue representsamounts received from customers under subscription software licenses,maintenance agreements, or for product sales in advance of revenuerecognition.  Judgments are required inevaluating the creditworthiness of our customers.  In all instances, revenue is not recognizeduntil we have determined, at the outset of the arrangement that collectibilityis reasonably assured.  Amounts billed tocustomers related to shipping and handling charges are recorded as revenue uponshipment and the related costs are included in cost of goods sold.****

###### **VideoProduct Warranties**

****Ourvideo hardware products are sold with warranty provisions that require us toremedy deficiencies in quality or performance over a period of 90 days, at nocost to our customers. Our policy is to establish warranty reserves at the timeof sale when our estimates of the costs that will be incurred to fulfill thosewarranty requirements become material. At December 31, 2006, we believe thatour future cost of materials, labor and overhead for the servicing of our videohardware products sold through that date are not material and no reserve iswarranted. If actual product failures or material or service delivery costsdiffer from our estimates, our warranty liability would need to be revised accordingly.****

###### **ThirdParty Technology**

Ezenia’s IWSproduct incorporates third party technology in the form of software licenses,which we purchase from other software vendors. Software licenses purchased from vendors are reported as prepaidlicenses and amortized to cost of revenue over the subscription period, whichis generally one year.

###### **Advertising**

Advertising costs areincluded in sales and marketing expense. Ezenia uses its website as its main form of advertising along withparticipating in various industry related trade shows and currently does notincur material advertising costs. Advertising costs are expensed as incurred.Advertising expense approximated $40 thousand, $49 thousand, and $39 thousandin fiscal years 2006, 2005 and 2004, respectively.

###### **Cash equivalents**

Ezenia considers 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.

###### **Financialinstruments and concentrations of credit risk**

Ezenia’s 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 Ezenia toconcentrations of credit risk, are cash equivalents and accounts receivable.

Major financialinstitutions maintain all the Company’s cash equivalents.  Concentration of credit risk with respect toaccounts receivable is limited to certain customers to whom Ezenia makessubstantial sales.  To reduce risk, weroutinely assess the financial strength of our customers.  Ezenia maintains an allowance for doubtfulaccounts based on accounts past due according to contractual terms andhistorical collection experience.  Actual

32

----

losses when incurred arecharged to the allowance.  Write-offsrelated to accounts receivable have been within management’s expectations.

Revenue from one customeraccounted for approximately 19% of total revenues in 2006, 20% of totalrevenues in 2005, and 33% of total revenues in 2004.  Accounts receivable from this customeramounted to approximately $1.1 million, $1.8 million and $1.8 million atDecember 31, 2006, 2005 and 2004, respectively. Revenue from internationalmarkets was approximately $209 thousand, $362 thousand and $391 thousand 2006,2005 and 2004, respectively.

###### **Equipmentand improvements**

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

| 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 andmaintenance costs are expensed as incurred.

**Researchand development costs**

We account for research and development costs in accordancewith several accounting pronouncements, including SFAS No. 2, *“Accounting forResearch and Development Costs”*, and SFAS No. 86, *“Accounting for theCosts of Computer Software to be Sold, Leased, or Otherwise Marketed”*.  SFAS No. 86 specifies that costsincurred internally in researching and developing a computer software productshould be charged to expense until technological feasibility has beenestablished for the product. Once technological feasibility is established, allsoftware costs should be capitalized until the product is available for generalrelease to customers.  During the quarterended March 31, 2006, we released Version 3.0 of our InfoWorkSpace softwareproduct.  In connection with thisdevelopment effort, a total of $140 thousand of costs were capitalized and arebeing amortized on a straight-line method over the remaining estimated economiclife of the product, which we have determined to be two years.

Judgment is required in determining when technologicalfeasibility of a product is established. In most cases, we have determined thattechnological feasibility for our software products/updates is reached shortlybefore the products are released to manufacturing. Costs incurred aftertechnological feasibility is established have historically not been material,and accordingly, were expensed when incurred in these instances.

**Incometaxes**

****Deferredtax assets and liabilities are determined at the end of each year based on thefuture tax consequences that can be attributed to net operating loss and creditcarryovers as well as the differences between the financial statement carryingamounts of existing assets and liabilities and their respective tax bases.  The deferred tax assets are reduced by avaluation allowance if it is more likely than not that the tax benefits willnot be realized.  The realization ofdeferred tax assets is dependant upon the generation of future taxableincome.  In determining the valuationallowance, we consider past performance, expected future taxable income, andqualitative factors which we consider to be appropriate to be considered inestimating future taxable income.  TheCompany’s forecast of expected future taxable income is for future periods thatcan be reasonably estimated.  Resultsthat differ materially from our current expectations may cause us to change ourjudgment on future taxable income. These changes, if any, may require us toadjust our existing tax valuation allowance higher or lower than the amount wehave recorded.****

****During2006, as a result of our assessment of future taxable income through 2007, wereleased approximately $579 thousand of valuation allowance against deferredtax assets resulting in a net deferred tax asset of approximately $717thousand.****

33

----

###### **Net income(loss) per share**

The Company reports netincome (loss) per share in accordance with the Statement of Financial AccountingStandard (“SFAS”) No. 128, “*Earnings per Share*.”Diluted earnings per share include the effect of dilutive stock options.

Shares used in computingbasic and diluted net income (loss) per share are as follows:

|                                                          | ** ** | **2006**   | ** ** | **2005**   | ** ** | **2004**   | ** ** |
|----------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| Basic                                                    |       | 14,638,488 |       | 14,483,399 |       | 14,070,034 |       |
| Effect of assumed exercise ofstock options               |       | 409,644    |       | 644,240    |       | 467,560    |       |
| Diluted                                                  |       | 15,048,132 |       | 15,127,639 |       | 14,537,594 |       |
| Outstanding  options excluded as impact is anti-dilutive |       | 1,486,608  |       | 760,752    |       | 783,752    |       |

 

###### **Accountingfor share-based compensation**

In December 2004, theFinancial Accounting Standards Board (“FASB”) issued SFAS No. 123R, *“Share-Based Payment”*(SFAS 123R).  This Statement is a revision of SFAS 123, “*Accountin*g *for Stock-BasedCompensation*” (SFAS 123), and supersedes Accounting Principles BoardOpinion No. 25, “*Accounting for Stock Issued to Employees*”(APB 25), and its related implementation guidance. SFAS 123R establishesstandards for transactions in which an entity exchanges its equity instrumentsfor goods or services.  This standardrequires a public entity to measure the cost of employee services received inexchange for an award of equity instruments based on the grant date fair valueof the award and recognize that cost over the period that such services areperformed.  This eliminates the exceptionto account for such awards using the intrinsic method previously allowableunder APB 25.   The Company adopted SFAS123R on January 1, 2006 under the modified-prospective transition method.

Prior to adopting SFAS 123R,we accounted for stock-based compensation under APB 25, as permitted by SFAS123.  Accordingly, no stock-basedcompensation cost was recognized in the statement of operations in connectionwith the issuance of stock options under any of our Stock Option Plans, orthrough our 1995 Employee Stock Purchase Plan for periods ended prior toJanuary 1, 2006.  We have applied themodified-prospective method in adopting SFAS 123R.  Accordingly, periods prior to adoption havenot been restated and are not directly comparable to periods afteradoption.  Under the modified prospectivemethod, compensation cost recognized in the twelve months ended December 31,2006 includes (a) compensation cost for all share-based payments granted priorto, but not yet vested as of January 1, 2006, based on the grant date fairvalue estimated in accordance with the original provisions of SFAS 123, lessestimated forfeitures, and (b) compensation cost for all share-based paymentsgranted and vested subsequent to January 1, 2006, based on the grant date fairvalue estimated in accordance with the provisions of SFAS 123R.

In March 2005, the Staff of the SEC issuedStaff Accounting Bulletin (“SAB”) 107, *“Share-based Payment”*(“SAB 107”), which expresses the view of the SEC regarding the interactionbetween SFAS No. 123R and certain SEC rules and regulations concerning thevaluation of share-based payment arrangements for public companies. Inparticular, SAB 107 provides guidance related to share-based paymenttransactions with non-employees, the transition from nonpublic to public entitystatus, valuation methods (including assumptions such as expected volatilityand expected term), the accounting for certain redeemable financial instrumentissues under shares-based payment arrangements, the classification ofcompensation expense, non-GAAP financial measures, first-time adoption of SFASNo. 123R in an interim period, capitalization of compensation costsrelated to share-based payment arrangements, the accounting for income taxeffects of share-based payment arrangements, the accounting for income taxeffects of share-based payment arrangements upon adoption of SFASNo. 123R, the modification of employee share options prior to adoption ofSFAS No. 123R, and disclosures in Management’s 

34

----

Discussion and Analysis of Financial Condition andResults of Operations subsequent to adoption of SFAS No. 123R. The Companyhas accounted for its stock option grants in compliance with SAB 107.

The following tableillustrates the effect on our net income and earnings per share had we used thefair value method prescribed by SFAS 123 to measure compensation expense relatedto stock options and awards granted to employees for the years ended December31, 2005 and 2004.

|                                                                                                          | ** ** | **2005**                                                                      | ** ** | **2004** | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------|------------|----------|------------|
| ** **                                                                                               | ** ** | **(in thousands except for  per share information)** | ** ** |
| Net income, as  reported                                                                                 |       |                                                                          | $          | 3,803    |       |   |   | $ | 3,184 |   |   |
| Deduct: share-based  compensation expense determined under fair value method for all awards, net  of tax |       |                                                                          | (273       | )        |       |   | (155 | ) |   |
| Pro forma net  income                                                                                    |       |                                                                          | $          | 3,530    |       |   |   | $ | 3,029 |   |   |
| Earnings per  share as reported:                                                                         |       |                                                                          |       |     |       |   |   |   |   |
| Basic                                                                                                    |       |                                                                          | $          | 0.26     |       |   |   | $ | 0.23 |   |   |
| Diluted                                                                                                  |       |                                                                          | $          | 0.25     |       |   |   | $ | 0.22 |   |   |
| Earnings per  share pro-forma:                                                                           |       |                                                                          |       |     |       |   |   |   |   |
| Basic                                                                                                    |       |                                                                          | $          | 0.24     |       |   |   | $ | 0.21 |   |   |
| Diluted                                                                                                  |       |                                                                          | $          | 0.23     |       |   |   | $ | 0.21 |   |   |

 

Forthe year ended December 31, 2006, the Company recorded share-based compensationexpense in the consolidated statements of operations as follows:

|                                | ** ** | **Year Ended**             | ** ** |
|--------------------------------|------------|---------------------------------|------------|
| ** **                     | ** ** | **December 31, 2006** | ** ** |
| ** **                     | ** ** | **(in thousands)**         | ** ** |
|  Cost of revenues         |       |                            | $          | 5 |   |   |
|  Research and development |       |                            | 69         |   |   |
| Sales and  marketing           |       |                            | 75         |   |   |
| General and  administrative    |       |                            | 273        |   |   |
|                           |       |                            | $          | 422 |   |   |

 

Weestimate the fair value of each option award issued under the plans on the dateof grant using a Black-Scholes based option-pricing model that uses theassumptions 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,** | ** ** |
|--------------------------|------------|--------------------------------------------|------------|
| ** **               | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| Expected volatility      |       | 99.64%-110.66%                             |       | 150.79%-154.06% |   | 153.93%-155.26% |   |
| Risk-free interest rate  |       | 4.28%-5.22%                                |       | 4.0-4.50% |   | 2.00%-4.75% |   |
| Expected life in years   |       | 4.0                                        |       | 4.0 |   | 4.0 |   |
| Expected  dividend yield |       | None                                       |       | None |   | None |   |

 

**Basedon the above assumptions, the weighted average estimated fair value of optionsgranted in fiscal years 2006, 2005, and 2004 was $2.34, $1.44 and $0.53 pershare, respectively.  We estimatedforfeitures related to option grants at an annual rate of 20.51% per year andtrue up for actual forfeitures each reporting period.**

**Otherreasonable assumptions about these factors could provide different estimates offair value.  Future changes in stockprice volatility, life of options, interest rates, forfeitures and dividendpractices, if any, may require changes in our assumptions, which couldmaterially affect the calculation of fair value.**

35

----

**Totalunrecognized equity-based compensation expense related to unvested stockoptions, expected to be recognized over a weighted average period of 1.32years, amounted to $1.4 million at December 31, 2006.**

**Theweighted average exercise price of stock options exercised for the year endedDecember 31, 2006 was $0.31.  Theintrinsic value of stock options exercised for the year ended December 31, 2006was $134 thousand.**

InNovember 2005, the FASB issued FASB Staff Position SFAS 123R-3 “*Transition Election Related to Accounting for Tax Effects ofShare-Based Payment Awards.”* The Company has elected to adopt the alternative transition methodprovided by this FASB Staff Position for calculating the tax effects (ifany) of stock-based compensation expense pursuant to SFAS 123R.  The alternative transition method includessimplified methods to establish the beginning balance of the additional paid-incapital pool related to the tax effects of employee stock-based compensation,and to determine the subsequent impact to the additional paid-in capital pooland the consolidated statements of operations and cash flows of the tax effectsof employee stock-based compensation awards that are outstanding upon adoptionof SFAS 123R.

**Recent Accounting pronouncements**

In June 2006, the FASB issued FASB Interpretation No. 48“*Accounting for Uncertainty in Income Taxes —an interpretation of FASB Statement No. 109” (“FIN No. 48”),*which is effective for fiscal years beginning after December 15, 2006 withearlier adoption encouraged.  Thisinterpretation was issued to clarify the accounting for uncertainty in incometaxes recognized in an enterprise’s financial statements in accordance withFASB Statement No. 109, *Accounting forIncome Taxes.*The interpretation prescribes a recognition thresholdand measurement attribute for the financial statement recognition andmeasurement of a tax position taken or expected to be taken in a tax return.FIN No. 48 requires recognition of tax benefits that satisfy a greaterthan 50% probability threshold. FIN No. 48 also provides guidance onderecognition, classification, interest and penalties, accounting in interimperiods, disclosure, and transition. FIN No. 48 is effective for usbeginning January 1, 2007. We are assessing the potential impact that theadoption of FIN No. 48 will have on our financial statements.

InSeptember 2006, the Staff of the SEC issued SAB No. 108, *“Consideringthe Effects of Prior Year Misstatements when Quantifying Misstatements inCurrent Year Financial Statements” (“SAB No.108”). *SAB No. 108 provides guidance onthe consideration of the effects of**prior yearmisstatements in quantifying current year misstatements for the purpose ofdetermining whether the current year’s financial statements are materiallymisstated.  SAB No. 108 is effective forfiscal years ending after November 15, 2006. We adopted SAB No. 108 during fiscal 2006.  Our 2006 financial results include acumulative effect adjustment for adjustments previously deemed immaterial inour revenue and cost of sales amortization for our InfoWorkSpace product lineand a non-material correction of the 2005 income tax provision.  The cumulative effect adjustment results fromapplying the provisions of SAB No. 108. Historically, the amortization of the InfoWorkSpace deferred revenue andthe related cost of sales was done using a full month convention ofamortization, whereby a full month of revenue and prepaid license cost wasamortized in the month of license shipment, regardless of what day of the monththe product was shipped on.  This had theeffect of accelerating revenue and cost recognition.  Prior to the adoption of SAB No. 108, we usedthe “rollover” method described therein in evaluating the materiality offinancial statements’ adjustments related to the license revenue and prepaidlicense cost amortization.  We determinedthe impact from the adjustment to be immaterial to current and prior periods’financial results under the “rollover” method. However, we have evaluated the adjustment using the dual approach methoddescribed in SAB No. 108 and accordingly, as of January 1, 2006, we recorded acumulative effect adjustment to increase the deferred revenue balance by $358thousand and increase the prepaid software license cost by $70 thousand, with acorresponding net charge to retained earnings of $288 thousand.  During 2006 we also identified a $100thousand error in the 2005 tax provision related primarily to incomeapportionments for state taxes.  Webelieve that this adjustment is immaterial to both 2006 and 2005.  In accordance with SAB No. 108, the incometax error was corrected as of January 1, 2006 by recording an adjustment toincrease the income tax accrual by $100 thousand, 

36

----

witha corresponding charge to retained earnings of $100 thousand.  In accordance with SAB No. 108, reportedresults for periods prior to January 1, 2006 have not been adjusted.

The 2006 financial statements were affected by theseadjustments through a $149 thousand increase in product revenue, with acorresponding increase of $25 thousand in cost of product revenue and a $99thousand increase in the income tax benefit. Of these amounts, approximately $69 thousand of the increase in productrevenue, $13 thousand of the increase in cost of product revenue, and $99thousand of the increase in the income tax benefit was applicable to previouslyreported 2006 periods through September 30, 2006.

InSeptember 2006, the FASB issued SFAS No. 157, *“Fair ValueMeasurements”* (“SFAS No. 157”). Among other requirements, SFAS No. 157 defines fair value andestablishes a framework for measuring fair value and also expands disclosureabout the use of fair value to measure assets and liabilities.  SFAS No. 157 is effective beginning the firstfiscal year that begins after November 15, 2007.  We are required to adopt SFAS No. 157 onJanuary 1, 2008.  We are currentlyevaluating the potential impact of this statement.

**3.**                                      Equipment and Improvements

Property andequipment are recorded at cost less accumulated depreciation andamortization.  Depreciation is calculatedusing the straight-line method over the useful lives of the respectiveassets.  Leasehold improvements areamortized over the shorter of the estimated useful lives of the improvements orthe remaining lease term. For the years ended December 31, 2006, 2005, and2004, we had the following activity net of depreciation:

|                                            | ** ** | **2006**                | ** ** | **2005** | ** ** |
|--------------------------------------------|------------|-------------------------|------------|----------|------------|
| ** **                                 | ** ** | **(in thousands)** | ** ** |
| Computer  equipment and purchased software |       | $                       | 306        |     | $          | 172 |   |
| Office equipment                           |       | 46                      |       | 38       |       |
| Furniture and  fixtures                    |       | 40                      |       | 25       |       |
| Leasehold  improvements                    |       | 69                      |       | 64       |       |
| Total equipment and improvements           |       | $                       | 461        |     | $          | 299 |   |
| Less: accumulated depreciation             |       | (157                    | )          | (52      | )          |
| Total equipment and  improvements, net     |       | $                       | 304        |     | $          | 247 |   |

 

Depreciationexpense for the years ended December 31, 2006, 2005, and 2004 was $105thousand, $44 thousand, and $8 thousand respectively.

**4.****                                      Incometaxes**

The provision (benefit)for income taxes is as follows:
| ** **                | ** ** | **Year ended December 31** | ** ** |
|---------------------------|------------|-------------------------------------------|------------|
| ** **                | ** ** | **2006**                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                | ** ** | **(In thousands)**                   | ** ** |
| Current:                  |       |                                      |       |   |   |   |   |   |   |   |
| Federal                   |       |                                      | $          | 15 |   |   | $ | 45 |   |   | $ | (608 | ) |
| State                     |       |                                      | 51         |   |   | 2 |   |   | — |   |
| Foreign                   |       |                                      | —     |   |   | — |   |   | (819 | ) |
| Total current             |       |                                      | $          | 66 |   |   | $ | 47 |   |   | $ | (1,427 | ) |
|                      |       |                                      |       |   |   |   |   |   |   |   |
| Deferred:                 |       |                                      |       |   |   |   |   |   |   |   |
| Federal                   |       |                                      | $          | (560 | ) |   | $ | (107 | ) |   | $ | — |   |
| State                     |       |                                      | (19        | ) |   | (31 | ) |   | — |   |
| Foreign                   |       |                                      | —     |   |   | — |   |   | — |   |
| Total deferred            |       |                                      | $          | (579 | ) |   | $ | (138 | ) |   | $ | — |   |
|                      |       |                                      |       |   |   |   |   |   |   |   |
| Total income tax  benefit |       |                                      | $          | (513 | ) |   | $ | (91 | ) |   | $ | (1,427 | ) |

 

37

----

The amount reported as income tax benefit in 2006 is comprised ofestimated federal Alternative Minimum tax expense associated with the 2006federal income tax return and estimated state income tax arising from stateswhere the company conducts business and files a return, and receives minimal orno benefit from state Net Operating Loss carry forwards to absorb current yeartaxable income from current state taxation, offset by a deferred tax benefit ofapproximately $579 thousand primarily associated with the release of a portionof the Company’s valuation allowance. The amount reported as income tax benefit in 2005 is comprised ofcurrent income tax expense of approximately $47 thousand in estimated federalalternative minimum tax expense and state income tax expense, and a deferredtax benefit of approximately $138 thousand primarily associated with therelease of a portion of the Company’s valuation allowance.  The amount reported as income tax benefit in 2004 isthe result of an $819 thousand net settlement reached with the Israel TaxCommission and a $608 thousand refund received in connection with the 2002carry back of net operating losses incurred in 2001.

Areconciliation of the expected income tax (benefit) computed using the federalstatutory income tax rate to the Company’s effective income tax rate atDecember 31 for the years ended 2006, 2005, and 2004 is as follows:
| ** **                                                             | ** ** | **Year ended December 31** | ** ** |
|------------------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                             | ** ** | **2006**                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                             | ** ** | **(In thousands)**                   | ** ** |
| Federal income  tax at federal statutory tax rate                      |       |                                      | $          | 1,163 |   |   |   | $ | 1,262 |   |   |   | $ | 597 |   |   |
| State taxes, net  of federal benefit                                   |       |                                      | 200        |   |   |   | 266 |   |   |   | 105 |   |   |
| Research and  development and other tax credits                        |       |                                      | 16         |   |   |   | 45 |   |   |   | 708 |   |   |
| Change in  valuation allowance and utilization of net operating losses |       |                                      | (1,869     | ) |   |   | (1,461 | ) |   |   | (1,259 | ) |   |
| Prior year  refunds and reversal of reserves                           |       |                                      | —     |   |   |   | — |   |   |   | (1,427 | ) |   |
| Permanent  differences and other                                       |       |                                      | (23        | ) |   |   | (203 | ) |   |   | (151 | ) |   |
| Total income tax  expense (benefit)                                    |       |                                      | $          | (513 | ) |   |   | $ | (91 | ) |   |   | $ | (1,427 | ) |   |

 

The Company’sdeferred tax assets consist of the following:

|                                    | ** ** | **2006**                | ** ** | **2005** | ** ** |
|------------------------------------|------------|-------------------------|------------|----------|------------|
| ** **                         | ** ** | **(In thousands)** | ** ** |
| Net operating  loss carryforwards  |       | $                       | 17,534     |     | $          | 21,239 |   |
| Purchased  intangibles             |       | 4,266                   |       | 5,389    |       |
| Tax credit  carryforwards          |       | 2,484                   |       | 3,077    |       |
| Reserves,  accruals and allowances |       | 2,317                   |       | 2,422    |       |
| Depreciation and  amortization     |       | 17                      |       | (12      | )          |
| Total gross  deferred tax asset    |       | 26,618                  |       | 32,115   |       |
| Valuation  allowance               |       | (25,901                 | )          | (31,977  | )          |
| Net deferred tax asset             |       | $                       | 717        |     | $          | 138 |   |

 

At December 31, 2006 andDecember 31, 2005, the Company has domestic federal net operating losscarryforwards of approximately $51.1 million and $53.1 million respectively,available to reduce future taxable income, which expire at various datesbeginning in 2020 through 2025. The Company also has federal research anddevelopment tax credit carryforwards of approximately $2.4 million available atboth December 31, 2006 and 2005 respectively, to reduce future tax liabilities.The Company has state net operating loss carryforwards of approximately $3.1million and $53.2 million as of December 31, 2006 and 2005 respectivelyavailable to reduce future state taxable income, which expire at various datesbeginning in 2006 through 2011. The Company also has state research anddevelopment tax credit carryforwards of approximately of $- and $918 thousandas of December 31, 2006 and 2005, respectively, available to reduce future taxliabilities and which expire at various dates beginning in 2015 through 2020.

The company waspreviously headquartered in Massachusetts and had accumulated approximately $53million and $918 thousand in Massachusetts net operating loss and creditcarryforwards, respectively. During 2006 the Company concluded that it does notexpect to have income reportable in Massachusetts. Accordingly, the Companywrote the Massachusetts net operating loss and credit carryforwards off againstthe previously provided valuation allowance.

Under the provisions ofthe Internal Revenue Code, certain substantial changes in the Company’sownership may result in a limitation on the amount of net operating loss (NOL)carryforwards and research and development credit carryforwards which may beutilized annually to offset future taxable income and taxes payable.

As required by SFAS No.109, management of the Company has evaluated the positive and negative evidencebearing upon the realizability of its deferred tax assets, which are comprisedprincipally of NOL carryforwards, research and experimentation creditcarryforwards, capitalized start up expenditures, purchased intangibles,  and research and development expendituresamortizable over sixty months. Management has determined at this time that it is more likely than notthat the Company will recognize a portion of the benefits of its federal andstate deferred tax assets.  Accordingly,in 2006 and 2005, a provision for current income tax of approximately$66thousand and  $47 thousand respectively,relating to federal alternative minimum and state income taxes was recorded,which was offset by the release of a valuation allowance of approximately $579thousand and $138 thousand.  As a result,a valuation allowance of approximately $25.9 million and $32.0 million has beenestablished at December 31, 2006 and 2005 respectively, resulting in a netdeferred tax asset of approximately $717 thousand and $138 thousand,respectively.  The amount of the deferredtax asset considered realizable could be reduced or increased in the near termif estimates of future taxable income during the carryforward period change.

38

----

*Restatement of 2004 and 2003deferred tax items:*

In connection with theCompany’s review of income tax returns previously filed in relation to ourdisclosures relative to certain temporary differences we have restated certainof the deferred tax asset amounts and corresponding valuation from our previouslyfiled Form 10-K’s for the years ended December 31, 2004 and 2003, respectively.While the adjustments individually are material to our tax disclosures therewas no impact to our balance sheet, statement of operations stockholders equityor cash flows. Accordingly, the following represents the restated amounts ascompared to amounts previously disclosed in our prior Form 10-K.

The Company’s deferredtax assets comprise of the following:
| ** **                                                       | ** ** | **2004  (as restated)** | ** ** | **2003  (as restated)** | ** ** | **2004  (as originally  reported)** | ** ** | **2003  (as originally  reported)** | ** ** |
|------------------------------------------------------------------|------------|------------------------------|------------|------------------------------|------------|------------------------------------------|------------|------------------------------------------|------------|
| Net operating  loss carryforwards                                |       | $                            | 21,927     |                         | $          | 21,363                                   |       | $                                        | 21,400     |   | $ | 18,512 |   |
| Purchase intangibles                                             |       | 6,013                        |       | 6,162                        |       | 6,013                                    |       | 5,903                                    |       |
| Research and  development and other credits                      |       | 3,342                        |       | 3,718                        |       | 3,718                                    |       | 5,166                                    |       |
| Accruals and  allowances not current deductible for tax purposes |       | 2,156                        |       | 3,138                        |       | 2,156                                    |       | 1,425                                    |       |
| Depreciation and  other                                          |       | —                       |       | 316                          |       | —                                   |       | 316                                      |       |
|                                                             |       | 34,438                       |       | 34,697                       |       | 33,287                                   |       | 31,322                                   |       |
| Valuation  allowance                                             |       | (33,438                      | )          | (34,697                      | )          | (38,287                                  | )          | (31,322                                  | )          |
| Total deferred tax assets                                        |       | $                            | —     |                         | $          | —                                   |       | $                                        | —     |   | $ | — |   |

 

The restatements in 2003were primarily related to a $2,851 thousand understatement of state netoperating loss carryforwards, an understatement of cumulative temporarydifferences related to purchase intangibles of $259 thousand and of variousreserves, accruals and allowances of $1,713 thousand offset by an overstatementof tax credit carryforwards of $1,448 thousand. The 2004 restatements relateprimarily to a $527 thousand understatement of federal net operating lossesoffset by a $376 thousand overstatement of tax credit carryforwards.

As a result of theserestatements to the aforementioned deferred tax items a restated reconciliationof the expected income tax (benefit) computed using the federal statutoryincome tax rate to the Company’s effective income tax rate for the years 2004and 2003 is as follows:
| ** **                                        | ** ** | **2004  (as restated)** | ** ** | **2003  (as restated)** | ** ** | **2004  (as originally  reported)** | ** ** | **2003  (as originally  reported)** | ** ** |
|---------------------------------------------------|------------|------------------------------|------------|------------------------------|------------|------------------------------------------|------------|------------------------------------------|------------|
| Federal income  tax at federal statutory tax rate |       | $                            | 597        |                         | $          | (373                                     | )          | $597                                     |       | $ | (373 | ) |
| State income  taxes, net of federal benefit       |       | 105                          |       | —                       |       | 105                                      |       | —                                   |       |
| Research and  development and other tax credits   |       | 708                          |       | —                       |       | 708                                      |       | —                                   |       |
| Change in  valuation allowance                    |       | (1,259                       | )          | 1,038                        |       | 1,965                                    |       | 1,308                                    |       |
| Prior year  refunds and reversal of reserves      |       | (1,427                       | )          | (267                         | )          | (1,427                                   | )          | (267                                     | )          |
| Adjustment of  prior year                         |       | —                       |       | —                       |       | (4,127                                   | )          | —                                   |       |
| Other                                             |       | (151                         | )          | (665                         | )          | 752                                      |       | (665                                     | )          |
|                                              |       | $                            | (1,427     | )                            | $          | (267                                     | )          | $                                        | (1,427     | ) | $ | (267 | ) |
|                                                   |            |                              |            |                              |            |                                          |            |                                          |            |  |  |  |  |

 

**5.****                                      OtherIncome**

Ezenia hadpreviously settled a patent infringement suit against Accord in the UnitedStates District Court for the District of Massachusetts.  The settlement agreement provided, amongother things, that Ezenia receive $6.5 million in return for a covenant not tosue with respect to the patents that were the subject of the litigation.  Ezenia received the payment in 2000, net offoreign tax withholding of $975 thousand, pending a resolution of certain taxmatters related to the settlement with the tax authorities in Israel.  In April 2004, Ezenia reached a settlementagreement with the Israel Tax Commission (ITC), resulting in the receipt byEzenia of cash proceeds related to the disputed amount, net of interest earned,tax withholding, and settlement fees of approximately $179 thousand, ofapproximately $706 thousand.

**6.*****                                     *Commitmentsand Contingencies**

Ourcontractual obligations relate primarily to our facilities leases and acontractual purchase commitment.  Welease our primary facility in Nashua, New Hampshire, under an operating lease,which expires in June 2010. We also have two other leases for office space inthe United States, located in Colorado Springs, Colorado; and Sterling,Virginia for sales, development and technical support operations.  In February 2006, we amended our operatinglease for our development and technical support operation in Colorado Springs,Colorado whereby we added an additional 2,010 square feet to the premises andextended the lease for an additional five years.  These leases expire at various dates throughNovember 2011. Rent expense was approximately $148 thousand, $199 thousand, and$278 thousand in 2006, 2005 and 2004, respectively.  Future minimum lease obligations at December31, 2006 under all of these non-cancelable operating leases are approximately$178 thousand in 2007, $179 thousand in 2008, $180 thousand in 2009, $126thousand in 2010, and $98 thousand in 2011.

**Ezenia is subject to a variety ofclaims and suits that arise from time to time in the ordinary course of itsbusiness. **Currently we are not a defendant in any claims or suits.   As of December 31, 2004, Ezenia hadreserved approximately $160 thousand for potential liabilities that we expectedto incur as a result of lawsuits filed during the fourth quarter of 2004.  During the quarter ended June 30, 2005, weresolved these suits for approximately $15 thousand and therefore reversed theexcess accrual of approximately $145 thousand, which is included as a credit ingeneral and administrative expense as a change in estimate in 2005.

**7.****                                      StockholdersEquity**

The Company hasauthorized 2,000,000 shares of undesignated Preferred Stock. Each series ofPreferred Stock shall have such rights, preferences, privileges andrestrictions, including voting rights, dividend rights, conversion rights,redemption privileges and liquidation preferences as determined by the Board ofDirectors.

39

----

 

**8.*****                                     *BenefitPlans**

###### **Stockoption plans**

The Company’s 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, for up to 6,090,541 shares toofficers, employees and consultants.  The1991 Plan terminated on March 31, 2001, and no further options have beengranted under the 1991 Plan subsequent to that date.  At December 31, 2006, there were 655,252 sharesof common stock reserved to be issued upon exercise of outstanding optionsgranted under the 1991 Plan.

The 2001 Stock IncentivePlan was approved and adopted by the Board of Directors on April 11, 2001 (the “2001Stock Incentive Plan”). The 2001 Stock Incentive Plan provided for the sale oraward of common stock, or the grant of non-qualified stock options for thepurchase of common stock, for up to 5,000,000 shares to officers, directors,employees and consultants of the Company. Vesting of options granted under the 2001 Stock Incentive Planaccelerates upon change of control or acquisition as defined in the 2001 StockIncentive Plan. The 2001 Stock Incentive Plan terminated on December 31, 2004and no further options have been granted under the 2001 Stock Incentive Plansubsequent to this date.  At December 31,2006, there were 168,046 shares of common stock reserved to be issued uponexercise of outstanding options granted under the 2001 Stock Incentive Plan.

The 2004 Stock IncentivePlan was approved and adopted by the Board of Directors on December 31, 2004(the “2004 Stock Incentive Plan”). The 2004 Stock Incentive Plan provides forthe sale or award of common stock or the grant of non-qualified stock optionsfor the purchase of common stock, for up to 7,500,000 shares to officers,directors, employees and consultants of the Company. The Board of Directorsadministers the 2004 Stock Incentive Plan, and the terms of grants and awardsmade pursuant to the 2004 Stock Incentive Plan. Vesting of options granted under the 2004 Stock Incentive Planaccelerates upon change of control or acquisition as defined in the 2004 StockIncentive Plan. The 2004 Stock Incentive Plan will terminate on December 31,2014.  At December 31, 2006, there were1,539,550 shares of common stock reserved to be issued upon exercise ofoutstanding options granted under the 2004 Stock Incentive Plan.

**1994 Non-employee director stockoption plan**

InApril 1995, the Board of Directors and shareholders approved the Director Plan,which was amended by the Board of Directors on June 5, 2002 (the “Director Plan”).  The Director Plan provided that the Board ofDirectors, at its discretion, was permitted to grant options to non-employeedirectors, subject to terms and conditions as determined by the Board ofDirectors.  The Director Planterminated on November 9, 2004, and no further options have been granted underthe Director Plan subsequent to that date. At December 31, 2006, there were 34,000 shares of common stock reservedto be issued upon exercise of outstanding options granted under the DirectorPlan.

A summary ofoption activity under the 2004 Stock Incentive Plan, 2001 Stock Incentive Plan,the 1991 Plan and the Director Plan is as follows:
| ** **                        | ** ** | **Shares** | ** ** | **Weighted  Average  Exercise  Price** | ** ** |
|-----------------------------------|------------|------------|------------|----------------------------------------|------------|
| Outstanding at  December 31, 2004 |       | 1,438,221  |       | $                                      | 4.02       |   |
| Granted                           |       | 1,045,200  |       | 1.44                                   |       |
| Terminated                        |       | (271,388   | )          | 1.10                                   |       |
| Exercised                         |       | (366,394   | )          | 0.71                                   |       |
|                              |       |       |       |                                   |       |
| Outstanding at  December 31, 2005 |       | 1,845,639  |       | $                                      | 3.65       |   |
| Granted                           |       | 773,600    |       | 3.15                                   |       |
| Terminated                        |       | (165,418   | )          | 2.44                                   |       |
| Exercised                         |       | (56,973    | )          | 0 .31                                  |       |
|                              |       |       |       |                                   |       |
| Outstanding at  December 31, 2006 |       | 2,396,848  |       | $                                      | 3.66       |   |
|                              |       |       |       |                                   |       |

 

40

----

Theweighted average remaining contractual term and the aggregate intrinsic valuefor options outstanding at December 31, 2006 were 6.76 years and $991 thousand,respectively.  The weighted averageremaining contractual term and the aggregate intrinsic value for optionsexercisable at December 31, 2006 were 4.64 years and $490 thousand,respectively.

Related information foroptions outstanding and exercisable as of December 31, 2006 under these optionplans is as follows:
| **Range of exercise prices** | ** ** | ** ** | ** ** | **Outstanding  Options** | ** ** | **Weighted  Average  Remaining  Contractual Life** | ** ** | **Weighted  Average  Exercise Price** | ** ** | **Exercisable  Options** | ** ** | **Weighted  Average  Exercise Price** | ** ** |
|---------------------------------------------|------------|------------|------------|--------------------------|------------|---------------------------------------------------------|------------|--------------------------------------------|------------|--------------------------|------------|--------------------------------------------|------------|
| $0.11 - $0.97                               |       | 800,984    |       | 7.60                     |       | $                                                       | 0.84       |                                       | 381,825    |                     | $          | 0.79                                       |       |
| 1.02 - 1.92                                 |       | 108,756    |       | 8.52                     |       | 1.69                                                    |       | 34,640                                     |       | 1.56                     |       |
| 2.01 - 2.95                                 |       | 264,906    |       | 8.86                     |       | 2.58                                                    |       | 55,751                                     |       | 2.43                     |       |
| 3.08 - 4.50                                 |       | 586,702    |       | 9.08                     |       | 3.29                                                    |       | 19,252                                     |       | 3.97                     |       |
| 7.81 - 9.13                                 |       | 635,500    |       | 2.39                     |       | 8.33                                                    |       | 635,500                                    |       | 8.33                     |       |
|                                        |       |       |       |                     |       |                                                    |       |                                       |       |                     |       |
|                                        |       | 2,396,848  |       | 6.76                     |       | 3.66                                                    |       | 1,126,968                                  |       | 5.20                     |       |
|                                             |            |            |            |                          |            |                                                         |            |                                            |            |                          |            |                                            |            |  |  |

 

**Employee stock purchase plan**

The Company’s 1995Employee Stock Purchase Plan (the “1995 Employee Stock Purchase Plan”) asamended on May 30, 2001 and further amended on January 24, 2005, providedeligible employees the right to purchase common stock at a price per shareequal to 85% of the lower of the fair market value of the common stock at thebeginning or end of each offering period. Participation in the offering was limited to 10% of an employee’scompensation (not to exceed amounts allowed under Section 423 of the InternalRevenue Code), could be terminated at any time by the employee andautomatically ended on termination of employment with the Company.  A total of 900,000 shares of common stock hadbeen reserved for issuance under the 1995 Employee Stock Purchase Plan.  Pursuant to the terms of the 1995 EmployeeStock Purchase Plan, no shares under the 1995 Employee Stock Purchase Plan canbe issued after January 31, 2005 and, as such, the 1995 Employee Stock PurchasePlan is now terminated.  In fiscal year2005, 35,394 shares of common stock were issued at the grant date fair value of$0.85 per share under the 1995 Employee Stock Purchase Plan.  No shares were issued under the 1995 EmployeeStock Purchase Plan during fiscal year 2006 and 2004.

**Savings plan**

The Companysponsors a savings plan for its employees, which has been qualified underSection 401(k) of the Internal Revenue Code. Eligible employees are permitted to contribute to the 401(k) planthrough payroll deductions within statutory and plan limits.  Contributions from the Company are made atthe discretion of the Board of Directors and approximated $32,000, $22,000, and$18,000 in 2006, 2005, and 2004, respectively.

**DeferredCompensation Plan**

Effective March 31, 2006,the Company adopted the Ezenia Deferred Compensation Plan (the “Plan”). Underthis Plan, eligible employees may elect to defer up to 100% of their base andincentive compensation into the Plan. The Company is under no obligation to establisha fund or reserve in order to pay the benefits under the Plan except in theevent of a change in control.  If funded,the plan Trustee makes all investment decisions for the Trust on behalf of theparticipants. The Company has not guaranteed a return on investment for theparticipants, however, all earnings and losses on the Plan assets are borne bythe Participant.  All contributions andearnings are fully vested to the Participant when made but are subject to theCompany’s creditors in the event of bankruptcy. As a result, the assets held in the Plan have been recorded as cashequivalents in the consolidated balance sheet with a corresponding liabilitybeing recorded as deferred compensation, which is included in employeecompensation and benefits in the accompanying consolidated balance sheet.  Interest earned on the Plan assets is

41

----

recorded as interestincome in the consolidated statement of operations. A corresponding entry todeferred compensation is made to increase (decrease) the amounts due theParticipant resulting from the changes in the asset value with an offsettingcharge or credit to general and administrative expense. Compensation expense,including employee deferrals, was approximately $195 thousand in the year endedDecember 31, 2006.

**ITEM 9A.CONTROLS AND PROCEDURES**

**As required by Rule 13a-15 underthe Securities Exchange Act of 1934, as of December 31, 2006, the Company’smanagement, under the supervision and with the participation of both the chiefexecutive officer and the chief financial officer, carried out an evaluation ofthe effectiveness of the Company’s disclosure controls and procedures.  Based on this evaluation, the Company’s chiefexecutive officer and chief financial officer concluded that the Company’sdisclosure controls and procedures were effective at the reasonable assurancelevel to ensure that the information required to be disclosed on the reportsfiled or submitted by the Company under the Securities Exchange Act of 1934 wasrecorded, processed, summarized, and reported within the requisite timeperiods, including ensuring that such material information is accumulated andcommunicated to the Company’s management to allow timely decisions regardingrequired disclosure.  There were nochanges in the Company’s internal control over financial reporting thatoccurred during the quarter ended December 31, 2006 that materially affected,or are reasonably likely to materially affect, the Company’s internal controlover financial reporting.**

The Company’s disclosure controls and procedures are designed to providereasonable assurance of achieving their objectives.  Because of the inherent limitations in allcontrol systems, no evaluation of controls can provide absolute assurance that allcontrol issues and instances of fraud, if any, within the Company have beendetected.  These inherent limitationsinclude the realities that judgments in decision-making can be faulty, and thatbreakdowns can occur because of simple error or mistake.  Additionally, controls can be circumvented bythe individual acts of some persons, by collusion of two or more people, or bymanagement override of the control.  Thedesign of any system of controls also is based in part upon certain assumptionsabout the likelihood of future events, and there can be no assurance that anydesign will succeed in achieving it stated goals under all potential futureconditions. Over time, control may become inadequate because of changes inconditions, or the degree of compliance with the policies or procedures may deteriorate.  Because of the inherent limitations in acost-effective control system, misstatements due to error or fraud may occurand not be detected.

**PART III**

**ITEM10.  DIRECTORS AND EXECUTIVE OFFICERS OFTHE REGISTRANT**

Information with respectto Directors and compliance with Section 16(a) of the Securities Exchange Actmay be found in the sections captioned, “Proposal No. 1 - Election of Directors”and “Section 16(a) - Beneficial Ownership Reporting Compliance” appearing inthe definitive Proxy Statement to be delivered to shareholders in connectionwith the 2007 Annual Meeting of Shareholders. Such information is incorporatedherein by reference.

The Company hasadopted, ratified and approved a Code of Business Conduct and Ethics (the “Code”)that applies to all of the Company’s employees, including its executiveofficer, and directors. The Company shall also provide to any person withoutcharge, upon request, a copy of the Code. Any such request must be made in writing to the Company, c/o InvestorRelations, 14 Celina Ave, Suite 17-18, Nashua, New Hampshire 03063.

**ITEM 11. EXECUTIVE COMPENSATION**

The information requiredwith respect to this item may be found in the sections captioned “ExecutiveCompensation and Other Information Concerning Directors and Executive Officers”appearing in the definitive Proxy Statement to be delivered to shareholders inconnection with the 2007 Annual Meeting of Shareholders. Such information isincorporated herein by reference.

42

----

**ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT ANDRELATED STOCKHOLDER MATTERS**

The information found inthe section captioned, “Security Ownership of Certain Beneficial Owners andManagement” appearing in the definitive Proxy Statement to be delivered toshareholders in connection with the 2007 Annual Meeting of Shareholders isincorporated herein by reference.

**Equity Compensation PlanInformation**

The following table setsforth information as of December 31, 2006 about the Company’s equitycompensation plans under which shares of its common stock are authorized forissuance.
| **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 security holders     |       |       | 2,228,802  | (1)                                                                                                                                                  |       |                                                                                                        | $          | 3.90                                                                                                                                                                                                                 |       |   |   | 5,956,481 | (2) |   |
|                                                        |       |       |       |                                                                                                                                                 |       |                                                                                                        |       |                                                                                                                                                                                                                 |       |   |   |   |   |
| Equity  compensation plans not approved by security holders |       |       | 168,046    | (3)                                                                                                                                                  |       |                                                                                                        | $          | 0.41                                                                                                                                                                                                                 |       |   |   | — |   |   |
|                                                        |       |       |       |                                                                                                                                                 |       |                                                                                                        |       |                                                                                                                                                                                                                 |       |   |   |   |   |
| Total                                                       |       |       | 2,396,848  |                                                                                                                                                 |       |                                                                                                        | $          | 3.66                                                                                                                                                                                                                 |       |   |   | 5,956,481 |   |   |

----

**(1)**                                  Includes 655,252shares of common stock to be issued upon exercise of outstanding options underthe Amended and Restated 1991 Stock Incentive Plan, 34,000 shares of commonstock to be issued upon exercise of outstanding options under the 1994Non-Employee Director Option Plan, and 1,539,550 shares of common stock to beissued upon exercise of outstanding options under the 2004 Stock IncentivePlan.

**(2)**                                  Includes 5,956,481shares of common stock remaining available for future issuance under the 2004Stock Incentive Plan. The Amended and Restated 1991 Stock Incentive Planterminated on March 31, 2001, the 1994 Non Employee Director Option Planterminated on November 9, 2004, and the 1995 Employee Stock Purchase Planterminated on January 31, 2005, and no additional options may be granted underthese plans.

**(3)**                                  Represents shares ofcommon stock to be issued upon exercise of outstanding options under the 2001Stock Incentive Plan.  The 2001 StockIncentive Plan terminated on December 31, 2004, and no additional options maybe granted under this plan.

A description of theStock Incentive Plans is included in Note 10 to the Company’s ConsolidatedFinancial Statements set forth herein.

**ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS**

The informationrequired with respect to this item may be found in the section captioned, “CertainTransactions” appearing in the definitive Proxy Statement to be delivered toshareholders in connection with the 2007 Annual Meeting of Shareholders. Suchinformation is incorporated herein by reference.

43

----

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

The information required with respect to this item maybe found in the section captioned, “Principal Accountant Fees and Services”appearing in the definitive Proxy Statement to be delivered to shareholders inconnection with the 2007 Annual Meeting of Shareholders.  Such information is incorporated herein byreference.

44

----

 

**PART IV**

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

**(a)****      Documents Filed as Part ofForm 10-K**

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

The following consolidated financial statements andsupplementary data are included in Part II-Item 8 filed as part of this report:

·                  Reportof Independent Registered Public Accounting Firm

·                  ConsolidatedBalance Sheets as of December 31, 2006 and 2005

·                  ConsolidatedStatements of Operations for the years ended December 31, 2006, 2005 and 2004

·                  ConsolidatedStatements of Stockholders’ Equity for the years ended December 31, 2006, 2005and 2004

·                  ConsolidatedStatements of Cash Flows for the years ended December 31, 2006, 2005 and 2004

·                  Notesto Consolidated Financial Statements

·                  QuarterlyFinancial Information (unaudited)

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

·                  ScheduleII - Valuation and Qualifying Accounts

Schedules not listed above have been omitted becausethey are not applicable, not required or the information required is shown inthe consolidated financial statements or the notes thereto.

**3.****                                      Listof Exhibits.**

| Exhibit   Number | ** ** | ** **                                                                                                                                         | ** ** | **Description of Exhibit** | ** ** | ** ** | ** ** |
|------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|------------|------------|
|             |       |                                                                                                                                               |       |
| 3.1(1)           |       | Amended and Restated Certificate of Incorporation of  the Registrant.                                                                              |       |
| 3.2(1)           |       | Amended and Restated By-Laws of the Registrant.                                                                                                    |       |
| 4.1(1)           |       | Specimen Stock Certificate.                                                                                                                        |       |
| 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(9)          |       | 2004 Stock Incentive Plan                                                                                                                          |       |
| 10.15(1)         |       | License Agreement dated January 2, 1995 between the  Registrant and Datapoint Corporation.                                                         |       |
|             |
| 10.16(1)         |       | Letter Agreement dated December 31, 1994 between the  Registrant and Fleet Bank of Massachusetts, N.A.                                             |       |
|             |
| 10.19(3)+        |       | Employment Agreement dated January 22, 1998 between  the Registrant and Khoa D. Nguyen.                                                            |       |
|             |
| 10.20(4)         |       | Asset Purchase Agreement dated as of December 28,  2000 between the Registrant and General Dynamics Government Systems  Corporation, as amended.   |       |
|             |
| 10.21(a)(5)      |       | Put Agreement dated as of March 27, 2001 (as amended  to date) by and between the Registrant and General Dynamics Government  Systems Corporation. |       |
|             |
| 10.21(b)(8)      |       | Agreement and Release dated as of December 31, 2002  by and between the Registrant and General Dynamics Government Systems  Corporation.           |       |
|             |
| 10.22(6)+        |       | 2001 Stock Incentive Plan of the Registrant.                                                                                                       |       |
| 10.23(7)         |       | Asset Purchase Agreement dated as of August 1, 2002  between the Registrant and Tandberg Telecom AS.                                               |       |
|             |

 

45

----

 

| 10.24(7)  |   | License Agreement dated as of August 1, 2002 between  the Registrant and Telecom AS.                                                                                    |   |
|-----------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
| 10.25(7)  |   | Promissory Note dated as of August 1, 2002 made by  the Registrant in favor Tandberg Telecom AS.                                                                        |   |
| 10.26(7)  |   | Security Agreement dated as of August 1, 2002  between the Registrant and Tandberg Telecom AS.                                                                          |   |
| 10.27(7)  |   | Ezenia! License Agreement dated as of October 30,  2002 between the Registrant Tandberg Telecom AS.                                                                     |   |
| 10.28(10) |   | First Amended and Restated Software Distribution  License Agreement dated January 1, 2005 by and between Microsoft Corporation  and Ezenia! Inc.                        |   |
| 21.1      |   | Subsidiaries of the Registrant.                                                                                                                                         |   |
| 23.1      |   | Consent of Brown & Brown, LLP                                                                                                                                       |   |
| 23.2      |   | Consent of Vitale, Caturano & Company Ltd.                                                                                                                          |   |
| 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-OIxley 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 ofthese exhibits are available without charge upon written request to InvestorRelations, Ezenia! Inc., 14 Celina Avenue, Suite 17-18, Nashua, NH 03063.

 +                                            Managementcontract for compensatory plan or arrangement required to be filed as anexhibit to this report pursuant to Item 15(c) of this report.

 (1)                                     Incorporatedby reference from the Company’s Registration Statement on Form S-1.

 (2)                                     Incorporatedby reference from the Company’s Form 10-K filed with the Securities andExchange Commission for the year ended December 31, 1995.

 (3)                                     Incorporatedby reference from the Company’s Form 10-K filed with the Securities andExchange Commission for the year ended December 31, 1998.

 (4)                                     Incorporatedby reference from the Company’s Form 10-K filed with the Securities andExchange Commission for the year ended December 31, 2000.

 (5)                                     Incorporatedby reference from the Company’s Form 10-Q for the quarter ended September 30,2001.

 (6)                                     Incorporatedby reference from the Company’s Registration Statement on Form S-8 filed withthe Securities and Exchange Commission on December 21, 2001.

 (7)                                     Incorporatedby reference from the Company’s Form 10-Q for the quarter ended September 30,2002.

 (8)                                     Incorporatedby reference from the Company’s Form 10-K filed with the Securities and ExchangeCommission for the year ended December 31, 2002.

 (9)                                     Incorporatedby reference from the Company’s Form 10-K/A filed with the Securities and ExchangeCommission for the year ended December 31, 2004.

(10)                                  Incorporatedby reference from the Company’s Form 10-Q for the quarter ended March 31, 2005.

46

----

**SIGNATURES**

Pursuant to therequirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, theRegistrant has duly caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.
|        | EZENIA! INC. |
|--------|--------------|
|   |         |   |   |
|   |         |   |   |
|   |         | /s/ Khoa D. Nguyen |   |
|   |         | Khoa D. Nguyen |
|   |         | Chairman, Chief Executive Officer, and President |
|   |         | (Principal Executive Officer) |
|   |         |   |
|   |         | Date: March 30, 2007 |

 

Pursuant to therequirements of the Securities Exchange Act of 1934, this report has beensigned below by the following persons on behalf of the Registrant and in thecapacities and on the dates indicated.
| Signature                    | ** ** | **Title**                                    | ** ** | **Date**       |
|------------------------------|------------|----------------------------------------------|------------|----------------|
|                         |       |                                         |       |           |
|  /s/ Khoa D.  Nguyen    |       | Chairman, Chief Executive Officer,           |       | March 30, 2007 |
| Khoa D. Nguyen               |       | and President                                |       |           |
|                         |       |                                         |       |           |
|  /s/ Ronald L.  Breland |       | Director                                     |       | March 30, 2007 |
| Ronald L. Breland            |       |                                         |       |           |
|                         |       |                                         |       |           |
| /s/ Gerald P. Carmen         |       | Director                                     |       | March 30, 2007 |
| Gerald P. Carmen             |       |                                         |       |           |
|                         |       |                                         |       |           |
| /s/ Thomas G. McInerney      |       | Director                                     |       | March 30, 2007 |
| Thomas G. McInerney          |       |                                         |       |           |
|                         |       |                                         |       |           |
| /s/ John A. McMullen         |       | Director                                     |       | March 30, 2007 |
| John A. McMullen             |       |                                         |       |           |
|                         |       |                                         |       |           |
| /s/ John F. Stewart          |       | Director                                     |       | March 30, 2007 |
| John F. Stewart              |       |                                         |       |           |
|                         |       |                                         |       |           |
| /s/ Robert N. McFarland      |       | Director                                     |       | March 30, 2007 |
| Robert N. McFarland          |       |                                         |       |           |
|                         |       |                                         |       |           |
| /s/ Roger N. Tuttle          |       | Chief Financial Officer                      |       | March 30, 2007 |
| Roger N. Tuttle              |       | and Secretary                                |       |           |
|                         |       |                                         |       |           |
| /s/ Kenneth E. Garofano      |       | Vice President — Strategic Media        |       | March 30, 2007 |
| Kenneth E. Garofano          |       | Technology                                   |       |           |
|                         |       |                                         |       |           |
| /s/ Michael A. Bass          |       | Chief Technical Officer                      |       | March 30, 2007 |
| Michael A. Bass              |       | and Vice President—Business Development |       |           |

 

47

----

** **

**EZENIA! INC.**

 

**SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS**
| **Column A — Description** | ** ** | **Column B**                              | ** ** | **Column C - Additions**                   | ** ** | **Column D**                    | ** ** | **Column E**                                                | ** ** |
|------------------------------------------------|------------|------------------------------------------------|------------|-----------------------------------------------------------|------------|--------------------------------------|------------|------------------------------------------------------------------|------------|
| **Accounts Receivable Allowances**   | ** ** | **Balance At  Beginning  Of Period** | ** ** | **Charged  (Credited) to  Costs and  Expenses** | ** ** | **Charged to  Other  Accounts** | ** ** | **Deductions —  Uncollectible  Accounts  Written-off** | ** ** | **Balance at  End of  Period** | ** ** |
|                                           |       |                                           |       |                                                      |       |                                 |       |                                                             |       |   |   |
| Year Ended December 31,  2006                  |       | $                                              | 339,246    |                                                      | (15,967    | )                                    | 89,630     |                                                             | -          |   | $ | 412,909 |   |
|                                           |       |                                           |       |                                                      |       |                                 |       |                                                             |       |   |   |
| Year Ended December 31,  2005                  |       | $                                              | 370,696    |                                                      | (50,000    | )                                    | 25,000     |                                                             | (6,450     | ) | $ | 339,246 |   |
|                                           |       |                                           |       |                                                      |       |                                 |       |                                                             |       |   |   |
| Year Ended December 31,  2004                  |       | $                                              | 1,068,262  |                                                      | (110,000   | )                                    | -          |                                                             | (587,566   | ) | $ | 370,696 |   |
|                                           |       |                                           |       |                                                      |       |                                 |       |                                                             |       |   |   |

 

48

----

**Exhibit Index**

** **
| ExhibitNumber | ** ** | **Description of Exhibit**                                                            |
|---------------|------------|---------------------------------------------------------------------------------------|
|          |       |                                                                                  |
| 3.1(1)        |       | Amended and Restated Certificate of Incorporation of  the Registrant.                 |
| 3.2(1)        |       | Amended and Restated By-Laws of the Registrant.                                       |
| 4.1(1)        |       | Specimen Stock Certificate.                                                           |
| 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(9)       |       | 2004 Stock Incentive Plan                                                             |
| 10.15(1)      |       | License Agreement dated January 2, 1995 between the  Registrant and Datapoint         |
|          |       | Corporation.                                                                          |
| 10.16(1)      |       | Letter Agreement dated December 31, 1994 between the  Registrant and Fleet Bank       |
|          |       | of Massachusetts, N.A.                                                                |
| 10.19(3)+     |       | Employment Agreement dated January 22, 1998 between  the Registrant and               |
|          |       | Khoa D. Nguyen.                                                                       |
| 10.20(4)      |       | Asset Purchase Agreement dated as of December 28,  2000 between the Registrant        |
|          |       | and General Dynamics Government Systems Corporation,  as amended.                     |
| 10.21(a)(5)   |       | Put Agreement dated as of March 27, 2001 (as amended  to date) by and between the     |
|          |       | Registrant and General Dynamics Government Systems  Corporation.                      |
| 10.21(b)(8)   |       | Agreement and Release dated as of December 31, 2002  by and between the               |
|          |       | Registrant and General Dynamics Government Systems  Corporation.                      |
| 10.22(6)+     |       | 2001 Stock Incentive Plan of the Registrant.                                          |
| 10.23(7)      |       | Asset Purchase Agreement dated as of August 1, 2002  between the Registrant and       |
|          |       | Tandberg Telecom AS.                                                                  |
| 10.24(7)      |       | License Agreement dated as of August 1, 2002 between  the Registrant and              |
|          |       | Telecom AS.                                                                           |
| 10.25(7)      |       | Promissory Note dated as of August 1, 2002 made by  the Registrant in favor           |
|          |       | Tandberg Telecom AS.                                                                  |
| 10.26(7)      |       | Security Agreement dated as of August 1, 2002  between the Registrant and Tandberg    |
|          |       | Telecom AS.                                                                           |
| 10.27(7)      |       | Ezenia! License Agreement dated as of October 30,  2002 between the Registrant        |
|          |       | Tandberg Telecom AS.                                                                  |
| 10.28(10)     |       | First Amended and Restated Software Distribution  License Agreement dated January     |
|          |       | 1, 2005 by and between Microsoft Corporation and  Ezenia! Inc.                        |
| 21.1          |       | Subsidiaries of the Registrant.                                                       |
| 23.1          |       | Consent of Brown & Brown, LLP                                                     |
| 23.2          |       | Vitale, Caturano & Company, Ltd.                                                  |
| 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-OIxley 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.  |

----

+                    Managementcontract for compensatory plan or arrangement required to be filed as anexhibit to this report pursuant to Item 15(c) of this report.

(1)             Incorporatedby reference from the Company’s Registration Statement on Form S-1.

(2)             Incorporatedby reference from the Company’s Form 10-K filed with the Securities andExchange Commission for the year ended December 31, 1995.

(3)             Incorporatedby reference from the Company’s Form 10-K filed with the Securities andExchange Commission for the year ended December 31, 1998.

49

----

(4)             Incorporatedby reference from the Company’s Form 10-K filed with the Securities andExchange Commission for the year ended December 31, 2000.

(5)             Incorporatedby reference from the Company’s Form 10-Q for the quarter ended September 30,2001.

(6)             Incorporatedby reference from the Company’s Registration Statement on Form S-8 filed withthe Securities and Exchange Commission on December 21, 2001.

(7)             Incorporatedby reference from the Company’s Form 10-Q for the quarter ended September 30,2002.

(8)             Incorporatedby reference from the Company’s Form 10-K filed with the Securities and ExchangeCommission for the year ended December 31, 2002.

(9)             Incorporatedby reference from the Company’s Form 10-K/A filed with the Securities and ExchangeCommission for the year ended December 31, 2004

(10)       Incorporatedby reference from the Company’s Form 10-Q

 

50

----